NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Pressure
Biosciences, Inc. (“we”, “our”, “the Company”) is focused on solving the challenging problems
inherent in biological sample preparation, a crucial laboratory step performed by scientists worldwide working in biological life
sciences research. Sample preparation is a term that refers to a wide range of activities that precede most forms of scientific
analysis. Sample preparation is often complex, time-consuming, and in our belief, one of the most error-prone steps of scientific
research. It is a widely-used laboratory undertaking, the requirements of which drive what we believe is a large and growing worldwide
market. We have developed and patented a novel, enabling technology platform that can control the sample preparation process.
It is based on harnessing the unique properties of high hydrostatic pressure. This process, called pressure cycling technology,
or PCT, uses alternating cycles of hydrostatic pressure between ambient and ultra-high levels (35,000 psi or greater) to safely,
conveniently and reproducibly control the actions of molecules in biological samples, such as cells and tissues from human, animal,
plant, and microbial sources.
Our
pressure cycling technology uses internally developed instrumentation that is capable of cycling pressure between ambient and
ultra-high levels - at controlled temperatures and specific time intervals - to rapidly and repeatedly control the interactions
of bio-molecules, such as DNA, RNA, proteins, lipids, and small molecules. Our laboratory instrument, the Barocycler®®,
and our internally developed consumables product line, including PULSE® (Pressure Used to Lyse Samples for Extraction) Tubes,
other processing tubes, and application specific kits (which include consumable products and reagents) together make up our PCT
Sample Preparation System, or PCT SPS.
In
2015, together with an investment bank, we formed a subsidiary called Pressure BioSciences Europe (“PBI Europe”) in
Poland. We have 49% ownership interest with the investment bank retaining 51%. As of now, PBI Europe does not have any operating
activities and we cannot reasonably predict when operations will commence. Therefore, we do not have control of the subsidiary
and did not consolidate in our financial statements. PBI Europe did not have any operations in 2016 or in 2015.
(2)
Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal course of business. However, we have experienced negative
cash flows from operations with respect to our pressure cycling technology business since our inception. As of December 31, 2016,
we do not have adequate working capital resources to satisfy our current liabilities and as a result, there is substantial doubt
regarding our ability to continue as a going concern. We have been successful in raising cash through debt and equity offerings
in the past and as described in Note 6, completed debt financing subsequent to December 31, 2016. We have financing efforts in
place to continue to raise cash through debt and equity offerings.
Management
has developed a plan to continue operations. This plan includes obtaining equity or debt financing. During the year ended December
31, 2016 we received $4,378,371 net proceeds, in additional convertible and non-convertible debt. Although we have successfully
completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future
will be successful.
We
need substantial additional capital to fund normal operations in future periods. In the event that we are unable to obtain financing
on acceptable terms, or at all, we will likely be required to cease our operations, pursue a plan to sell our operating assets,
or otherwise modify our business strategy, which could materially harm our future business prospects. These financial statements
do not include any adjustments that might result from this uncertainty.
(3)
Summary of Significant Accounting Policies
i.
Principles of Consolidation
The
consolidated financial statements include the accounts of Pressure BioSciences, Inc., and its wholly-owned subsidiary PBI BioSeq,
Inc. All intercompany accounts and transactions have been eliminated in consolidation.
ii.
Use of Estimates
To
prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America, we are required to make significant estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. In addition, significant estimates were made in projecting future cash flows to quantify
impairment of assets, deferred tax assets, the costs associated with fulfilling our warranty obligations for the instruments that
we sell, and the estimates employed in our calculation of fair value of stock options awarded, beneficial conversion features
and derivative liabilities. We base our estimates on historical experience and on various other assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results could differ from the estimates and assumptions
used.
iii.
Revenue Recognition
Revenue
is recognized when realized or when realizable and earned when all the following criteria have been met: persuasive evidence of
an arrangement exists; goods were shipped, delivery of service has occurred and risk of loss has passed to the customer; the seller’s
price to the buyer is fixed or determinable; and collectability is reasonably assured.
Our
current instruments, the Barocycler NEP3229 and NEP2320, require a basic level of instrumentation expertise to set-up for initial
operation. To support a favorable first experience for our customers, upon customer request and for an additional fee, we will
send a highly trained technical representative to the customer site to install Barocyclers that we sell, lease, or rent through
our domestic sales force. The installation process includes uncrating and setting up the instrument, followed by introductory
user training. Product revenue related to current Barocycler instrumentation is recognized upon shipment of the unit, or in the
case where the customer requests installation and training, the completion of the installation and introductory training process
of the instrumentation at the customer location, for domestic installations. Product revenue related to sales of PCT instrumentation
to our foreign distributors is recognized upon shipment through a common carrier. We provide for the expected costs of warranty
upon the recognition of revenue for the sales of our instrumentation. Our sales arrangements do not provide our customers with
a right of return. Product revenue related to the HUB440 and our consumable products such as PULSE Tubes, MicroTubes, and application
specific kits is recorded upon shipment through a common carrier. Shipping costs are included in sales and marketing expense.
Any shipping costs billed to customers are recognized as revenue.
The
Company applies ASC 845, “Accounting for Non-Monetary Transactions”, to account for products and services sold through
non-cash transactions based on the fair values of the products and services involved, where such values can be determined. Non-cash
exchanges would require revenue to be recognized at recorded cost or carrying value of the assets or services sold if any of the
following conditions apply:
|
a)
|
The
fair value of the asset or service involved is not determinable.
|
|
|
|
|
b)
|
The
transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property
to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
|
|
|
|
|
c)
|
The
transaction lacks commercial substance.
|
The
Company currently records revenue for its non-cash transactions at recorded cost or carrying value of the assets or services sold.
We
account for our lease agreements under the operating method. We record revenue over the life of the lease term and we record depreciation
expense on a straight-line basis over the thirty-six month estimated useful life of the Barocycler instrument. The depreciation
expense associated with assets under lease agreement is included in the “Cost of PCT products and services” line item
in our consolidated statements of operations. Many of our lease and rental agreements allow the lessee to purchase the instrument
at any point during the term of the agreement with partial or full credit for payments previously made. We pay all maintenance
costs associated with the instrument during the term of the leases.
Revenue
from government grants is recorded when qualifying expenses are incurred under the grant in accordance with the terms of the grant
award.
Deferred
revenue represents amounts received from grants and the Company’s service contracts for which the related revenues have
not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred
revenue represents the amount to be recognized within one year from the balance sheet date based on the estimated performance
period of the underlying deliverables. Revenue from service contracts is recorded ratably over the length of the contract.
Our
transactions sometimes involve multiple elements (i.e., products and services). Revenue under multiple element arrangements is
recognized in accordance with FASB ASC 605-25
Multiple-Element Arrangements (“ASC 605”)
. When vendor specific
objective evidence or third party evidence of selling price for deliverables in an arrangement cannot be determined, the Company
develops a best estimate of the selling price to separate deliverables and allocates arrangement consideration using the relative
selling price method. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered
elements, we defer the fair value of the undelivered elements to such time as they are delivered. Fair value is determined based
upon the price charged when the element is sold separately. If there is not sufficient evidence of the fair value of the undelivered
elements the Company uses its best estimate of the value of those items and recognizes revenues based on the relative values of
the delivered and undelivered items. We provide certain customers with extended service contracts with revenue recognized ratably
over the life of the contract.
iv.
Cash and Cash Equivalents
Our
policy is to invest available cash in short-term, investment grade interest-bearing obligations, including money market funds,
and bank and corporate debt instruments. Securities purchased with initial maturities of three months or less are valued at cost
plus accrued interest, which approximates fair value, and are classified as cash equivalents.
v.
Research and Development
Research
and development costs, which are comprised of costs incurred in performing research and development activities including wages
and associated employee benefits, facilities, consumable products and overhead costs that are expensed as incurred. In support
of our research and development activities we utilize our Barocycler instruments that are capitalized as fixed assets and depreciated
over their expected useful life.
vi.
Inventories
Inventories
are valued at the lower of cost (average cost) or market (sales price). The cost of Barocyclers consists of the cost charged by
the contract manufacturer. The cost of manufactured goods includes material, freight-in, direct labor, and applicable overhead.
The composition of inventory as of December 31, is as follows:
|
|
2016
|
|
|
2015
|
|
Raw
materials
|
|
$
|
326,228
|
|
|
$
|
310,367
|
|
Finished
goods
|
|
|
599,056
|
|
|
|
778,004
|
|
Inventory
reserve
|
|
|
(20,000
|
)
|
|
|
(50,000
|
)
|
Total
|
|
$
|
905,284
|
|
|
$
|
1,038,371
|
|
vii.
Property and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, depreciation is recognized
using the straight-line method, allocating the cost of the assets over their estimated useful lives of three years for certain
laboratory equipment, from three to five years for management information systems and office equipment, and three years for all
PCT finished units classified as fixed assets.
viii.
Intangible Assets
We
have classified as intangible assets, costs associated with the fair value of acquired intellectual property. Intangible assets,
including patents, are being amortized on a straight-line basis over sixteen years. We perform an annual review of our intangible
assets for impairment. When impairment is indicated, any excess of carrying value over fair value is recorded as a loss. As of
December 31, 2016 and 2015, the outstanding balance for intangible assets is zero.
ix.
Long-Lived Assets
The
Company’s long-lived assets are reviewed for impairment in accordance with the guidance of the FASB ASC 360-10-05,
Property,
Plant, and Equipment
, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to
the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Through December
31, 2016, the Company had not experienced impairment losses on its long-lived assets. While our current and historical operating
losses and cash flow are indicators of impairment, we performed an impairment test at December 31, 2016 and determined that such
long-lived assets were not impaired.
x.
Concentrations
Credit
Risk
Our
financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents
and trade receivables. We have cash investment policies which, among other things, limit investments to investment-grade securities.
We perform ongoing credit evaluations of our customers, and the risk with respect to trade receivables is further mitigated by
the fact that many of our customers are government institutions and university labs. Allowances are provided for estimated amounts
of accounts receivable which may not be collected. At December 31, 2016 and 2015, we determined that no allowance against accounts
receivable was necessary.
The
following table illustrates the level of concentration of the below two groups within revenue as a percentage of total revenues
during the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Top
Five Customers
|
|
|
29
|
%
|
|
|
38
|
%
|
Federal
Agencies
|
|
|
3
|
%
|
|
|
23
|
%
|
The
following table illustrates the level of concentration of the below two groups within accounts receivable as a percentage of total
accounts receivable balance as of December 31:
|
|
2016
|
|
|
2015
|
|
Top
Five Customers
|
|
|
82
|
%
|
|
|
93
|
%
|
Federal
Agencies
|
|
|
1
|
%
|
|
|
1
|
%
|
Investment
in Available-For-Sale Equity Securities
As
of December 31, 2016, we held 601,500 shares of common stock of Everest, a Polish publicly traded company listed on the Warsaw
Stock Exchange. We exchanged 1,000,000 shares of our common stock for the 601,500 shares from Everest. We account for this investment
in accordance with ASC 320
“Investments — Debt and Equity Securities”
as securities available for sale.
On December 31, 2016, our consolidated balance sheet reflected the fair value of our investment in Everest to be $25,865, based
on the closing price of Everest shares of $0.043 per share on that day. The carrying value of our investment in Everest common
stock held will change from period to period based on the closing price of the common stock of Everest as of the balance sheet
date. The change in market value since the receipt of stock amounting to $373,682 was determined to be other than temporary and
was recorded by us as an impairment loss in 2016.
xi.
Computation of Loss per Share
Basic
loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding.
Diluted loss per share is computed by dividing loss available to common shareholders by the weighted average number of common
shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been
issued. For purposes of this calculation, convertible preferred stock, common stock dividends, warrants to acquire preferred stock
convertible into common stock, and warrants and options to acquire common stock, are all considered common stock equivalents in
periods in which they have a dilutive effect and are excluded from this calculation in periods in which these are anti-dilutive.
The following table illustrates our computation of loss per share for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,706,984
|
)
|
|
$
|
(7,415,298
|
)
|
Preferred
dividends accrued
|
|
|
-
|
|
|
|
(23,194
|
)
|
Net
loss applicable to common shareholders
|
|
$
|
(2,706,984
|
)
|
|
$
|
(7,438,492
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
27,339,362
|
|
|
|
20,726,205
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share - basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.36
|
)
|
The
following table presents securities that could potentially dilute basic loss per share in the future. For all periods presented,
the potentially dilutive securities were not included in the computation of diluted loss per share because these securities would
have been anti-dilutive for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Stock
options
|
|
|
5,269,250
|
|
|
|
5,571,250
|
|
Convertible
debt
|
|
|
26,733,955
|
|
|
|
19,689,286
|
|
Common
stock warrants
|
|
|
26,459,695
|
|
|
|
29,227,664
|
|
Convertible
preferred stock:
|
|
|
|
|
|
|
|
|
Series
D Convertible Preferred
|
|
|
750,000
|
|
|
|
750,000
|
|
Series
G Convertible Preferred
|
|
|
865,700
|
|
|
|
865,700
|
|
Series
H Convertible Preferred
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Series
H2 Convertible Preferred
|
|
|
2,100,000
|
|
|
|
2,100,000
|
|
Series
J Convertible Preferred
|
|
|
3,521,000
|
|
|
|
3,546,000
|
|
Series
K Convertible Preferred
|
|
|
6,816,000
|
|
|
|
11,416,000
|
|
|
|
|
73,515,600
|
|
|
|
74,165,900
|
|
xii.
Accounting for Income Taxes
We
account for income taxes under the asset and liability method, which requires recognition of deferred tax assets, subject to valuation
allowances, and liabilities for the expected future tax consequences of events that have been included in the consolidated financial
statements or tax returns. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting and income tax purposes. The Company considers many factors when assessing the
likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction,
expectations of future taxable income or loss, the carry-forward periods available to us for tax reporting purposes, and other
relevant factors. A valuation allowance is established if it is more likely than not that all or a portion of the net deferred
tax assets will not be realized. If substantial changes in the Company’s ownership should occur, as defined in Section 382
of the Internal Revenue Code, there could be significant limitations on the amount of net loss carry forwards that could be used
to offset future taxable income.
Tax
positions must meet a “more likely than not” recognition threshold at the effective date to be recognized. At December
31, 2016 and 2015, the Company did not have any uncertain tax positions. No interest and penalties related to uncertain tax positions
were accrued at December 31, 2016 and 2015.
xiii.
Accounting for Stock-Based Compensation
We
maintain equity compensation plans under which incentive stock options and non-qualified stock options are granted to employees,
independent members of our Board of Directors and outside consultants. We recognize equity compensation expense over the requisite
service period using the Black-Scholes formula to estimate the fair value of the stock options on the date of grant. Employee
awards are accounted for under ASC 718 where the awards are valued at grant date. Awards given to nonemployees are accounted for
under ASC 505 where the awards are valued at earlier of commitment date or completion of services.
Determining
Fair Value of Stock Option Grants
Valuation
and Amortization Method
- The fair value of each option award is estimated on the date of grant using the Black-Scholes pricing
model based on certain assumptions. The estimated fair value of employee stock options is amortized to expense using the straight-line
method over the vesting period, which generally is over three years.
Expected
Term
- The Company uses the simplified calculation of expected life, described in the FASB ASC 718,
Compensation-Stock
Compensation
, as the Company does not currently have sufficient historical exercise data on which to base an estimate of expected
term. Using this method, the expected term is determined using the average of the vesting period and the contractual life of the
stock options granted.
Expected
Volatility
- Expected volatility is based on the Company’s historical stock volatility data over the expected term of
the award.
Risk-Free
Interest Rate
- The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield
currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Forfeitures
- As required by FASB ASC 718,
Compensation-Stock Compensation
, the Company records stock-based compensation expense
only for those awards that are expected to vest. The Company estimated a forfeiture rate of 5% for awards granted based on historical
experience and future expectations of options vesting. We used this historical rate as our assumption in calculating future stock-based
compensation expense.
The
following table summarizes the assumptions we utilized for grants of stock options to the three sub-groups of our stock option
recipients during the year ended December 31, 2015:
Assumptions
|
|
Non-Employee
Board Members
|
|
|
CEO,
other Officers and Employees
|
|
Expected
life
|
|
|
6.0
(yrs)
|
|
|
|
6.0
(yrs)
|
|
Expected
volatility
|
|
|
116.32%-141.15
|
%
|
|
|
116.32%-141.15
|
%
|
Risk-free
interest rate
|
|
|
0.65%-2.54
|
%
|
|
|
0.65%-2.54
|
%
|
Forfeiture
rate
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Expected
dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
We
recognized stock-based compensation expense of $379,964 and $208,989 for the years ended December 31, 2016 and 2015, respectively.
The following table summarizes the effect of this stock-based compensation expense within each of the line items within our accompanying
consolidated statements of operations for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Research
and development
|
|
$
|
65,500
|
|
|
$
|
50,617
|
|
Selling
and marketing
|
|
|
42,315
|
|
|
|
32,704
|
|
General
and administrative
|
|
|
272,149
|
|
|
|
125,668
|
|
Total
stock-based compensation expense
|
|
$
|
379,964
|
|
|
$
|
208,989
|
|
During
the years ended December 31, 2016 and 2015, the total fair value of stock options awarded was $0 and $598,582, respectively.
As
of December 31, 2016, the total estimated fair value of unvested stock options to be amortized over their remaining vesting period
was $369,224. The non-cash, stock based compensation expense associated with the vesting of these options will be $212,957 in
2017 and $156,267 in 2018.
xiv.
Advertising
Advertising
costs are expensed as incurred. We incurred $19,125 in 2016 and $12,291 in 2015 for advertising.
xv.
Fair Value of Financial Instruments
Due
to their short maturities, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate their fair value. Short-term and long-term liabilities are primarily related to liabilities transferred under
contractual arrangements with carrying values that approximate fair value.
xvi.
Fair Value Measurements
The
Company follows the guidance of FASB ASC Topic 820, “
Fair Value Measurements and Disclosures
” (“
ASC
820
”) as it related to financial assets and financial liabilities that are recognized or disclosed at fair value in
the consolidated financial statements on a recurring basis.
The
Company generally defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (exit price). The Company uses a three-tier fair value
hierarchy, which classifies the inputs used in measuring fair values. These tiers include: Level 1, defined as observable inputs
such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market
data exists, therefore requiring an entity to develop its own assumptions.
Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement. The Company has determined that its financial assets are currently classified within Level 1 and that its financial
liabilities are currently all classified within Level 3 in the fair value hierarchy.
The
following tables set forth the Company’s financial assets and financial liabilities that were accounted for at fair value
on a recurring basis as of December 31, 2016 and December 31, 2015. The development of the unobservable inputs for Level 3 fair
value measurements and fair value calculations are the responsibility of the Company’s management.
|
|
|
|
|
Fair
value measurements at December 31, 2016 using:
|
|
|
|
December
31, 2016
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Available-For-Sale
Equity Securities
|
|
|
25,865
|
|
|
|
25,865
|
|
|
|
-
|
|
|
|
-
|
|
Total
Financial Assets
|
|
$
|
25,865
|
|
|
$
|
25,865
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
December
31, 2016
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable inputs
(Level 2)
|
|
|
Significant
unobservable
inputs (Level 3)
|
|
Series
D Preferred Stock Purchase Warrants
|
|
$
|
23,313
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
23,313
|
|
Warrants
Issued with Convertible Debt
|
|
|
1,661,795
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,661,795
|
|
Conversion
Option Derivative Liabilities
|
|
|
951,059
|
|
|
|
-
|
|
|
|
-
|
|
|
|
951,059
|
|
Total
Derivatives
|
|
$
|
2,636,167
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,636,167
|
|
|
|
|
|
|
Fair
value measurements at December 31, 2015 using:
|
|
|
|
December
31, 2015
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Available-For-Sale
Equity Securities
|
|
|
294,522
|
|
|
|
294,522
|
|
|
|
-
|
|
|
|
-
|
|
Total
Financial Assets
|
|
$
|
294,522
|
|
|
$
|
294,522
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
December
31, 2015
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Series
D Preferred Stock Purchase Warrants
|
|
$
|
173,526
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
173,526
|
|
Warrants
Issued with Convertible Debt
|
|
|
3,122,450
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,122,450
|
|
Conversion
Option Derivative Liabilities
|
|
|
3,940,791
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,940,791
|
|
Total
Derivatives
|
|
$
|
7,236,767
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,236,767
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs:
|
|
January 1, 2016
|
|
|
Issuance
fair value
|
|
|
Change
in
fair value
|
|
|
December 31, 2016
|
|
Series
D Preferred Stock Purchase Warrants
|
|
$
|
173,526
|
|
|
$
|
-
|
|
|
$
|
(150,213
|
)
|
|
$
|
23,313
|
|
Warrants
Issued with Convertible Debt
|
|
|
3,122,450
|
|
|
|
1,094,432
|
|
|
|
(2,555,087
|
)
|
|
|
1,661,795
|
|
Conversion
Option Derivative Liabilities
|
|
|
3,940,791
|
|
|
|
1,547,127
|
|
|
|
(4,536,859
|
)
|
|
|
951,059
|
|
Total
Derivatives
|
|
$
|
7,236,767
|
|
|
$
|
2,641,559
|
|
|
$
|
(7,242,159
|
)
|
|
$
|
2,636,167
|
|
|
|
January 1, 2015
|
|
|
Issuance
fair value
|
|
|
Change
in fair value
|
|
|
Gain
on extinguishment of derivative liabilities
|
|
|
December 31, 2015
|
|
Series
D Preferred Stock Purchase Warrants
|
|
$
|
159,875
|
|
|
$
|
-
|
|
|
$
|
13,651
|
|
|
$
|
-
|
|
|
$
|
173,526
|
|
Warrants
Issued with Convertible Debt
|
|
|
-
|
|
|
|
2,320,021
|
|
|
|
802,429
|
|
|
|
-
|
|
|
|
3,122,450
|
|
Conversion
Option Derivative Liabilities
|
|
|
590,341
|
|
|
|
5,305,185
|
|
|
|
600,445
|
|
|
|
(2,555,180
|
)
|
|
|
3,940,791
|
|
Total
Derivatives
|
|
$
|
750,216
|
|
|
$
|
7,625,206
|
|
|
$
|
1,416,525
|
|
|
$
|
(2,555,180
|
)
|
|
$
|
7,236,767
|
|
The
issuance fair values for 2016 and 2015 include the “day 1” derivative losses on the conversion option derivative liabilities
of $1,337,510 and $805,476, respectively, which are included in “change in fair value of derivative liabilities” in
the consolidated statements of operations.
The
fair value of the derivative liabilities was determined using a binomial pricing model. The assumptions for the binomial pricing
model are represented in the table below for the warrants issued in the Series D private placement reflected on a per share common
stock equivalent basis.
Assumptions
|
|
November
10, 2011
|
|
|
Warrants
revalued at December 31, 2015
|
|
|
Warrants
revalued at
December 31, 2016
|
|
Expected
life (in months)
|
|
|
60.0
|
|
|
|
11.0
|
|
|
|
5.0
|
|
Expected
volatility
|
|
|
104.5
|
%
|
|
|
104.9
|
%
|
|
|
83.5
|
%
|
Risk-free
interest rate
|
|
|
0.875
|
%
|
|
|
0.65
|
%
|
|
|
0.62
|
%
|
Exercise
price
|
|
$
|
0.81
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
Fair
value per warrant
|
|
$
|
0.54
|
|
|
$
|
0.16
|
|
|
$
|
0.02
|
|
The
assumptions for the binomial pricing model are represented in the table below for the warrants issued with the Convertible Debt
in 2015 and 2016 reflected on a per share common stock equivalent basis.
Assumptions
|
|
At
Issuance
Fair value
|
|
|
Warrants
revalued
at
December 31, 2015
|
|
|
Warrants
revalued
at
December 31, 2016
|
|
Expected
life (in months)
|
|
|
60.0
|
|
|
|
55.0-60.0
|
|
|
|
43.0-51.0
|
|
Expected
volatility
|
|
|
118.3-120.1
|
%
|
|
|
136.3-141.6
|
%
|
|
|
110.0-116.0
|
%
|
Risk-free
interest rate
|
|
|
1.48-1.69
|
%
|
|
|
1.29-1.76
|
%
|
|
|
1.93
|
%
|
Exercise
price
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
Fair
value per warrant
|
|
$
|
0.19-$0.21
|
|
|
$
|
0.30
|
|
|
$
|
0.12-0.14
|
|
The
assumptions for the binomial pricing model are represented in the table below for the conversion options reflected on a per share
common stock equivalent basis.
Assumptions
|
|
At
Issuance fair value
|
|
|
At
Settlement fair value
|
|
|
Conversion
options revalued at December 31, 2015
|
|
|
Conversion
options revalued at December 31, 2016
|
|
Expected
life (in months)
|
|
|
6.0-24.0
|
|
|
|
0-18.0
|
|
|
|
18-24
|
|
|
|
6.0-15.0
|
|
Expected
volatility
|
|
|
104.2-153.8
|
%
|
|
|
86.9%-142.2
|
%
|
|
|
112.2-114.7
|
%
|
|
|
84.4-94.8
|
%
|
Risk-free
interest rate
|
|
|
0.05-0.99
|
%
|
|
|
0.01-0.72
|
%
|
|
|
1.06
|
%
|
|
|
0.62-0.85
|
%
|
Exercise
price
|
|
$
|
0.10-$0.35
|
|
|
$
|
0.10-$0.25
|
|
|
$
|
0.28
|
|
|
$
|
0.28
|
|
Fair
value per conversion option
|
|
$
|
0.09-$0.28
|
|
|
$
|
0.07-$0.26
|
|
|
$
|
0.14-$0.33
|
|
|
$
|
0.03-$0.06
|
|
xvii.
Recently Issued Accounting Standards
In
April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires
that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liability, consistent
with the presentation of debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented
as deferred charge assets, separate from the related debt liability. ASU 2015-03 does not change the recognition and measurement
requirements for debt issuance costs. The Company early-adopted ASU 2015-03 as of the end of its Fiscal 2015, and applied its
provisions retrospectively. The adoption of ASU 2015-03 resulted in the reclassification of approximately $888,000 unamortized
debt issuance costs related to the Company’s Senior Notes (see Note 8) from other non-current assets to long-term debt within
its consolidated balance sheets as of December 31, 2015. Other than this reclassification, the adoption of ASU 2015-03 and other
new pronouncements that have been issued did not have an impact on the Company’s consolidated financial statements.
(4)
Property and Equipment, net
Property
and equipment as of December 31, 2016 and 2015 consisted of the following components:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Laboratory
and manufacturing equipment
|
|
$
|
226,326
|
|
|
$
|
226,081
|
|
Office
equipment
|
|
|
165,832
|
|
|
|
158,872
|
|
Leasehold
improvements
|
|
|
8,117
|
|
|
|
8,117
|
|
PCT
collaboration, demonstration and leased systems
|
|
|
461,858
|
|
|
|
461,858
|
|
Total
property and equipment
|
|
|
862,133
|
|
|
|
854,928
|
|
Less
accumulated depreciation
|
|
|
(852,720
|
)
|
|
|
(834,779
|
)
|
Net
book value
|
|
$
|
9,413
|
|
|
$
|
20,149
|
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $17,939 and $25,288, respectively.
(5)
Retirement Plan
We
provide all of our employees with the opportunity to participate in our retirement savings plan. Our retirement savings plan has
been qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to the plan through
payroll deductions within statutory limitations and subject to any limitations included in the plan. During 2016 and 2015 we contributed
$22,627 and $22,098, respectively, in the form of discretionary Company-matching contributions.
(6)
Income Taxes
Tax
positions must meet a “more likely than not” recognition threshold at the effective date to be recognized. At December
31, 2016 and 2015, the Company did not have any uncertain tax positions. No interest and penalties related to uncertain tax positions
were accrued at December 31, 2016 and 2015. Our tax returns for fiscal years 2013, 2014 and 2015 are open to examination.
We
did not record an income tax benefit or provision for the years ended December 31, 2016 and 2015.
Significant
items making up the deferred tax assets and deferred tax liabilities as of December 31, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Current
deferred taxes
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
7,856
|
|
|
$
|
19,640
|
|
Accounts
receivable allowance
|
|
|
17,253
|
|
|
|
-
|
|
Other
accruals
|
|
|
33,399
|
|
|
|
23,714
|
|
Less:
valuation allowance
|
|
|
(58,508
|
)
|
|
|
(43,354
|
)
|
Total
current deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Long
term deferred taxes:
|
|
|
|
|
|
|
|
|
Accelerated
tax depreciation
|
|
$
|
14,582
|
|
|
$
|
14,134
|
|
Non-cash,
stock-based compensation, nonqualified
|
|
|
711,676
|
|
|
|
562,426
|
|
Impairment
loss on investment
|
|
|
146,782
|
|
|
|
-
|
|
Goodwill
and intangibles
|
|
|
-
|
|
|
|
-
|
|
Operating
loss carry forwards and tax credits
|
|
|
13,561,012
|
|
|
|
12,028,900
|
|
Less:
valuation allowance
|
|
|
(14,434,052
|
)
|
|
|
(12,605,460
|
)
|
Total
long term deferred tax assets (liabilities), net
|
|
|
-
|
|
|
|
-
|
|
Total
net deferred tax liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
A
valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.
Accordingly, a valuation allowance was established in 2016 and 2015 for the full amount of our deferred tax assets due to the
uncertainty of realization. We believe based on our projection of future taxable operating income for the foreseeable future,
it is more likely than not that we will not be able to realize the benefit of the deferred tax asset at December 31, 2016.
We
have net operating loss carry-forwards for federal income tax purposes of $30,471,000 as of December 31, 2016. Included in these
numbers are loss carry-forwards that were obtained through the acquisition of BioSeq, Inc. and are subject to Section 382 NOL
limitations. These net operating loss carry-forwards expire at various dates from 2018 through 2037.
We
had net operating loss carry-forwards for state income tax purposes of approximately $21,547,000 at December 31, 2016. These net
operating loss carry-forwards expire at various dates from 2030 through 2037.
We
have research and development tax credit carry-forwards for federal income tax purposes of approximately $1,039,000 as of December
31, 2016 and research and development tax credit carry-forwards for state income tax purposes of approximately $207,000 as of
December 31, 2016. The federal credit carry-forwards expire at various dates from 2017 through 2037. The state credit carry-forwards
expire at various dates from 2023 through 2032.
In
addition, we have federal alternative minimum tax credit carry-forwards for federal income tax purposes of approximately $217,000
as of December 31, 2016. These credits do not expire.
Our
effective income tax (benefit) provision rate was different than the statutory federal income tax (benefit) provision rate as
follows for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Federal
tax provision rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Permanent
differences
|
|
|
24
|
%
|
|
|
(12
|
)%
|
State
tax expense
|
|
|
0
|
%
|
|
|
0
|
%
|
Refundable
AMT and R&D tax credit
|
|
|
0
|
%
|
|
|
0
|
%
|
Net
operating loss carry back
|
|
|
0
|
%
|
|
|
0
|
%
|
Valuation
allowance
|
|
|
(58
|
)%
|
|
|
(23
|
)%
|
Effective
income tax provision
|
|
|
0
|
%
|
|
|
0
|
%
|
(7)
Commitments and Contingencies
Operating
Leases
Our
corporate office is currently located at 14 Norfolk Avenue, South Easton, Massachusetts 02375. We are currently paying $4,800
per month, on a lease extension, signed on December 29, 2016, that expires December 31, 2017, for our corporate office.
On
November 1, 2014 we signed a lease for lab space in Medford, MA. We subsequently expanded our space in Medford. The lease expires
December 30, 2017 and requires monthly payments of $5,385 subject to annual cost of living increases.
Following
is a schedule by years of future minimum rental payments required under operating leases with initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2016:
2017
|
|
$
|
122,220
|
|
Thereafter
|
|
|
-
|
|
Total
minimum payments required
|
|
$
|
122,220
|
|
Royalty
Commitments
BioMolecular
Assays, Inc.
In
1996, we acquired our initial equity interest in BioSeq, Inc., which at the time was developing our original pressure cycling
technology. BioSeq, Inc. acquired its pressure cycling technology from BioMolecular Assays, Inc. under a technology transfer and
patent assignment agreement. In 1998, we purchased all of the remaining outstanding capital stock of BioSeq, Inc., and at such
time, the technology transfer and patent assignment agreement was amended to require us to pay BioMolecular Assays, Inc., a 5%
royalty on our sales of products or services that incorporate or utilize the original pressure cycling technology that BioSeq,
Inc. acquired from BioMolecular Assays, Inc. We are also required to pay BioMolecular Assays, Inc. 5% of the proceeds from any
sale, transfer or license of all or any portion of the original pressure cycling technology. These payment obligations terminated
on March 7, 2016. During the years ended December 31, 2016 and 2015, we incurred approximately $6,963 and $31,301, respectively,
in royalty expense associated with our obligation to BioMolecular Assays, Inc.
In
connection with our acquisition of BioSeq, Inc., we licensed certain limited rights to the original pressure cycling technology
back to BioMolecular Assays, Inc. This license is non-exclusive and limits the use of the original pressure cycling technology
by BioMolecular Assays, Inc. solely for molecular applications in scientific research and development and in scientific plant
research and development. BioMolecular Assays, Inc. is required to pay us a royalty equal to 20% of any license or other fees
and royalties, but not including research support and similar payments, it receives in connection with any sale, assignment, license
or other transfer of any rights granted to BioMolecular Assays, Inc. under the license. BioMolecular Assays, Inc. was required
to pay us these royalties until the expiration in March 2016 of the patents held by BioSeq, Inc. since 1998. We have not received
any royalty payments from BioMolecular Assays, Inc. under this license.
Battelle
Memorial Institute
In
December 2008, we entered into an exclusive patent license agreement with the Battelle Memorial Institute (“
Battelle
”).
The licensed technology is the subject of a patent application filed by Battelle in 2008 and relates to a method and a system
for improving the analysis of protein samples, including through an automated system utilizing pressure and a pre-selected agent
to obtain a digested sample in a significantly shorter period of time than current methods, while maintaining the integrity of
the sample throughout the preparatory process. In addition to royalty payments on net sales on “licensed products,”
we are obligated to make minimum royalty payments for each year that we retain the rights outlined in the patent license agreement
and we are required to have our first commercial sale of the licensed products within one year following the issuance of the patent
covered by the licensed technology. After re-negotiating the terms of the contract in 2013, the minimum annual royalty was $1,200
in 2014 and $2,000 in 2015; the minimum royalties are $3,000 in 2016, $4,000 in 2017 and $5,000 in 2018 and each calendar year
thereafter during the term of the agreement.
Target
Discovery Inc
.
In
March 2010, we signed a strategic product licensing, manufacturing, co-marketing, and collaborative research and development agreement
with Target Discovery Inc. (“
TDI
”). Under the terms of the agreement, we have been licensed by TDI to manufacture
and sell a highly innovative line of chemicals used in the preparation of tissues for scientific analysis (“
TDI reagents
”).
The TDI reagents were designed for use in combination with our pressure cycling technology. The companies believe that the combination
of PCT and the TDI reagents can fill an existing need in life science research for an automated method for rapid extraction and
recovery of intact, functional proteins associated with cell membranes in tissue samples. We did not incur any royalty obligation
under this agreement in 2015 or 2014.
In
April 2012, we signed a non-exclusive license agreement with TDI to grant the non-exclusive use of our pressure cycling technology.
We recorded $20,000 and $22,000 of minimum royalty income in 2016 and 2015, respectively. We executed an amendment to this agreement
on October 1, 2016 wherein we agreed to pay a monthly fee of $1,400 for the use of a lab bench, shared space and other utilities,
and $2,000 per day for technical support services as needed.
Severance
and Change of Control Agreements
Each
of Mr. Schumacher, and Drs. Ting, Lazarev, and Lawrence, executive officers of the Company, are entitled to receive a severance
payment if terminated by us without cause. The severance benefits would include a payment in an amount equal to one year of such
executive officer’s annualized base salary compensation plus accrued paid time off. Additionally, the officer will be entitled
to receive medical and dental insurance coverage for one year following the date of termination.
Each
of these executive officers, other than Mr. Schumacher, is entitled to receive a change of control payment in an amount equal
to one year of such executive officer’s annualized base salary compensation, accrued paid time off, and medical and dental
coverage, in the event of a change of control of the Company. In the case of Mr. Schumacher, this payment would be equal to two
years of annualized base salary compensation, accrued paid time off, and two years of medical and dental coverage. The severance
payment is meant to induce the aforementioned executives to remain in the employ of the Company, in general; and particularly
in the occurrence of a change in control, as a disincentive to the control change.
(8)
Convertible Debt and Other Debt
Senior
Secured Convertible Debentures and Warrants
We
entered into Subscription Agreements (the “
Subscription Agreement
”) with various individuals (each, a “
Purchaser
”)
between July 23, 2015 and March 31, 2016, pursuant to which the Company sold Senior Secured Convertible Debentures (the “
Debentures
”)
and warrants to purchase shares of common stock equal to 50% of the number of shares issuable pursuant to the subscription amount
(the “
Warrants
”) for an aggregate purchase price of $6,329,549 (the “
Purchase Price
”).
The
Company issued a principal aggregate amount of $6,962,504 in Debentures which includes a 10% original issue discount on the Purchase
Price. The Debenture does not accrue any additional interest during the first year it is outstanding but accrues interest at a
rate equal to 10% per annum for the second year it is outstanding. The Debenture has a maturity date of two years from issuance.
The Debenture is convertible any time after its issuance date. The Purchaser has the right to convert the Debenture into shares
of the Company’s common stock at a fixed conversion price equal to $0.28 per share, subject to applicable adjustments. In
the second year that the Debenture is outstanding, any interest accrued shall be payable quarterly in either cash or common stock,
at the Company’s discretion.
At
any time after the Issuance Date, the Company has the option, subject to certain conditions, to redeem some or all of the then
outstanding principal amount of the Debenture for cash in an amount equal to the sum of (i) 120% of the then outstanding principal
amount of the Debenture, (ii) accrued but unpaid interest and (iii) any liquidated damages and other amounts due in respect of
the Debenture.
The
Company issued warrants exercisable into a total of 11,302,766 shares of our common stock. The Warrants issued in this transaction
are immediately exercisable at an exercise price of $0.40 per share, subject to applicable adjustments including full ratchet
anti-dilution in the event that we issue any securities at a price lower than the exercise price then in effect. The Warrants
have an expiration period of five years from the original issue date. The Warrants are subject to adjustment for stock splits,
stock dividends or recapitalizations and also include anti-dilution price protection for subsequent equity sales below the exercise
price.
Subject
to the terms and conditions of the Warrants, at any time commencing six months from the Final Closing, the Company has the right
to call the Warrants for cancellation if the volume weighted average price of its Common Stock on the OTCQB (or other primary
trading market or exchange on which the Common Stock is then traded) equals or exceeds three times the per share exercise price
of the Warrants for 15 out of 20 consecutive trading days.
In
connection with the Subscription Agreement and Debenture, the Company entered into Security Agreements with the Purchasers whereby
the Company agreed to grant to Purchasers an unconditional and continuing, first priority security interest in all of the assets
and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations
under the Debentures, Warrants and the other Transaction Documents.
The
Company determined that the conversion feature of the Debentures met the definition of a liability in accordance with ASC 815-40
and therefore bifurcated the conversion feature on each debt agreement and accounted for it as a derivative liability. The fair
value of the conversion feature was accounted for as a note discount and are amortized to interest expense over the life of the
loan. The fair value of the conversion feature was reflected in the conversion option liability line in the condensed consolidated
balance sheets.
The
proceeds from these convertible debts were allocated between the host debt instrument and the convertible option based on the
residual method. The estimated fair value of the convertible option was determined using a binomial formula, resulting in allocations
to the convertible option and accounted for as a liability in the Company’s condensed consolidated balance sheet. In accordance
with the provisions of ASC 815-40, the gross proceeds are offset by debt discounts, which are amortized to interest expense over
the expected life of the debt.
ASC
470-20 states that the proceeds from the issuance of debt with detachable stock warrants should be allocated between the debt
and warrants on the basis of their relative fair market values. The debt discount will be amortized to interest expense over the
two-year term of these loans. We amortized $3,740,746 of the debt discount to interest expense in 2016. The warrants issued in
connection with the convertible debentures are classified as warrant derivative liabilities because the warrants are entitled
to certain rights in subsequent financings and the warrants contain “down-round protection” and therefore, do not
meet the scope exception for treatment as a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). Since
“down-round protection” is not an input into the calculation of the fair value of the warrants, the warrants cannot
be considered indexed to the Company’s own stock which is a requirement for the scope exception as outlined under ASC 815.
The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $2,847,624 to
the total warrants out of the gross proceeds of $6,329,549. The fair value will be affected by changes in inputs to that model
including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. We will continue
to classify the fair value of the warrants as a liability until the warrants are exercised, expire or are amended in a way that
would no longer require these warrants to be classified as a liability, whichever comes first.
Other
convertible notes
On
May 13, 2016, one lender converted an outstanding note issued on April 28, 2015 and the related accrued interest totaling $117,837
to 420,849 common shares. As of December 31, 2016, the outstanding balance on the note was zero.
On
May 24, 2016, we sold an additional convertible note for $107,000 with warrants to purchase 50,000 shares of common stock at an
exercise price of $0.55 per share. The purchaser has the right to convert the notes into shares of the Company’s common
stock at a fixed conversion price equal to $0.45 per share, subject to applicable adjustments. The estimated fair value of the
warrants was determined using the binomial model, resulting in an allocation of $12,406 to the total warrants and the recognition
of a beneficial conversion feature of $7,962, both of which were recorded as a discount to the note. We evaluated the convertible
note and warrants for derivative liability treatment and determined that these instruments do not include certain rights such
as price protection like our previous debt financings. Accordingly, we concluded that this financing arrangement did not qualify
for derivative accounting treatment.
On
June 14, 2016, we sold an additional convertible note for $115,000 and issued 30,667 common shares to compensate the lender. On
July 1, 2016, the note was modified to increase the principal amount to $200,000 and we received the remaining proceeds of $85,000
on the same date and issued 34,333 common shares as compensation to the lender. The lender has the right to convert the note into
shares of the Company’s common stock at fixed conversion price equal to $0.45 per share, subject to applicable adjustments.
We valued the total 65,000 common shares using the stock prices at the respective dates the note proceeds were received and recorded
the relative fair value of the shares amounting to $26,000 as a debt discount to be amortized over the term of the loan. We then
computed the effective conversion price of the note, noting that no beneficial conversion feature exists. We also evaluated the
convertible note for derivative liability treatment and determined that the instrument does not include certain rights such as
price protection like our previous debt financing. Accordingly, we concluded that this financing arrangement did not qualify for
derivative accounting treatment.
On
July 29, 2016, we sold an additional convertible note for $100,000 and issued 32,500 common shares to compensate the lender. The
lender has the right to convert the notes into shares of the Company’s common stock at a fixed conversion price equal to
$0.45 per share, subject to applicable adjustments. The proceeds were allocated between the convertible note and shares of common
stock based on their relative fair values. The relative fair values of the convertible note and the common shares was $87,241
and $12,759, respectively. We then computed the effective conversion price of the note, noting that the convertible debt gave
rise to a beneficial conversion feature (BCF) of $12,759. The sum of the relative fair value of the common shares and the BCF
of $25,518 was recorded as a debt discount to be amortized over the term of the loan. We also evaluated the convertible note for
derivative liability treatment and determined that the instruments does not include certain rights such as price protection like
our previous debt financings. Accordingly, we concluded that this financing arrangements did not qualify for derivative accounting
treatment.
On
September 15, 2016, we sold an additional convertible note for $500,000 and issued 200,000 common shares to compensate the lender.
The lender has the right to convert the notes into shares of the Company’s common stock at a fixed conversion price equal
to $0.45 per share, subject to applicable adjustments. The convertible note includes an original issue discount of $40,541 and
is subject to a one-time interest of 9% or $45,000 which was recorded as a debt discount and amortized over the term of the loan.
The proceeds were allocated between the convertible note and shares of common stock based on their relative fair values. The relative
fair value of the convertible note was $434,028. The allocation of the gross proceeds to the shares of common stock was $65,972
and recorded as a debt discount to be amortized over the term of the loan. We then computed the effective conversion price of
the note, noting that no beneficial conversion feature exists. We also evaluated the convertible note for derivative liability
treatment and determined that the instrument does not include certain rights such as price protection like our previous debt financings.
Accordingly, we concluded that this financing arrangement did not qualify for derivative accounting treatment.
The
specific terms of the convertible notes and outstanding balances as of December 31, 2016 are listed in the tables below.
Fixed
Rate Convertible Notes
Inception
Date
|
|
Term
|
|
Loan
Amount
|
|
|
Outstanding
Balance
|
|
|
Original
Issue
Discount
|
|
|
Interest
Rate
|
|
|
Deferred
Finance
Fees
|
|
|
Discount
related
to fair
value of
conversion
feature
and
warrants/shares
|
|
|
July
22, 2015
|
|
24
months
|
|
$
|
2,180,000
|
|
|
$
|
2,180,000
|
|
|
$
|
218,000
|
1
|
|
|
10
|
%
2
|
|
$
|
388,532
|
|
|
$
|
2,163,074
|
|
September
25, 2015
|
|
24
months
|
|
|
1,100,000
|
|
|
|
1,100,000
|
|
|
|
110,000
|
1
|
|
|
10
|
%
2
|
|
|
185,956
|
|
|
|
1,022,052
|
|
October
2, 2015
|
|
24
months
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
15,000
|
1
|
|
|
10
|
%
2
|
|
|
26,345
|
|
|
|
140,832
|
|
October
6, 2015
|
|
24
months
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
3,000
|
1
|
|
|
10
|
%
2
|
|
|
5,168
|
|
|
|
26,721
|
|
October
14, 2015
|
|
24
months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
1
|
|
|
10
|
%
2
|
|
|
8,954
|
|
|
|
49,377
|
|
November
2, 2015
|
|
24
months
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
25,000
|
1
|
|
|
10
|
%
2
|
|
|
43,079
|
|
|
|
222,723
|
|
November
10, 2015
|
|
24
months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
1
|
|
|
10
|
%
2
|
|
|
8,790
|
|
|
|
46,984
|
|
November
12, 2015
|
|
24
months
|
|
|
215,000
|
|
|
|
215,000
|
|
|
|
21,500
|
1
|
|
|
10
|
%
2
|
|
|
38,518
|
|
|
|
212,399
|
|
November
20, 2015
|
|
24
months
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
20,000
|
1
|
|
|
10
|
%
2
|
|
|
37,185
|
|
|
|
200,000
|
|
December
4, 2015
|
|
24
months
|
|
|
170,000
|
|
|
|
170,000
|
|
|
|
17,000
|
1
|
|
|
10
|
%
2
|
|
|
37,352
|
|
|
|
170,000
|
|
December
11, 2015
|
|
24
months
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
36,000
|
1
|
|
|
10
|
%
2
|
|
|
75,449
|
|
|
|
360,000
|
|
December
18, 2015
|
|
24
months
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
5,500
|
1
|
|
|
10
|
%
2
|
|
|
11,714
|
|
|
|
55,000
|
|
December
31, 2015
|
|
24
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
10,000
|
1
|
|
|
10
|
%
2
|
|
|
20,634
|
|
|
|
100,000
|
|
January
11, 2016
|
|
24
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
10,000
|
1
|
|
|
10
|
%
2
|
|
|
24,966
|
|
|
|
80,034
|
|
|
January
20, 2016
|
|
24
months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
1
|
|
|
10
|
%
2
|
|
|
9,812
|
|
|
|
40,188
|
|
|
January
29, 2016
|
|
24
months
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
30,000
|
1
|
|
|
10
|
%
2
|
|
|
60,887
|
|
|
|
239,113
|
|
February
26, 2016
|
|
24
months
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
20,000
|
1
|
|
|
10
|
%
2
|
|
|
43,952
|
|
|
|
156,048
|
|
|
March
10, 2016
|
|
24
months
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
12,500
|
1
|
|
|
10
|
%
2
|
|
|
18,260
|
|
|
|
106,740
|
|
|
March
18, 2016
|
|
24
months
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
36,000
|
1
|
|
|
10
|
%
2
|
|
|
94,992
|
|
|
|
265,008
|
|
|
March
24, 2016
|
|
24
months
|
|
|
106,667
|
|
|
|
106,667
|
|
|
|
10,667
|
1
|
|
|
10
|
%
2
|
|
|
15,427
|
|
|
|
91,240
|
|
|
March
31, 2016
|
|
24
months
|
|
|
167,882
|
|
|
|
167,882
|
|
|
|
16,788
|
1
|
|
|
10
|
%
2
|
|
|
2,436
|
|
|
|
165,446
|
|
|
April
5, 2016
|
|
24
months
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
1,000
|
1
|
|
|
10
|
%
2
|
|
|
-
|
|
|
|
10,000
|
|
|
May
24, 2016
|
|
7
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
7,000
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
20,368
|
|
|
June
15, 2016
|
|
6
months
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,680
|
|
|
June
17, 2016
|
|
6
months
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,899
|
|
|
June
22, 2016
|
|
6
months
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,373
|
|
|
July
6, 2016
|
|
6
months
|
|
|
85,000
|
|
|
|
85,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
15,048
|
|
|
July
29, 2016
|
|
6
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
25,518
|
|
|
September
15, 2016
|
|
8
months
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
85,541
|
|
|
|
9
|
%
|
|
|
-
|
|
|
|
65,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,229,549
|
|
|
$
|
7,229,549
|
|
|
$
|
725,496
|
|
|
|
|
|
|
$
|
1,158,408
|
|
|
$
|
6,060,837
|
|
|
1.
The original issue discount is reflected in the first year.
2.
The annual interest started accruing in the second year.
As
of December 31, 2016, a total of approximately $291,000 convertible debentures were purchased by related parties who were members
of the Company’s Board of Directors and management and their family members.
Deferred
finance fees included cash commissions amounting to $621,500 and the fair value of the 2,101,786 warrants issued to the placement
agent amounting to $536,908. For the year ended December 31, 2016, the Company recognized amortization expense related to the
debt discounts indicated above of $3,876,622. The unamortized debt discounts as of December 31, 2016 related to the convertible
debentures and other convertible notes amounted to $3,142,078.
Revolving
Note Payable
On
October 28, 2016, an accredited investor (the “
Investor
”) purchased from us a promissory note in the aggregate
principal amount of up to $2,000,000 (the “
Revolving Note
”) due and payable on the earlier of October 28, 2017
(the “
Maturity Date
”) or on the seventh business day after the closing of a Qualified Offering (as defined
in the Revolving Note). Although the Revolving Note is dated October 26, 2016, the transaction did not close until October 28,
2016, when we received its initial $250,000 advance pursuant to the Revolving Note. As a result, on the same day and pursuant
to the Revolving Note, we issued to the Investor a Common Stock Purchase Warrant to purchase 625,000 shares of our common stock
at an exercise price per share equal to $0.40 per share. The Investor is obligated to provide us with advances of $250,000 under
the Revolving Note, but the Investor shall not be required to advance more than $250,000 in any individual fifteen (15) day period
and no more than $500,000 in the thirty (30) day period immediately following the date of the initial advance. Notwithstanding
the fifteen (15) day period limitation, on November 2, 2016, November 23, 2016, December 6, 2016 and December 16, 2016, we received
$1,000,000 pursuant to the Revolving Note and we issued to the Investor additional warrants to purchase 2,500,000 shares of our
Common Stock. The terms of the Warrants are identical except for the exercise date, issue date, and termination date.
In
the event that a Qualified Offering occurs on or prior to the six (6) month anniversary of October 28, 2016, within seven (7)
Business Days of the closing of the Qualified Offering, the Company shall pay a cash fee equal to five percent (5%) of the total
outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering or, at the option of the
Company, issue to the Holder a number of restricted shares of the Company’s common stock equal to (x) five percent (5%)
of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering divided by
(y) the purchase price provided by the documents governing the Qualified Offering. A
Qualified Offering
means the completion
of a public offering of the Company’s securities pursuant to which the Company receives aggregate gross proceeds of at least
Seven Million United States Dollars (US$7,000,000) in consideration of the purchase of its securities and resulting in, pursuant
to the effectiveness of the registration statement for such offering, the Company’s common stock being traded on the NASDAQ
Capital Market, NASDAQ Global Select Market or the New York Stock Exchange.
In
the event that a Qualified Offering occurs following the six (6) month anniversary of October 28, 2016, but prior to the Maturity
Date, within seven(7) Business Days of the closing of the Qualified Offering, the Company shall pay a cash fee equal to five percent
(5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering or, at
the option of the Company, issue to the Holder a number of restricted shares of the Company’s common stock equal to (x)
five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering
divided by (y) the purchase price provided by the documents governing the Qualified Offering.
Interest
on the principal balance of the Revolving Note shall be paid in full on the Maturity Date, unless otherwise paid prior to the
Maturity Date. Interest shall be assessed as follows: (i) a one-time interest of 10% on all principal amounts advanced prior to
April 28, 2017; (ii) the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between April
28, 2017 and July 28, 2017; or (iii) both of the foregoing and 4% on any amount remaining outstanding if the principal amount
is repaid between July 28, 2017 and October 28, 2017.
Broker
fees amounting to $116,500, the one-time interest of $125,000 and the fair value of the 3,125,000 warrants issued to the Investor
amounting to $479,730 were recorded as debt discounts and amortized over the term of the revolving note. For the year ended December
31, 2016, the Company recognized amortization expense related to the debt discounts indicated above of $84,200. The unamortized
debt discounts as of December 31, 2016 related to the convertible debentures amounted to $637,030.
The
following table provides a summary of the changes in convertible debt and revolving note payable, net of unamortized discounts,
during 2016:
|
|
2016
|
|
Balance
at January 1,
|
|
$
|
277,342
|
|
Issuance
of convertible debt, face value
|
|
|
2,509,045
|
|
Issuance
of revolving note payable, face value
|
|
|
1,250,000
|
|
Original
issue discount
|
|
|
(189,496
|
)
|
Debt
discount from derivative liabilities (embedded conversion option and warrants)
|
|
|
(1,153,817
|
)
|
Debt
discount from beneficial conversion feature
|
|
|
(20,721
|
)
|
Deferred
financing fees
|
|
|
(385,371
|
)
|
Debt
discount related to one-time interest charge
|
|
|
(170,000
|
)
|
Repayment
of convertible debt
|
|
|
(107,000
|
)
|
Conversion
of convertible debt into common stock
|
|
|
(100,000
|
)
|
Debt
discount from shares and warrants issued with the notes
|
|
|
(596,867
|
)
|
Accretion
of interest and amortization of debt discount to interest expense
|
|
|
3,960,822
|
|
Balance
at December 31,
|
|
|
5,273,937
|
|
Less:
revolving note payable
|
|
|
612,970
|
|
Less:
current portion of convertible debt
|
|
|
4,005,702
|
|
Convertible
debt, long-term portion
|
|
$
|
655,265
|
|
Other
Notes
On
January 15, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $150,000 in exchange for rights
to all customer receipts until the lender was paid $187,500, which was collected at the rate of $744 per business day. The payments
were secured by essentially all tangible assets of the Company. $67,925 of the proceeds were used to pay off the outstanding balance
of a previous loan from this lender. The Company paid $1,875 in fees in connection with this loan. The note was paid off in its
entirety prior to December 31, 2015.
On
January 29, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $200,000 in exchange for rights
to all customer receipts until the lender was paid $278,000, which was collected at the rate of $1,985 per business day. The payments
were secured by essentially all tangible assets of the Company. The Company paid $999 in fees in connection with this loan. The
note was paid off in its entirety prior to December 31, 2015.
On
March 17, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $50,000 in exchange for rights to
all customer receipts until the lender was paid $67,450, which was collected at the rate of $559 per business day. The payments
were secured by essentially all tangible assets of the Company. The Company paid $999 in fees in connection with this loan. The
note was paid off in its entirety prior to December 31, 2015.
On
May 29, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $100,000 in exchange for rights to
all customer receipts until the lender was paid $132,000, which was collected at the rate of $1,098 per business day. The Company
paid $3,999 in fees in connection with this loan. The note was paid off in its entirety prior to December 31, 2015.
On
August 28, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $300,000 in exchange for rights
to all customer receipts until the lender is paid $384,000, to be collected at the rate of $2,560 per business day. The payments
are not secured. On the closing date, $131,710 of the proceeds were used to pay off the outstanding balances of two existing Notes.
The Company paid $6,000 in fees in connection with this loan. The loan was paid off in its entirety prior to December 31, 2016.
During
the year ended December 31, 2015, we signed three ninety-day notes with an investor. Under the terms of the notes, the Company
received a total of $600,000. The investor converted these loans, plus $60,000 in accrued interest into the Company’s $5
million PIPE offering on July 21, 2015. There was no gain or loss on the conversion.
During
the year ended December 31, 2015, the Company made payments of $587,949 in total on the non-convertible debt from non-related
parties.
On
January 6, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $250,000 in exchange for rights
to all customer receipts until the lender is paid $322,500, which is collected at the rate of $1,280 per business day. The payments
were secured by second position rights to all customer receipts until the loan has been paid in full. $138,840 of the proceeds
were used to pay off the outstanding balance of a previous loan from another lender. The Company recognized a gain on the settlement
of the previous loan of $5,044 which was credited to interest expense. The Company paid $2,500 in fees in connection with this
loan. We received an additional $93,161 in June 2016 under the existing Merchant Agreement. The note was still outstanding as
of December 31, 2016 with a balance of $157,287.
On
January 20, 2016 we borrowed $50,000 from an individual with no interest or fees. We paid back the loan in March 2016.
On
February 8, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $100,000 in exchange for third
position rights to all customer receipts until the lender is paid $129,900, which is collected at the rate of $927 per business
day. The Company paid $2,000 in fees in connection with this loan. We received an additional $125,000 in June 2016 under the existing
Merchant Agreement of which $48,420 was used to pay off the prior loan. The lender provided an additional $70,000 on August 16,
2016. We repaid a portion of the $70,000 with $32,430 remaining as outstanding as of December 31, 2016.
On
May 9, 2016 we signed a promissory note with a lender. Under the agreement we received $200,000 net of a $6,000 original issue
discount and we repaid $206,000 on August 25, 2016. In connection with this promissory note, we issued warrants exercisable into
100,000 shares of our common stock. The warrants issued in this transaction are immediately exercisable at an exercise price of
$0.55 per share. The warrants have an expiration period of three years from the original issue date. The warrants are subject
to adjustment for stock splits, stock dividends or recapitalizations. The warrants were recorded as a component of our Stockholders’
Equity. The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $27,349
to the total warrants and recorded as a discount to the note to be amortized over the term of the loan. We evaluated the warrants
for derivative liability treatment and determined that these instruments do not include certain rights such as price protection
like our previous debt financings. Accordingly, we concluded that these instruments did not qualify for derivative accounting
treatment. In August 2016, the lender extended the maturity date of the note from August 11, 2016 to August 25, 2016. Consequently,
a penalty interest of $41,200 was added to the principal amount and settled through the issuance of 100,049 common shares. As
of December 31, 2016, the outstanding balance on this note was zero.
On
August 26, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $122,465 net proceeds in exchange
for rights to all customer receipts which is collected at the rate of $1,386 per business day. The note was still outstanding
as of December 31, 2016 with a balance of $48,440.
Related
Party Notes
During
the year ended December 31, 2016, the Company received advances from certain officers of the Company amounting to $20,000. These
advances were non-interest bearing and payable on demand. As of December 31, 2016 there are no outstanding notes to related parties.
(9)
Stockholders’ (Deficit)
Preferred
Stock
We
are authorized to issue 1,000,000 shares of preferred stock with a par value of $0.01. Of the 1,000,000 shares of preferred stock:
|
1)
|
20,000
shares have been designated as Series A Junior Participating Preferred Stock (“
Junior A
”)
|
|
|
|
|
2)
|
313,960
shares have been designated as Series A Convertible Preferred Stock (“
Series A
”)
|
|
|
|
|
3)
|
279,256
shares have been designated as Series B Convertible Preferred Stock (“
Series B
”)
|
|
|
|
|
4)
|
88,098
shares have been designated as Series C Convertible Preferred Stock (“
Series C
”)
|
|
|
|
|
5)
|
850
shares have been designated as Series D Convertible Preferred Stock (“
Series D
”)
|
|
|
|
|
6)
|
500
shares have been designated as Series E Convertible Preferred Stock
(“Series E”)
|
|
|
|
|
7)
|
240,000
shares have been designated as Series G Convertible Preferred Stock (“
Series G
”)
|
|
|
|
|
8)
|
10,000
shares have been designated as Series H Convertible Preferred Stock (“
Series H
”)
|
|
|
|
|
9)
|
21
shares have been designated as Series H2 Convertible Preferred Stock (“
Series H2
”)
|
|
|
|
|
10)
|
6,250
shares have been designated as Series J Convertible Preferred Stock (“
Series J
”)
|
|
|
|
|
11)
|
15,000
shares have been designated as Series K Convertible Preferred Stock (“
Series K
”)
|
As
of December 31, 2016 and 2015, there were no shares of Junior A, and Series A, B, C, E, and H1 issued and outstanding.
Series
D Convertible Preferred Stock
On
November 11, 2011, we completed a registered direct offering, pursuant to which we sold an aggregate of 843 units for a purchase
price of $1,000 per unit, resulting in gross proceeds to us of $843,000 (the “
Series D Placement
”). Each unit
(“
Series D Unit
”) consisted of (i) one share of Series D Convertible Preferred Stock, $0.01 par value per share
(the “
Series D Convertible Preferred Stock
”) convertible into 1,538.46 shares of our common stock, (subject
to adjustment for stock splits, stock dividends, recapitalization, etc.) and (ii) one five-year warrant to purchase approximately
614 shares of our common stock at a per share exercise price of $0.81, subject to adjustment as provided in the Warrants (“
Series
D Warrant
”). The Series D Warrants will be exercisable beginning on May 11, 2012 and until the close of business on
the fifth anniversary of the initial exercise date.
The
proceeds from the sale of each Series D Unit were allocated between the Series D Convertible Preferred Stock and the Series D
Warrants based on the residual method. The estimated fair value of the Series D Warrants was determined using a binomial formula,
resulting in an allocation of the gross proceeds of $283,725 to the total warrants issued. The allocation of the gross proceeds
to the Series D Convertible Preferred Stock was $559,275. In accordance with the provisions of ASC 470-20, an additional adjustment
between Additional Paid in Capital and Accumulated Deficit of $530,140 was recorded to reflect an implicit non-cash dividend related
to the allocation of proceeds between the stock and warrants issued. The $530,140 represents the value of the adjustment to additional
paid in capital related to the beneficial conversion feature of the Series D Convertible Preferred Stock. The value adjustment
was calculated by subtracting the fair market value of the underlying common stock on November 10, 2011 issuable upon conversion
of the Series D Convertible Preferred Stock from the fair market value of the Series D Convertible Preferred Stock as determined
when the Company performed a fair market value allocation of the proceeds to the Series D Convertible Preferred Stock and warrants.
The warrants are recorded as a liability. See “Warrant Derivative Liability” below.
The
Series D Convertible Preferred Stock will rank senior to the Company’s common stock and Series C Convertible Preferred Stock
with respect to payments made upon liquidation, winding up or dissolution. Upon any liquidation, dissolution or winding up of
the Company, after payment of the Company’s debts and liabilities, and before any payment is made to the holders of any
junior securities, the holders of Series D Convertible Preferred Stock will first be entitled to be paid $1,000 per share subject
to adjustment for accrued but unpaid dividends.
We
may not pay any dividends on shares of common stock unless we also pay dividends on the Series D Convertible Preferred Stock in
the same form and amount, on an as-if-converted basis, as dividends actually paid on shares of our common stock. Except for such
dividends, no other dividends may be paid on the Series D Convertible Preferred Stock.
Each
share of Series D Convertible Preferred Stock is convertible into 1,538.46 shares of common stock (based upon an initial conversion
price of $0.65 per share) at any time at the option of the holder, subject to adjustment for stock splits, stock dividends, combinations,
and similar recapitalization transactions (the “
Series D Conversion Ratio
”). Subject to certain exceptions,
if the Company issues any shares of common stock or common stock equivalents at a per share price that is lower than the conversion
price of the Series D Convertible Preferred Stock, the conversion price will be reduced to the per share price at which such shares
of common stock or common stock equivalents are issued. Each share of Series D Convertible Preferred Stock will automatically
be converted into shares of common stock at the Series D Conversion Ratio then in effect if, after six months from the closing
of the Series D Placement, the common stock trades on the OTCQB (or other primary trading market or exchange on which the common
stock is then traded) at a price equal to at least 300% of the then effective Series D Convertible Preferred Stock conversion
price for 20 out of 30 consecutive trading days with each trading day having a volume of at least $50,000. Unless waived under
certain circumstances by the holder of the Series D Convertible Preferred Stock, such holder’s Series D Convertible Preferred
Stock may not be converted if upon such conversion the holder’s beneficial ownership would exceed certain thresholds.
In
addition, in the event we consummate a merger or consolidation with or into another person or other reorganization event in which
our shares of common stock are converted or exchanged for securities, cash or other property, or we sell, lease, license or otherwise
dispose of all or substantially all of our assets or we or another person acquire 50% or more of our outstanding shares of common
stock, then following such event, the holders of the Series D Convertible Preferred Stock will be entitled to receive upon conversion
of the Series D Convertible Preferred Stock the same kind and amount of securities, cash or property which the holders of the
Series D Convertible Preferred Stock would have received had they converted the Series D Convertible Preferred Stock immediately
prior to such fundamental transaction.
The
holders of Series D Convertible Preferred Stock are not entitled to vote on any matters presented to the stockholders of the Company
for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu
of meeting), except that the holders of Series D Convertible Preferred Stock may vote separately as a class on any matters that
would (i) amend, our Restated Articles of Organization, as amended, in a manner that adversely affects the rights of the Series
D Convertible Preferred Stock, (ii) alter or change adversely the powers, preferences or rights of the Series D Convertible Preferred
Stock or alter or amend the certificate of designation, (iii) authorize or create any class of shares ranking as to dividends,
redemption or distribution of assets upon liquidation senior to, or otherwise pari passu with, the Series D Convertible Preferred
Stock, or (iv) increase the number of authorized shares of Series D Convertible Preferred Stock.
If,
within 12 months of the initial issuance of the Series D Convertible Preferred Stock, we issue any common stock, common stock
equivalents, indebtedness or any combination thereof (a “
Subsequent Financing
”), the holders of Series D Convertible
Preferred Stock will have the right to participate on a pro-rata basis in up to 50% of such Subsequent Financing.
Series
D Warrants
The
Series D Warrants originally had an exercise price equal to $0.81 per share of common stock. In April 2012, the number of Series
D Warrants increased by 530,406 to a total of 1,047,875 and each Series D Warrant had an exercise price reset to $0.40 per share
of common stock. In December of 2013 the number of Series D Warrants increased by 628,733 to a total of 1,676,608 and each Series
D Warrant had an exercise price reset to $0.25 per share of common stock. The Series D Warrants will be exercisable beginning
on the six-month anniversary of the date of issuance and expire five years from the initial exercise date. The Series D Warrants
permit the holder to conduct a “cashless exercise” at any time a registration statement registering, or the prospectus
contained therein, is not available for the issuance of the shares of common stock issuable upon exercise of the Series D Warrant,
and under certain circumstances at the expiration of the Series D Warrants. The exercise price and/or number of shares of common
stock issuable upon exercise of the Series D Warrants are subject to adjustment for certain stock dividends, stock splits or similar
capital reorganizations, as set forth in the Warrants. The exercise price is also subject to adjustment in the event that we issue
any shares of common stock or common stock equivalents at a per share price that is lower than the exercise price for the Series
D Warrants then in effect. Upon any such issuance, subject to certain exceptions, the exercise price will be reduced to the per
share price at which such shares of common stock or common stock equivalents are issued and number of Series D Warrant shares
issuable thereunder shall be increased such that the aggregate exercise price payable thereunder, after taking into account the
decrease in the exercise price, shall be equal to the aggregate exercise price prior to such adjustment. Unless waived under certain
circumstance by the holder of a Series D Warrant, such holder may not exercise the Series D Warrant if upon such exercise the
holder’s beneficial ownership of the Company’s common stock would exceed certain thresholds.
In
the event we consummate a merger or consolidation with or into another person or other reorganization event in which our shares
of common stock are converted or exchanged for securities, cash or other property, or we sell, lease, license or otherwise dispose
of all or substantially all of our assets or we or another person acquire 50% or more of our outstanding shares of common stock,
then following such event, the holders of the Series D Warrants will be entitled to receive upon exercise of the Series D Warrants
the same kind and amount of securities, cash or property which the holders would have received had they exercised the Series D
Warrants immediately prior to such fundamental transaction.
Series
G Convertible Preferred Stock
On
July 6 and November 15, 2012, we completed a private placement, pursuant to which we sold an aggregate of 145,320 units for a
purchase price of $5.00 per unit (the “Series G Purchase Price”), resulting in gross proceeds to us of $726,600 (the
“
Series G Private Placement
”). Each unit (“
Series G Unit
”) consists of (i) one share of
Series G Convertible Preferred Stock, $0.01 par value per share (the “Series G Preferred Stock”) convertible into
10 shares of our common stock, (subject to adjustment for stock splits, stock dividends, recapitalization, etc.) and (ii) a three-year
warrant to purchase 5 shares of our common stock at a per share exercise price of $0.50 (the “
Series G Warrant
”).
The Series G Warrants will be exercisable until the close of business on the third anniversary of the applicable closing date
of the Series G Private Placement.
Each
share of Series G Preferred Stock will receive a cumulative dividend at the annual rate of (i) four percent (4%) on those shares
of Series G Preferred Stock purchased from the Company by an individual purchaser with an aggregate investment of less than $100,000,
(ii) six percent (6%) on those shares of Series G Preferred Stock purchased from the Company by an individual purchaser with an
aggregate investment of at least $100,000 but less than $250,000, and (iii) twelve percent (12%) on those shares of Series G Preferred
Stock purchased from the Company by an individual purchaser with an aggregate investment of at least $250,000. Dividends accruing
on the Series G Preferred Stock shall accrue from day to day until, and shall be paid within fifteen (15) days of, the first anniversary
of, the original issue date of the Series G Preferred Stock; provided, however, if any shares of the Company’s Series E
Preferred Stock are outstanding at such time, payment of the accrued dividends on the Series G Preferred Stock shall be deferred
until no such shares of Series E Convertible Preferred Stock remain outstanding. The Company may pay accrued dividends on the
Series G Preferred Stock in cash or in shares of its common stock equal to the volume weighted average price of the common stock
as reported by the OTCQB for the ten (10) trading days immediately preceding the Series G’s first anniversary.
At
the election of the Company and upon required advanced notice, each share of Series G Preferred Stock will automatically be converted
into shares of common stock at the Conversion Ratio then in effect: (i) if, after 6 months from the original issuance date of
the Series G Preferred Stock, the common stock trades on the OTCQB (or other primary trading market or exchange on which the common
stock is then traded) at a price equal to at least $0.75, for 7 out of 10 consecutive trading days with average daily trading
volume of at least 10,000 shares, (ii) on or after the first anniversary of the original issuance date of the Series G Preferred
Stock or (iii) upon completion of a firm-commitment underwritten registered public offering by the Company at a per share price
equal to at least $0.75, with aggregate gross proceeds to the Company of not less than $2.5 million. Unless waived under certain
circumstances by the holder of the Series G Preferred Stock, such holder’s Series G Preferred Stock may not be converted
if upon such conversion the holder’s beneficial ownership would exceed certain thresholds.
The
holders of Series G Preferred Stock are not entitled to vote on any matters presented to the stockholders of the Company for their
action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting),
except as required by law.
Series
G Warrants
The
Series G Warrants issued in the Series G Private Placement had an exercise price equal to $0.50 per share and expired on July
6, 2015.
Series
H Convertible Preferred Stock
On
December 28, 2012 the Company amended the Articles of Incorporation to authorize 10,000 shares of Series H Convertible Preferred
Stock. On January 4, 2013, the Company reported that it had entered into a securities purchase and exchange agreement with an
investor, pursuant to which the Company agreed to exchange 1,000,000 shares of the Company’s common stock, par value $0.01
per share of common stock held by the investor for an aggregate of 10,000 shares of a newly created series of preferred stock,
designated Series H Convertible Preferred Stock, par value $0.01 per share (the “
Series H Preferred Stock
”)
in a non-cash transaction. The investor originally purchased the common stock from the Company for $0.8025 per share. The exchange
ratio was 100 shares of common stock per share of Series H Preferred Stock at a stated conversion price of $0.8025 per share.
Series
H2 Convertible Preferred Stock
On
December 23, 2014 the Company amended the Articles of Incorporation to authorize 21 shares of Series H2 Convertible Preferred
Stock. On December 23, 2014, the Company reported that it had entered into a securities purchase and exchange agreement with an
investor, pursuant to which the Company agreed to exchange 2,100,000 shares of the Company’s common stock, par value $0.01
per share of common stock held by the investor for an aggregate of 21 shares of a newly created series of preferred stock, designated
Series H2 Convertible Preferred Stock, par value $0.01 per share (the “
Series H2 Preferred Stock
”) in a non-cash
transaction. The investor originally acquired the common stock from the Company for $0.25 per share in the warrant reset transaction
on December 23, 2014. The exchange ratio was 100,000 shares of common stock per share of Series H2 Preferred Stock at a stated
conversion price of $0.25 per share.
Series
J Convertible Preferred Stock
On
February 6, March 28 and May 20, 2013, the Company entered into a Securities Purchase with various individuals pursuant to which
the Company sold an aggregate of 5,087.5 units for a purchase price of $400.00 per unit (the “Purchase Price”), or
an aggregate Purchase Price of $2,034,700. Each unit purchased in the initial tranche consists of (i) one share of a newly created
series of preferred stock, designated Series J Convertible Preferred Stock, par value $0.01 per share (the “Series J Convertible
Preferred Stock”), convertible into 1,000 shares of the Company’s common stock, par value $0.01 per share and (ii)
a warrant to purchase 1,000 shares of common stock at an exercise price equal to $0.40 per share. The warrants expire three years
from the issuance date.
From
the date of issuance of any shares of Series J Convertible Preferred Stock and until the earlier of the first anniversary of such
date, the voluntary conversion of any shares of Series J Convertible Preferred Stock, or the date of any mandatory conversion
(solely under the Company’s control based upon certain triggering events) of the Series J Convertible Preferred Stock, dividends
will accrue on each share of Series J Convertible Preferred Stock at an annual rate of (i) four percent (4%) of the Purchase Price
on those shares of Series J Convertible Preferred Stock purchased from the Company pursuant to the Securities Purchase Agreement
by an individual purchaser who purchased from the Company shares of Series J Convertible Preferred Stock with an aggregate Purchase
Price of less than $250,000, and (ii) six percent (6%) of the Purchase Price on those shares of Series J Convertible Preferred
Stock purchased from the Company pursuant to the Securities Purchase Agreement by an individual purchaser who purchased shares
of Series J Convertible Preferred Stock with an aggregate purchase price of at least $250,000. Dividends accruing on the Series
J Convertible Preferred Stock shall accrue from day to day until the earlier of the first anniversary of the date of issuance
of such shares of Series J Convertible Stock, the voluntary conversion of any shares of Series J Convertible Preferred Stock,
or the date of any mandatory conversion of the Series J Convertible Preferred Stock, and shall be paid, as applicable, within
fifteen (15) days of the first anniversary of the original issue date of the Series J Convertible Preferred Stock, within five
(5) days of the voluntary conversion of shares of the Series J Convertible Preferred Stock, or within five (5) days of the mandatory
conversion of shares of the Series J Convertible Preferred Stock. The Company may pay accrued dividends on the Series J Convertible
Preferred Stock in cash or, in the sole discretion of the Board of Directors of the Company, in shares of its common stock in
accordance with a specified formula.
Each
share of Series J Convertible Preferred Stock is convertible into 1,000 shares of common stock at the option of the holder on
or after the six-month anniversary of the issuance of such share, subject to adjustment for stock splits, stock dividends, recapitalizations
and similar transactions (the “Conversion Ratio”). Unless waived under certain circumstances by the holder of Series
J Convertible Preferred Stock, such holder’s shares of Series J Convertible Preferred Stock may not be converted if upon
such conversion the holder’s beneficial ownership would exceed certain thresholds.
At
the election of the Company and upon required advance notice, each share of Series J Convertible Preferred Stock will automatically
be converted into shares of common stock at the Conversion Ratio then in effect: (i) on or after the six-month anniversary of
the original issuance date of the Series J Convertible Preferred Stock, the common stock trades on the OTCQB (or other primary
trading market or exchange on which the common stock is then traded) at a price per share equal to at least $0.80 for 7 out of
10 consecutive trading days with average daily trading volume of at least 50,000 shares, (ii) on the first anniversary of the
original issuance date of the Series J Convertible Preferred Stock or (iii) within three days of the completion of a firm-commitment
underwritten registered public offering by the Company at a per share price equal to at least $0.80, with aggregate gross proceeds
to the Company of not less than $2.5 million. Unless waived under certain circumstances by the holder of the Series J Convertible
Preferred Stock, such holder’s Series J Convertible Preferred Stock may not be converted if upon such conversion the holder’s
beneficial ownership would exceed certain thresholds.
The
holders of Series J Convertible Preferred Stock are not entitled to vote on any matters presented to the stockholders of the Company
for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu
of meeting), except as required by law.
Series
J Warrants
The
Series J Warrants issued in the Series J Private Placement had an exercise price equal to $0.40 per share and expired on February
6, March 28 and May 20, 2016.
Registration
Rights Agreement
In
connection with the Private Placement, the Company has agreed that, if, at any time after February 1, 2014, the Company files
a Registration Statement relating to an offering of equity securities of the Company (the “Registration Statement”),
subject to certain exceptions, including a Registration Statement relating solely to an offering or sale of securities having
an aggregate public offering price of less than $5,000,000, the Company shall include in the Registration Statement the resale
of the shares of common stock underlying the Warrants. Shares of common stock issued upon conversion of Series J Convertible Preferred
Stock or in payment of the dividend on the Series J Convertible Preferred Stock will not be registered and will not be subject
to registration rights. This right is subject to customary conditions and procedures.
Series
K Convertible Preferred Stock
On
December 12, 2013, the Company entered into a Securities Purchase with various individuals pursuant to which the Company sold
an aggregate of 4,000 units for a purchase price of $250.00 per unit (the “Purchase Price”), for an aggregate Purchase
Price of $1,000,000. Each unit purchased in the initial tranche consists of (i) one share of a newly created series of preferred
stock, designated Series K Convertible Preferred Stock, par value $0.01 per share (the “Series K Convertible Preferred Stock”),
convertible into 1,000 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 500
shares of common stock at an exercise price equal to $0.3125 per share. The warrants expire three years from the issuance date.
Of the $1,000,000 invested in the Private Placement, $572,044 was received in cash and $427,956 was from the conversion of outstanding
indebtedness and interest. The Company incurred $43,334 of fees in conjunction with this private placement. The purchasers in
the initial tranche of the private placement consisted of certain existing and new investors in the Company as well as all of
the members of the Company’s Board of Directors.
From
the date of issuance of any shares of Series K Convertible Preferred Stock and until the earlier of the first anniversary of such
date, the voluntary conversion of any shares of Series K Convertible Preferred Stock, or the date of any mandatory conversion
(solely under the Company’s control based upon certain triggering events) of the Series K Convertible Preferred Stock, dividends
will accrue on each share of Series K Convertible Preferred Stock at an annual rate of (i) four percent (4%) of the Purchase Price
on those shares of Series K Convertible Preferred Stock purchased from the Company pursuant to the Securities Purchase Agreement
by an individual purchaser who purchased from the Company shares of Series K Convertible Preferred Stock with an aggregate Purchase
Price of less than $100,000, and (ii) six percent (6%) of the Purchase Price on those shares of Series K Convertible Preferred
Stock purchased from the Company pursuant to the Securities Purchase Agreement by an individual purchaser who purchased shares
of Series K Convertible Preferred Stock with an aggregate purchase price of at least $100,000. Dividends accruing on the Series
K Convertible Preferred Stock shall accrue from day to day until the earlier of the first anniversary of the date of issuance
of such shares of Series K Convertible Stock, the voluntary conversion of any shares of Series K Convertible Preferred Stock,
or the date of any mandatory conversion of the Series K Convertible Preferred Stock, and shall be paid, as applicable, within
fifteen (15) days of the first anniversary of the original issue date of the Series K Convertible Preferred Stock, within five
(5) days of the voluntary conversion of shares of the Series K Convertible Preferred Stock, or within five (5) days of the mandatory
conversion of shares of the Series K Convertible Preferred Stock. The Company may pay accrued dividends on the Series K Convertible
Preferred Stock in cash or, in the sole discretion of the Board of Directors of the Company, in shares of its common stock in
accordance with a specified formula.
Each
share of Series K Convertible Preferred Stock is convertible into 1,000 shares of common stock at the option of the holder on
or after the six-month anniversary of the issuance of such share, subject to adjustment for stock splits, stock dividends, recapitalizations
and similar transactions (the “Conversion Ratio”). Unless waived under certain circumstances by the holder of Series
K Convertible Preferred Stock, such holder’s shares of Series K Convertible Preferred Stock may not be converted if upon
such conversion the holder’s beneficial ownership would exceed certain thresholds.
At
the election of the Company and upon required advance notice, each share of Series K Convertible Preferred Stock will automatically
be converted into shares of common stock at the Conversion Ratio then in effect: (i) on or after the six-month anniversary of
the original issuance date of the Series K Convertible Preferred Stock, the common stock trades on the OTCQB (or other primary
trading market or exchange on which the common stock is then traded) at a price per share equal to at least $0.80 for 7 out of
10 consecutive trading days with average daily trading volume of at least 50,000 shares, (ii) on the first anniversary of the
original issuance date of the Series K Convertible Preferred Stock or (iii) within three days of the completion of a firm-commitment
underwritten registered public offering by the Company at a per share price equal to at least $0.80, with aggregate gross proceeds
to the Company of not less than $2.5 million. Unless waived under certain circumstances by the holder of the Series K Convertible
Preferred Stock, such holder’s Series K Convertible Preferred Stock may not be converted if upon such conversion the holder’s
beneficial ownership would exceed certain thresholds.
The
proceeds from the sale of each Series K Unit were allocated between the Series K Convertible Preferred Stock and the Series K
Warrants based on the relative fair value method. The estimated fair value of the Series K Warrants was determined using a Black-Scholes
formula, resulting in an allocation of the gross proceeds of $271,422 to the total warrants issued. The allocation of the gross
proceeds to the Series K Convertible Preferred Stock was $685,245, net of $43,334 in fees. In accordance with the provisions of
ASC 470-20, an additional adjustment in the aggregate between Additional Paid in Capital and Accumulated Deficit of $1,495,415
was recorded for all tranches of Series K to reflect an implicit, deemed non-cash dividend related to the allocation of proceeds
between the stock and warrants issued. The $1,495,415 represents the aggregate value of the adjustment to additional paid in capital
related to the beneficial conversion feature of the Series K Convertible Preferred Stock. The value adjustment was calculated
by subtracting the fair market value of the underlying common stock on the closing dates issuable upon conversion of the Series
K Convertible Preferred Stock from the fair market value of the Series K Convertible Preferred Stock as determined when the Company
performed a fair market value allocation of the proceeds to the Series K Convertible Preferred Stock and warrants.
On
January 29, 2014, the Company entered into a Securities Purchase Agreement with various accredited investors, pursuant to which
the Company sold an aggregate of 4,875 units for a purchase price of $250.00 per unit or an aggregate Purchase Price of $1,218,750.
This was the second tranche of a $1.5 million private placement previously disclosed by the Company in its Current Report on Form
8-K filed with the Securities and Exchange Commission on December 12, 2013, which is incorporated by reference herein. The Purchasers
in the second tranche of the Private Placement consisted of certain existing and new investors in the Company, as well as all
of the members of the Company’s board of directors.
Each
unit purchased in the second tranche consists of (i) one share of Series K Convertible Preferred Stock, par value $0.01 per share,
convertible into 1,000 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 500
shares of common stock at an exercise price equal to $0.3125 per share, with a term expiring on January 29, 2017.
On
February 28, 2014, the Company entered into a Securities Purchase Agreement with various accredited investors, pursuant to which
the Company sold an aggregate of 1,854 units for a purchase price of $340.00 per unit or an aggregate Purchase Price of $630,360.
This was the third tranche of a $1.5 million private placement previously disclosed by the Company in its Current Report on Form
8-K filed with the Securities and Exchange Commission on December 12, 2013, which is incorporated by reference herein. The Purchasers
in the third tranche of the Private Placement consisted of certain existing and new investors in the Company.
Each
unit purchased in the third tranche consists of (i) one share of Series K Convertible Preferred Stock, par value $0.01 per share
convertible into 1,000 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 500
shares of common stock at an exercise price equal to $0.425 per share, with a term expiring on February 28, 2017.
On
June 30, 2014, the Company entered into a Securities Purchase Agreement with various accredited investors, pursuant to which the
Company sold an aggregate of 734 units for a purchase price of $300.00 per unit or an aggregate Purchase Price of $220,000. This
was the fourth tranche of a $1.5 million private placement previously disclosed by the Company in its Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 12, 2013, which is incorporated by reference herein. The Purchasers
in the fourth tranche of the Private Placement consisted of certain existing and new investors in the Company.
Each
unit purchased in the fourth tranche consists of (i) one share of Series K Convertible Preferred Stock, par value $0.01 per share
convertible into 1,000 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 500
shares of common stock at an exercise price equal to $0.375 per share, with a term expiring on June 30, 2017.
On
November 12, 2014, the Company entered into a Securities Purchase Agreement with various accredited investors, pursuant to which
the Company sold an aggregate of 1,052 units for a purchase price of $250.00 per unit or an aggregate Purchase Price of $263,000.
This was the fifth tranche of a $1.5 million private placement previously disclosed by the Company in its Current Report on Form
8-K filed with the Securities and Exchange Commission on December 12, 2013, which is incorporated by reference herein. The Purchasers
in the fourth tranche of the Private Placement consisted of certain existing and new investors in the Company.
Each
unit purchased in the fifth tranche consists of (i) one share of Series K Convertible Preferred Stock, par value $0.01 per share
convertible into 1,000 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 500
shares of common stock at an exercise price equal to $0.3125 per share, with a term expiring on November 12, 2017.
The
Private Placement was originally expected to raise $1.5 million and close on or before January 31, 2014. On January 29, 2014,
the Company’s Board of Directors voted to increase the subscription amount of the Private Placement by $718,750. The Board
of Directors also voted to extend the Private Placement until February 28, 2014. On February 28, 2014 the Company’s Board
of Directors voted to increase the subscription amount once again to a total of $3.5 million and extended the closing to April
4, 2014. On April 13, 2014 the Company’s Board of Directors voted to increase the subscription amount by $1 million, to
a total of $4.5 million, and extended the closing to May 31, 2014. On July 7, 2014 the Company’s Board of Directors voted
to extend the closing to August 15, 2014. Together with the initial tranche of $1,000,000 that closed on December 12, 2013, the
second tranche of $1,218,750 that closed January 29, 2014, the third tranche of $630,360 that closed February 28, 2014, the fourth
tranche of $220,000 that closed June 30, 2014, and the fifth tranche of $263,000 that closed November 12, 2014,the total consideration
received by the Company in the Private Placement is $3,332,110, which is comprised of $2,511,404 in cash and $820,706 from the
conversion of outstanding indebtedness and Board of Director fees. The placement was closed after the November 12, 2014 round.
On
September 22, 2014 the Company issued 64,000 shares of common stock for the conversion of 64 shares of Series K Preferred Convertible
Stock.
In
connection with the Series K Warrants, we calculated the fair value of the warrants received as described above using the Black-
Scholes formula with the below assumptions:
Assumptions
|
|
Series
K
Warrants
December 12, 2013
|
|
|
Series
K
Warrants
January 29, 2014
|
|
|
Series
K
Warrants
February 28, 2014
|
|
|
Series
K
Warrants
June 30, 2014
|
|
|
Series
K
Warrants
November 12, 2014
|
|
Contractual
life (in months)
|
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
Expected
volatility
|
|
|
136.1
|
|
|
|
152.4
|
|
|
|
152.7
|
|
|
|
153.9
|
|
|
|
153.9
|
|
Risk-free
interest rate
|
|
|
0.39
|
%
|
|
|
0.39
|
%
|
|
|
0.39
|
%
|
|
|
0.90
|
%
|
|
|
0.90
|
%
|
Exercise
price
|
|
$
|
0.3125
|
|
|
$
|
0.3125
|
|
|
$
|
0.425
|
|
|
$
|
0.375
|
|
|
$
|
0.3125
|
|
Fair
value per warrant
|
|
$
|
0.20
|
|
|
$
|
0.30
|
|
|
$
|
0.37
|
|
|
$
|
0.29
|
|
|
$
|
0.23
|
|
The
holders of Series K Convertible Preferred Stock are not entitled to vote on any matters presented to the stockholders of the Company
for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu
of meeting), except as required by law.
Series
K Warrants
The
warrants issued in the Private Placement have an exercise price equal to $0.3125 per share, for the December 12, 2013 and January
29, 2014 warrants, $0.425 per share for the February 28, 2014 warrants, $0.375 per share for the June 30, 2014 warrants and $0.3125
per share for the November 12, 2014 warrants, with a term expiring three years from the issuance date. The warrants also permit
the holder to conduct a “cashless exercise” at any time the holder of the warrant is an affiliate of the Company.
The exercise price and/or number of shares issuable upon exercise of the warrants will be subject to adjustment for stock dividends,
stock splits or similar capital reorganizations, as set forth in the warrant agreement.
Subject
to the terms and conditions of the warrants, at any time commencing six months from the closing date of the sale of Units under
the Securities Purchase Agreement the Company has the right to call the warrants for cancellation if the volume weighted average
price of its common stock on the OTCQB (or other primary trading market or exchange on which the common stock is then traded)
equals or exceeds three times the per share exercise price of the warrants for either (i) 10 consecutive trading days or (ii)
15 out of 25 consecutive trading days.
Registration
Rights Agreement
In
connection with the Private Placement, the Company has agreed that, if, at any time after February 1, 2014, the Company files
a Registration Statement relating to an offering of equity securities of the Company (the “Registration Statement”),
subject to certain exceptions, including a Registration Statement relating solely to an offering or sale of securities having
an aggregate public offering price of less than $5,000,000, the Company shall include in the Registration Statement the resale
of the shares of common stock underlying the warrants. Shares of common stock issued upon conversion of Series K Convertible Preferred
Stock or in payment of the dividend on the Series K Convertible Preferred Stock will not be registered and will not be subject
to registration rights. This right is subject to customary conditions and procedures.
Common
Stock
Stock
Options and Warrants
Our
stockholders approved our amended 2005 Equity Incentive Plan (the “
2005 Plan
”) pursuant to which an aggregate
of 1,800,000 shares of our common stock were reserved for issuance upon exercise of stock options or other equity awards made
under the 2005 Plan. Under the 2005 Plan, we may award stock options, shares of common stock, and other equity interests in the
Company to employees, officers, directors, consultants, and advisors, and to any other persons the Board of Directors deems appropriate.
As of December 31, 2016, options to acquire 1,153,750 shares were outstanding under the 2005 Plan with 586,250 shares available
for future grant under the Plan.
On
December 12, 2013 at the Company’s special meeting the shareholders approved the 2013 Equity Incentive Plan (the “
2013
Plan
”) pursuant to which 3,000,000 shares of our common stock were reserved for issuance upon exercise of stock options
or other equity awards under the 2013 Plan. Under the Plan, we may award stock options, shares of common stock, and other equity
interests in the Company to employees, officers, directors, consultants, and advisors, and to any other persons the Board of Directors
deems appropriate. As of December 31, 2016, options to acquire 2,047,500 shares were outstanding under the Plan with 952,500 shares
available for future grant under the 2013 Plan.
On
November 29, 2015 the Company’s Board of Directors adopted the 2015 Nonqualified Stock Option Plan (the “
2015 Plan
”)
pursuant to which 5,000,000 shares of our common stock were reserved for issuance upon exercise of non-qualified stock options
under the 2015 Plan. Under the Plan, we may award non-qualified stock options in the Company to employees, officers, directors,
consultants, and advisors, and to any other persons the Board of Directors deems appropriate. As of December 31, 2016, non-qualified
options to acquire 2,068,000 shares were outstanding under the Plan with 2,932,000 shares available for future grants under the
2015 Plan.
All
of the outstanding non-qualified options had an exercise price that was at or above the Company’s common stock share price
on December 31, 2016.
The
following tables summarize information concerning options and warrants outstanding and exercisable: