NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(UNAUDITED)
|
1)
|
Business
Overview, Liquidity and Management Plans
|
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 (45,000 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 the three months ended March 31,
2019 or in fiscal year 2018.
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 March 31, 2019,
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 Notes 6 and 7. In addition we raised cash through debt and equity financing after March 31, 2019
as described in Note 8. We have financing efforts in place to continue to raise cash through debt and equity offerings. 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. These financial statements do not include any adjustments that might result from this
uncertainty.
|
3)
|
Interim
Financial Reporting
|
The
accompanying unaudited consolidated balance sheet as of December 31, 2018, which was derived from audited financial statements,
and the unaudited interim consolidated financial statements of Pressure BioSciences, Inc. have been prepared in accordance with
accounting principles generally accepted in the United States of America (“generally accepted accounting principles”
or “GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material
adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2018. For further information, refer to the audited consolidated financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-K (the “Form 10-K”) for the fiscal year ended December
31, 2018 as filed with the Securities and Exchange Commission on April 16, 2019.
|
4)
|
Summary
of Significant Accounting Policies
|
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.
Reclassifications
Certain
prior year amounts have been reclassified to conform to our current year presentation.
Recent
Accounting Standards
From
time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company
as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards
that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
In
February 2016, the FASB issued ASU 2016-02, Leases (ASC Topic 842). The new standard requires the recognition of assets and liabilities
arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly,
a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease
obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments
over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification
of the lease as either finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease
will be included in the asset. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding
the amount, timing and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning
after December 15, 2018, and interim periods therein. The Company early adopted ASC 842 for 2018.
In
May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting
,
which clarifies that an entity should account for the effects of a modification unless the fair value, vesting terms and classification
as liability or equity of the modified and original awards do not change on the modification date. This ASU is effective for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this ASU effective
on January 1, 2018, on a prospective basis which did not have a material impact on the Company’s condensed consolidated
financial statements and related disclosures.
Effective
January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The
standard amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The most
significant impact to our consolidated financial statements relates to the recognition and measurement of equity investments at
fair value with changes recognized in Net income. The amendment also updates certain presentation and disclosure requirements.
The adoption of ASU 2016-01 did not have a material impact on the consolidated financial statements.
In
July 2018, the FASB issued ASU 2018-07, Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting as an amendment and update expanding the scope of Topic 718. The amendment specifies that Topic 718 now applies
to all share-based payment transactions, even non-employee awards, in which a grantor acquires goods or services to be used or
consumed in a grantor’s own operations by issuing share-based payment awards. Under the new guidance, awards to nonemployees
are measured on the grant date, rather than on the earlier of the performance commitment date or the date at which the nonemployee’s
performance is complete. Also, the awards would be measured by estimating the fair value of the equity instruments to be issued,
rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can
be measured more reliably. In addition, entities may use the expected term to measure nonemployee awards or elect to use the contractual
term as the expected term, on an award-by-award basis. The new guidance is effective for the Company in annual periods beginning
after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. Based on the new guidance,
the Company will measure its nonemployee stock awards at grant date not when the stock awards are vested. This new guidance did
not have a material impact on the Company’s consolidated financial statements.
Revenue
Recognition
We
recognize revenue in accordance with FASB ASC 606,
ASC 606, Revenue from Contracts with Customers,
and
ASC 340-40, Other
Assets and Deferred Costs—Contracts with Customers
. Revenue is measured based on a consideration specified in a contract
with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. We enter into sales contracts
that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are
not delivered in one reporting period. We measure and allocate revenue according to ASC 606-10.
We
identify a performance obligation as distinct if both the following criteria are true: the customer can benefit from the good
or service either on its own or together with other resources that are readily available to the customer and the entity’s
promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determining
the standalone selling price (“SSP”) and allocation of consideration from a contract to the individual performance
obligations, and the appropriate timing of revenue recognition, is the result of significant qualitative and quantitative judgments.
Management considers a variety of factors such as historical sales, usage rates, costs, and expected margin, which may vary over
time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. While
changes in the allocation of the SSP between performance obligations will not affect the amount of total revenue recognized for
a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect
on our financial position and result of operations. This is because the contract consideration is allocated to each performance
obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.
Taxes
assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that
are collected by the Company from a customer, are excluded from revenue.
Shipping
and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for
as a fulfillment cost and are in included in cost of revenues as consistent with treatment in prior periods.
Our
current Barocycler® instruments 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, will send a highly trained technical
representative to the customer site to install Barocycler®s 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. Our sales arrangements
do not provide our customers with a right of return. Any shipping costs billed to customers are recognized as revenue.
The
majority of our instrument and consumable contracts contain pricing that is based on the market price for the product at the time
of delivery. Our obligations to deliver product volumes are typically satisfied and revenue is recognized when control of the
product transfers to our customers. Concurrent with the transfer of control, we typically receive the right to payment for the
shipped product and the customer has significant risks and rewards of ownership of the product. Payment terms require customers
to pay shortly after delivery and do not contain significant financing components.
We
apply 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.
|
|
We
currently record revenue for its non-cash transactions at recorded cost or carrying value of the assets or services sold.
|
In
accordance with FASB ASC 842,
Leases
, we account for our lease agreements under the operating method. The new
standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’
for our instrument leases, which permits us not to reassess under the new standard our prior conclusions about lease identification,
lease classification and initial direct costs.
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 accompanying 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 expenses are incurred under the grant in accordance with the terms of the grant award.
Deferred
revenue represents amounts received from grants and service contracts for which the related revenues have not been recognized
because one or more of the revenue recognition criteria have not been met. Revenue from service contracts is recorded ratably
over the length of the contract.
Disaggregation
of revenue
In
the following table, revenue is disaggregated by primary geographical market, major product line, and timing of revenue recognition.
In
thousands of US dollars ($)
|
|
|
|
|
|
|
Primary
geographical markets
|
|
Q1
2019
|
|
|
Q1
2018
|
|
North America
|
|
|
224
|
|
|
|
365
|
|
Europe
|
|
|
40
|
|
|
|
155
|
|
Asia
|
|
|
246
|
|
|
|
91
|
|
|
|
|
510
|
|
|
|
611
|
|
Major
products/services lines
|
|
Q1
2019
|
|
|
Q1
2018
|
|
Instruments
|
|
|
138
|
|
|
|
420
|
|
Grants
|
|
|
0
|
|
|
|
25
|
|
Consumables
|
|
|
62
|
|
|
|
75
|
|
Others
|
|
|
310
|
|
|
|
91
|
|
|
|
|
510
|
|
|
|
611
|
|
Timing
of revenue recognition
|
|
Q1
2019
|
|
|
Q1
2018
|
|
Products
transferred at a point in time
|
|
|
501
|
|
|
|
576
|
|
Products
and services transferred over time
|
|
|
9
|
|
|
|
35
|
|
|
|
|
510
|
|
|
|
611
|
|
Contract
balances
In
thousands of US dollars ($)
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Receivables, which are included
in ‘Accounts Receivable’
|
|
|
443
|
|
|
|
475
|
|
Contract liabilities (deferred revenue)
|
|
|
71
|
|
|
|
59
|
|
Transaction
price allocated to the remaining performance obligations
The
following table includes estimated revenue expected to be recognized in the future related to performance obligations that are
unsatisfied (or partially unsatisfied) at the end of the reporting period.
In
thousands of US dollars ($)
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
Extended warranty service
|
|
|
37
|
|
|
|
34
|
|
|
|
-
|
|
|
|
71
|
|
All
consideration from contracts with customers is included in the amounts presented above.
Contract
Costs
The
Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the
assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general, and
administrative expenses. The costs to obtain a contract are recorded immediately in the period when the revenue is recognized
either upon shipment or installation. The costs to obtain a service contract are considered immaterial when spread over the life
of the contract so the Company records the costs immediately upon billing.
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
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 and warrant derivative liability. 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.
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, large pharmaceutical and biotechnology companies, and academic
laboratories.
The
following table illustrates the level of concentration as a percentage of total revenues during the three months ended March 31,
2019 and 2018. The Top Five Customers category may include federal agency revenues if applicable.
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Top Five Customers
|
|
|
73
|
%
|
|
|
40
|
%
|
Federal Agencies
|
|
|
18
|
%
|
|
|
4
|
%
|
The
following table illustrates the level of concentration as a percentage of net accounts receivable balance as of March 31, 2019
and December 31, 2018. The Top Five Customers category may include federal agency receivable balances if applicable.
|
|
March
31, 2019
|
|
|
December,
31, 2018
|
|
Top Five Customers
|
|
|
77
|
%
|
|
|
54
|
%
|
Federal Agencies
|
|
|
18
|
%
|
|
|
5
|
%
|
Product
Supply
CBM
Industries (Taunton, MA) has recently become the manufacturer of the Barocycler® 2320EXT. CBM is ISO 13485:2003 and 9001:2008
Certified. CBM provides us with precision manufacturing services that include management support services to meet our specific
application and operational requirements. Among the services provided by CBM to us are:
|
●
|
CNC
Machining
|
|
|
|
|
●
|
Contract
Assembly & Kitting
|
|
|
|
|
●
|
Component
and Subassembly Design
|
|
|
|
|
●
|
Inventory
Management
|
|
|
|
|
●
|
ISO
certification
|
At
this time, we believe that outsourcing the manufacturing of our new Barocycler® 2320EXT to CBM is the most cost-effective
method for us to obtain and maintain ISO Certified, CE and CSA Marked instruments. CBM’s close proximity to our South Easton,
MA facility is a significant asset enabling interactions between our Engineering, R&D, and Manufacturing groups and their
counterparts at CBM. CBM was instrumental in helping PBI achieve CE Marking on our Barocycler 2320EXT, as announced on February
2, 2017.
Although
we currently manufacture and assemble the Barozyme HT48, Barocycler® HUB440, the SHREDDER SG3, and most of our consumables
at our South Easton, MA facility, we plan to take advantage of outsourced manufacturing relationships such as that
with CBM and outsource manufacturing of the entire Barocycler® product line, future instruments, and other products
to CBM.
Investment
in Equity Securities
As
of March 31, 2019, we held 100,250 shares of common stock of Everest Investments Holdings S.A. (“Everest”), a Polish
publicly traded company listed on the Warsaw Stock Exchange. We account for this investment in accordance with ASC 321
“Investments —Equity Securities”
. ASC 321 requires equity investments with readily determinable fair
values to be measured at fair value with changes in fair value recognized in net income. On March 31, 2019, our consolidated
balance sheet reflected the fair value of our investment in Everest to be approximately $17,000. We recorded $3,182 as realized
losses in 2018 for the changes in market value.
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, 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 to our net loss.
The
following table illustrates our computation of loss per share for the three months ended March 31, 2019 and 2018:
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(3,470,982
|
)
|
|
$
|
(2,231,654
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted
loss per share:
|
|
|
|
|
|
|
|
|
Weighted average common stock shares
outstanding
|
|
|
1,723,557
|
|
|
|
1,363,326
|
|
|
|
|
|
|
|
|
|
|
Loss per common
share – basic and diluted
|
|
$
|
(2.01
|
)
|
|
$
|
(1.64
|
)
|
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 to our net loss. The Series D Convertible Preferred Stock, Series G Convertible Preferred Stock, Series
H and H2 Convertible Preferred Stock, Series J Convertible Preferred Stock, Series K Convertible Preferred Stock and Series AA
Convertible Preferred Stock are presented below as if they were converted into common shares according to the conversion terms.
|
|
As
of March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
366,734
|
|
|
|
247,136
|
|
Convertible debt
|
|
|
471,015
|
|
|
|
1,020,603
|
|
Common stock warrants
|
|
|
8,380,875
|
|
|
|
928,541
|
|
Convertible preferred stock:
|
|
|
|
|
|
|
|
|
Series D Convertible
Preferred Stock
|
|
|
25,000
|
|
|
|
25,000
|
|
Series G Convertible
Preferred Stock
|
|
|
26,857
|
|
|
|
26,857
|
|
Series H Convertible
Preferred Stock
|
|
|
33,334
|
|
|
|
33,334
|
|
Series H2 Convertible
Preferred Stock
|
|
|
70,000
|
|
|
|
70,000
|
|
Series J Convertible
Preferred Stock
|
|
|
115,267
|
|
|
|
115,267
|
|
Series K Convertible
Preferred Stock
|
|
|
229,334
|
|
|
|
229,334
|
|
Series
AA Convertible Preferred Stock
|
|
|
7,059,822
|
|
|
|
-
|
|
|
|
|
16,778,238
|
|
|
|
2,696,072
|
|
Accounting
for Stock-Based Compensation Expense
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 stock-based 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.
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.
Expected
Term - The Company uses the simplified calculation of expected life, 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
- 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. The Company
used this historical rate as our assumption in calculating future stock-based compensation expense.
The
Company recognized stock-based compensation expense of $245,392 and $86,020 for the three months ended March 31, 2019 and
2018, respectively. The following table summarizes the effect of this stock-based compensation expense within each of the line
items of our costs and expenses within our Consolidated Statements of Operations:
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of sales
|
|
$
|
8,316
|
|
|
$
|
-
|
|
Research and development
|
|
|
34,624
|
|
|
|
15,499
|
|
Selling and marketing
|
|
|
22,119
|
|
|
|
7,197
|
|
General and
administrative
|
|
|
180,333
|
|
|
|
63,324
|
|
Total stock-based
compensation expense
|
|
$
|
245,392
|
|
|
$
|
86,020
|
|
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. Long-term liabilities are primarily related to convertible debentures and deferred revenue
with carrying values that approximate fair value.
Fair
Value Measurements
The
Company follows the guidance of FASB ASC Topic 820, “
Fair Value Measurements and Disclosures
” (“ASC 820”)
as it related to all financial assets and financial liabilities that are recognized or disclosed at fair value in the 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 the Company to develop its own assumptions. A slight change in an unobservable input like volatility
could have a significant impact on the fair value measurement of the derivative liability.
Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement. The Company has determined that its financial assets are classified within Level 1 and its financial liabilities
are currently classified within Level 3 in the fair value hierarchy. The development of the unobservable inputs for Level 3 fair
value measurements and fair value calculations are the responsibility of the Company’s management.
The
following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring
basis as of March 31, 2019:
|
|
|
|
|
Fair
value measurements at
March 31, 2019 using:
|
|
|
|
March
31, 2019
|
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Equity
Securities
|
|
|
16,643
|
|
|
|
16,643
|
|
|
|
-
|
|
|
|
-
|
|
Total Financial
Assets
|
|
$
|
16,643
|
|
|
$
|
16,643
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring
basis as of December 31, 2018:
|
|
|
|
|
Fair
value measurements at
December 31, 2018 using:
|
|
|
|
December
31, 2018
|
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Equity
Securities
|
|
|
16,643
|
|
|
|
16,643
|
|
|
|
-
|
|
|
|
-
|
|
Total Financial
Assets
|
|
$
|
16,643
|
|
|
$
|
16,643
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Adoption
of ASU No. 2016-02
The
Company has early adopted ASU No. 2016-02, Leases (Topic 842). The amendment requires companies to recognize leased assets and
liabilities on the balance sheet and to disclose key information regarding lease arrangements. This guidance is effective for
annual periods, and interim periods within those annual periods, after December 15, 2018. Early application of this amendment
is permitted for all entities. While we do not anticipate that going forward, leases will be material to our balance sheet, we
chose to early-adopt as of December 31, 2018. We have one lease that is required to be included on our balance sheet under the
new standard. This lease is an operating lease and, therefore, will have no income statement impact resulting from the adoption
of this standard.
|
5)
|
Commitments
and Contingencies
|
Operating
Leases
As
disclosed in Note 4, the Company early adopted ASC 842 to our existing leases. The Company has elected to apply the short-term
lease exception to leases of one year or less. Consequently, as a result of adoption of ASC 842, we recognized an operating liability
of $136,385 with a corresponding Right-Of-Use (“ROU”) asset of the same amount based on present value of the minimum
rental payments of the lease which is included in non-current assets and long-term liabilities in the consolidated balance sheet.
The discount rate used for leases accounted for under ASC 842 is the Company’s estimated borrowing rate of 25%.
Our
corporate office is currently located at 14 Norfolk Avenue, South Easton, Massachusetts 02375. We are currently paying $6,950
per month, on a lease extension, signed on December 28, 2018, that expires December 31, 2019, for our corporate office. We expanded
our space to include offices, warehouse and a loading dock on the first floor starting May 1, 2017 with a monthly rent increase
already reflected in the current payments.
We extended our lease
for our space in Medford, MA to December 30, 2020. The lease requires monthly payments of $7,130.50 subject to annual cost
of living increases. The lease can be extended by the Company for an additional three years unless either
party terminates at least six months prior to the expiration of the current lease term.
Rental costs are expensed
on a straight-line basis subject to future cost of living increases that are not known until the anniversary date of each year.
During the three months ended March 31, 2019 and 2018 we incurred $44,241 and $46,723 in rent expense, respectively for the
use of our corporate office and research and development facilities.
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 March 31, 2019:
2019
|
|
$
|
62,215
|
|
2020
|
|
|
82,953
|
|
2021
|
|
|
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
145,168
|
|
|
6)
|
Convertible
Debt and Other Debt
|
Conversion
of Notes
We
issued 5,075.40 shares of our Series AA Convertible Preferred Stock in satisfaction of $12,688,635 of convertible promissory notes,
Revolving Note and short-term loans issued:
|
|
Debt
converted
to stock
|
|
Current liabilities
|
|
|
|
|
Convertible
Debentures, face value
|
|
$
|
6,962,635
|
|
Revolving Note with
interest
|
|
|
4,750,000
|
|
May 19, 2017 Promissory
Note with interest
|
|
|
750,000
|
|
Other
Notes with interest
|
|
|
226,000
|
|
Total debt converted
during the year 2018
|
|
$
|
12,688,635
|
|
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 $8.40 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. On September 11, 2017, we notified Debenture holders that their Debentures will be extended
180 days beyond the original maturity date as permitted in the Debenture agreement. We will continue to pay interest on the Debentures
until the extended maturity date. We accounted for the Debenture extensions as debt modifications and not extinguishment of debt
since the changes in fair value are not substantial in accordance with ASC 470-50. We started amortizing the remaining unamortized
discount as of September 11, 2017 over the new term, which extends 180 days beyond the original maturity date.
In
connection with the Debentures issued, the Company issued warrants exercisable into a total of 376,759 shares of our common stock.
The Warrants issued in this transaction are immediately exercisable at an exercise price of $12.00 per share, subject to applicable
adjustments including full ratchet anti-dilution if 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.
On
May 2, 2018, the Company entered into a Securities Purchase Agreement with an existing shareholder pursuant to which the Company
sold an aggregate of 100 shares of Series AA Convertible Preferred Stock for an aggregate Purchase Price of $250,000. We issued
to the shareholder a new warrant to purchase 100,000 shares of common stock with an exercise price of $3.50 per share.
The
Company, pursuant to a price protection provision triggered on May 2, 2018 with the sale of Series AA units, amended the Debentures
and Warrants to purchase Common Stock held by the Debenture Holders entered into between July 22, 2015 and March 31, 2016 as first
disclosed in the Company’s Current Report on Form 8-K filed on July 28, 2015. The fair value of $207,899 relating to the
reduction in exercise price was treated as a deemed dividend and recorded as a charge against additional paid-in capital within
equity. The amended Debenture conversion price was exempt from revaluation because a beneficial conversion feature had already
been recorded on the Debenture at issuance.
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. On May 14 and June 11, 2018, the Company signed letter agreements
with the Debenture holders as explained below that discharged all of the Company’s obligations within the Debenture Agreement
Conversion
of Debentures
On
May 14, 2018, we entered into letter agreements (the “Letter Agreements”) with 22 investors (each a “Debenture
Holder” and together the “Debenture Holders”) holding convertible debentures (collectively the “Debentures”)
and warrants to purchase common stock (the “Debenture Warrants”) whereby the Debenture Holders agreed to convert a
total of $6,220,500 in principal and original issue discount due them under the Debentures into 2,448.20 shares of Series AA Convertible
Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended Debenture Warrants
such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of $3.50 per share to
purchase 2,448,200 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible
Preferred Stock shares received as a result of the Debenture conversions). The Debenture Holders also agreed to waive any and
all defaults or events of default by the Company with respect to any failure by the Company to comply with any covenants contained
in the Debentures. The fair value of $29,865 relating to the adjustment in exercise price was treated as a loan modification and
recorded as a gain toward the extinguishment of debt.
On
June 11, 2018, the Company entered into additional Letter Agreements with 15 Debenture Holders whereby the Debenture Holders agreed
to convert a total of $742,135 in principal and original issue discount due them under the Debentures into 296.80 shares of Series
AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended
Debenture Warrants such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of
$3.50 per share to purchase 296,800 shares of common stock (the number of shares of common stock issuable upon conversion of the
Series AA Convertible Preferred Stock shares received as a result of the Debenture conversions). The Debenture Holders also agreed
to waive any and all defaults or events of default by the Company with respect to any failure by the Company to comply with any
covenants contained in the Debentures. The fair value of $3,155 relating to the adjustment in exercise price was treated as a
loan modification and recorded as a gain toward the extinguishment of debt.
In
connection with the above Debenture conversions and cancellation of the debt term, the Company recorded the full amount of the
remaining unamortized Debenture discounts of $157,908 as interest expense by June 11, 2018. The Company recorded $287,676 of the
Debenture discounts during 2018 through the cancellation date of June 11, 2018.
On
various dates for the three months ended March 31, 2018, the Company issued 22,606 shares of common stock based on the 10-day
VWAP prior to quarter end to holders of the Debentures in payment of the quarterly interest accrued from the Debentures first
anniversary date through December 31, 2017 for an aggregate amount of $85,040. We recognized a $4,285 gain on extinguishment of
debt by calculating the difference of the shares valued on the issuance date and the amount of accrued interest through December
31, 2017.
Convertible
notes
The
Company, pursuant to a price protection provision triggered on May 2, 2018 with the sale of Series AA units, amended the conversion
price of a March 12, 2018 loan to $2.50 per share. The fair value of $253,000, limited to the face value of the loan, relating
to the reset in the conversion price was recorded as a debt discount and amortized as interest expense over the remaining loan
term.
On
various dates during the quarter ended March 31, 2019, the Company issued convertible notes for net proceeds of approximately
$1.5 million which contained varied terms and conditions as follows: a) maturity dates ranging from 2 to 12 months; b)
interest rates that accrue per annum ranging from 4% to 15%; c) convertible to the Company’s common stock at issuance at
a fixed rate of $7.50 or convertible at variable conversion rates either after 6 months after issuance or in the event of a default.
Certain of these notes were issued with shares of common stock or warrants to purchase common stock that were fair valued at issuance
dates. The aggregate relative fair value of $47,459 of the shares of common stock to purchase common stock issued with the notes
was recorded as a debt discount and amortized over the term of the notes. We then computed the effective conversion price of the
notes, noting that no beneficial conversion feature exists. We also evaluated the convertible notes for derivative liability treatment
and determined that the notes did not qualify for derivative accounting treatment as of March 31, 2019.
The
specific terms of the convertible notes and outstanding balances as of March 31, 2019 are listed in the tables below.
Inception
Date
|
|
Term
|
|
Loan
Amount
|
|
|
Outstanding
Balance
with OID
|
|
|
Original
Issue
Discount
|
|
|
Interest
Rate
|
|
|
Conversion
Price
(Convertible
at Inception
Date)
|
|
|
Deferred
Finance
Fees
|
|
|
Discount
related to fair
value of
conversion
feature and
warrants/shares
|
|
February 15, 2018
1
|
|
6 months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
15
|
%
|
|
$
|
7.50
|
|
|
|
9,000
|
|
|
|
10,474
|
|
April 11, 2018
1
|
|
6 months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
4,000
|
|
|
|
15
|
%
|
|
$
|
7.50
|
|
|
|
20,000
|
|
|
|
7,218
|
|
April 24, 2018
1
|
|
9 months
|
|
|
77,000
|
|
|
|
77,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
$
|
7.50
|
|
|
|
2,000
|
|
|
|
-
|
|
April 25, 2018
1
|
|
12 months
|
|
|
105,000
|
|
|
|
105,000
|
|
|
|
-
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
|
5,000
|
|
|
|
4,590
|
|
April 25, 2018
1
|
|
12 months
|
|
|
105,000
|
|
|
|
105,000
|
|
|
|
-
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
|
5,000
|
|
|
|
4,590
|
|
May 17, 2018
1
|
|
12 months
|
|
|
380,000
|
|
|
|
380,000
|
|
|
|
15,200
|
|
|
|
8
|
%
|
|
$
|
7.50
|
|
|
|
15,200
|
|
|
|
43,607
|
|
May 30, 2018
1
|
|
2 months
|
|
|
150,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
8
|
%
|
|
$
|
7.50
|
|
|
|
-
|
|
|
|
6,870
|
|
June 4, 2018
|
|
12 months
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
7,500
|
|
|
|
5
|
%
|
|
|
-
|
|
|
|
2,000
|
|
|
|
3,869
|
|
June 8, 2018
1
|
|
6 months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
2,500
|
|
|
|
15
|
%
|
|
$
|
7.50
|
|
|
|
2,500
|
|
|
|
3,271
|
|
June 12, 2018
1
|
|
6 months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
5
|
%
|
|
$
|
7.50
|
|
|
|
5,000
|
|
|
|
-
|
|
June 16, 2018
1
|
|
9 months
|
|
|
130,000
|
|
|
|
101,500
|
|
|
|
-
|
|
|
|
5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
June 16, 2018
1
|
|
6 months
|
|
|
110,000
|
|
|
|
101,500
|
|
|
|
-
|
|
|
|
5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
June 26, 2018
1
|
|
3 months
|
|
|
150,000
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
15
|
%
|
|
$
|
7.50
|
|
|
|
-
|
|
|
|
20,242
|
|
June 28, 2018
1
|
|
6 months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
15
|
%
|
|
$
|
7.50
|
|
|
|
-
|
|
|
|
10,518
|
|
July 17, 2018
1
|
|
3 months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
15,000
|
|
|
|
15
|
%
|
|
$
|
7.50
|
|
|
|
-
|
|
|
|
16,944
|
|
July 19, 2018
|
|
12 months
|
|
|
184,685
|
|
|
|
150,000
|
|
|
|
34,685
|
|
|
|
10
|
%
|
|
$
|
7.50
|
|
|
|
-
|
|
|
|
-
|
|
September 7, 2018
1
|
|
6 months
|
|
|
85,000
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
4,364
|
|
October 1, 2018
|
|
6 months
|
|
|
118,800
|
|
|
|
118,800
|
|
|
|
8,800
|
|
|
|
25
|
%
|
|
$
|
7.50
|
|
|
|
3,000
|
|
|
|
|
|
October 19, 2018
|
|
6 months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
5
|
%
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
October 23, 2018
|
|
6 months
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,000
|
|
|
|
|
|
October 29, 2018
|
|
6 months
|
|
|
77,000
|
|
|
|
77,000
|
|
|
|
|
|
|
|
12
|
%
|
|
$
|
7.50
|
|
|
|
2,000
|
|
|
|
|
|
November 5, 2018
|
|
6 months
|
|
|
105,000
|
|
|
|
105,000
|
|
|
|
|
|
|
|
4
|
%
|
|
|
-
|
|
|
|
5,000
|
|
|
|
3,872
|
|
November 5, 2018
|
|
6 months
|
|
|
130,000
|
|
|
|
130,000
|
|
|
|
|
|
|
|
6
|
%
|
|
$
|
7.50
|
|
|
|
6,500
|
|
|
|
|
|
November 7, 2018
|
|
6 months
|
|
|
205,000
|
|
|
|
205,000
|
|
|
|
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
|
5,000
|
|
|
|
17,906
|
|
November 13, 2018
|
|
6 months
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
7,500
|
|
|
|
5
|
%
|
|
|
-
|
|
|
|
2,000
|
|
|
|
4,656
|
|
November
13, 2018
|
|
6
months
|
|
|
200,000
|
|
|
|
185,000
|
|
|
|
|
|
|
|
15
|
%
|
|
$
|
7.50
|
|
|
|
|
|
|
|
30,026
|
|
November
21, 2018
|
|
9
months
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,000
|
|
|
|
|
|
November
27, 2018
|
|
12
months
|
|
|
70,000
|
|
|
|
70,000
|
|
|
|
|
|
|
|
4
|
%
|
|
|
-
|
|
|
|
2,500
|
|
|
|
1,922
|
|
January
2, 2019
|
|
12
months
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
|
6,250
|
|
|
|
6,620
|
|
January
9, 2019
|
|
12
months
|
|
|
105,000
|
|
|
|
105,000
|
|
|
|
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
|
5,000
|
|
|
|
2,416
|
|
January
9, 2019
|
|
12
months
|
|
|
118,750
|
|
|
|
118,750
|
|
|
|
|
|
|
|
5
|
%
|
|
$
|
7.50
|
|
|
|
8,750
|
|
|
|
|
|
January
11, 2019
|
|
9
months
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
|
|
|
|
8
|
%
|
|
|
-
|
|
|
|
3,000
|
|
|
|
|
|
January
31, 2019
|
|
12
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
6
|
%
|
|
$
|
7.50
|
|
|
|
5,000
|
|
|
|
|
|
January
31, 2019
|
|
12
months
|
|
|
108,000
|
|
|
|
108,000
|
|
|
|
8,000
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
|
3,000
|
|
|
|
|
|
February
8, 2019
|
|
12
months
|
|
|
237,500
|
|
|
|
237,500
|
|
|
|
14,750
|
|
|
|
5
|
%
|
|
$
|
7.50
|
|
|
|
7,000
|
|
|
|
|
|
February
21, 2019
|
|
12
months
|
|
|
215,000
|
|
|
|
215,000
|
|
|
|
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
|
15,000
|
|
|
|
18,582
|
|
February
22, 2019
|
|
12
months
|
|
|
65,500
|
|
|
|
65,000
|
|
|
|
6,500
|
|
|
|
5
|
%
|
|
$
|
7.50
|
|
|
|
2,000
|
|
|
|
4,198
|
|
February
22, 2019
|
|
9
months
|
|
|
115,563
|
|
|
|
115,563
|
|
|
|
8,063
|
|
|
|
7
|
%
|
|
$
|
7.50
|
|
|
|
2,500
|
|
|
|
|
|
February
27, 2019
|
|
10
months
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
|
|
|
|
8
|
%
|
|
|
-
|
|
|
|
3,000
|
|
|
|
|
|
March
18, 2019
|
|
6
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
|
-
|
|
|
|
10,762
|
|
March
19, 2019
|
|
12
months
|
|
|
131,250
|
|
|
|
131,250
|
|
|
|
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
|
6,250
|
|
|
|
4,509
|
|
|
|
|
|
$
|
4,966,048
|
|
|
$
|
4,743,863
|
|
|
$
|
132,498
|
|
|
|
|
|
|
|
|
|
|
$
|
164,450
|
|
|
$
|
242,046
|
|
1)
The notes were extended for an additional term.
For
the three months ended March 31, 2019, the Company recognized amortization expense related to the debt discounts indicated above
of $101,752. The unamortized debt discounts as of March 31, 2019 related to the convertible debentures and other convertible
notes amounted to $239,675.
Revolving
Note Payable and May 19,2017 Promissory Note
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 20,834 shares of our common stock
at an exercise price per share equal to $12.00 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. We received $3,500,000
pursuant to the Revolving Note as amended of which $2,070,000 net proceeds was received in 2017 and we issued to the Investor
warrants to purchase 291,667 shares of our Common Stock at an exercise price per share equal to $12.00 per share. The terms of
the Warrants are identical except for the exercise date, issue date, and termination date which are based on the advance date.
The
Revolving Note was amended on May 2, 2017 to increase the aggregate principal amount to $3,000,000, to issue 16,667 shares of
our Common Stock to the Investor, to decrease the exercise price per share of the warrants to the lower of (i) $12.00 or (ii)
the per share purchase price of the shares of our Common Stock sold in the Qualified Offering, and to change the references in
the Revolving Note from “the six (6) month anniversary of October 28, 2016” to “July 25, 2017.” The fair
value of the 16,667 shares issued of $149,018 was accounted for as a note discount and are amortized to interest expense over
the life of the loan. We evaluated the accounting impact of the Revolving Note amendment and deemed that the amendment did not
have a material impact on our consolidated financial statements.
The
Revolving Note was amended on August 18, 2017 to increase the aggregate principal amount to $3,500,000 with all other terms unchanged.
The Revolving Note, previously amended, was further amended on January 30, 2018 to increase the aggregate principal amount to
$4,000,000 with all other terms unchanged.
In
the event that a Qualified Offering had occurred after July 25, 2017, but prior to the Maturity Date, within seven (7) Business
Days of the closing of the Qualified Offering, the Company was to 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. A Qualified Offering did not occur on or prior to the Maturity Date.
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 $336,500, the one-time interest of $400,000 and the relative fair value of the 333,334 warrants issued to the
Investor amounting to $1,266,691 were recorded as debt discounts and amortized over the term of the revolving note. The unamortized
debt discounts related to the Revolving Note were fully amortized as of December 31, 2017. The finance costs from advances after
December 31, 2017 were charged to interest expense directly because the maturity date had passed.
On
May 19, 2017, we received a 45-day non-convertible loan of $630,000 from the Investor. The loan provided guaranteed interest of
$63,000 and had an origination fee of $32,000. We paid a broker $31,500 in connection with this loan.
Conversion
of October 26, 2016 Revolving Note and May 19, 2017 Promissory Note
On
June 11, 2018, the Company entered into a Letter Agreement with the Investor to convert a total of $5,500,000 in principal and
interest due to the Investor pursuant to the Revolving Note and the May 19, 2017 promissory note into 2,200 shares of Series AA
Convertible Preferred Stock with a conversion price of $2.50 per share. The Company also amended the Line of Credit Warrants held
by the Investor. The Company lowered the Line of Credit Warrants’ exercise price from $12.00 per share to $3.50 per share.
The fair value of $82,904 relating to the reduction in exercise price was treated as a loan modification and recorded as a charge
against the extinguishment of debt.
The
Company also issued a new warrant to the Investor with an exercise price of $3.50 per share to purchase 2,200,000 shares of common
stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received
as a result of the conversion of a total of $5,500,000). In connection with the Letter Agreement, the Investor also waived $520,680
of interest and fees owed as of September 30, 2018. We recognized $520,680 as a gain on extinguishment of debt.
Convertible
Loan Modifications and Extinguishments
We
refinanced certain convertible loans during the quarter ended March 31, 2019 at substantially the same terms for extensions of
six months. We amortized any remaining unamortized debt discount as of the modification date over the remaining, extended term
of the new loans. We applied ASC 470 of modification accounting to the debt instruments which were modified during the quarter
or those settled with new notes issued concurrently for the same amounts but different maturity dates. The terms such as the interest
rate, prepayment penalties, and default rates will be the same over the new extensions. According to ASC 470, an exchange of debt
instruments between or a modification of a debt instrument by a debtor and a creditor in a nontroubled debt situation is deemed
to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under
the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under
the terms of the original instrument. If the terms of a debt instrument are changed or modified and the cash flow effect on a
present value basis is less than 10 percent, the debt instruments are not considered to be substantially different and will be
accounted for as modifications.
The
cash flows of new debt exceeded 10% of the remaining cash flows of the original debt on three loans. We recorded losses on debt
extinguishment of $40,810 per income statement on these three loans by calculating the difference of the fair value of the new debt and the
carrying value of the old debt. The loss was primarily from the fair value of common stock issued in connection with these refinancings
and cash fees paid.
The
following table provides a summary of the changes in convertible debt and revolving note payable, net of unamortized discounts,
during 2019:
|
|
2019
|
|
Balance at January 1,
|
|
$
|
4,000,805
|
|
Issuance of convertible debt, face value
|
|
|
1,627,063
|
|
Deferred financing cost
|
|
|
(136,695
|
)
|
Debt discount from shares issued with
the notes
|
|
|
(48,552
|
)
|
Payments
|
|
|
(1,040,185
|
)
|
Accretion of
interest and amortization of debt discount to interest expense
|
|
|
101,752
|
|
Balance at March 31,
|
|
|
4,504,188
|
|
Less: current
portion
|
|
|
4,504,188
|
|
Convertible debt,
long-term portion
|
|
$
|
-
|
|
Other
Notes
In
March 2018, we received non-convertible loans totaling $150,000 from private investors. The loans include one-year term and 10%
guaranteed interest. We converted these loans into Series AA Units. See below.
In
April 2018, we received a non-convertible loan for $10,000 from a private investor. The loan includes a one-year term and 10%
guaranteed interest. We converted this loan into Series AA Units. See below.
In
January 2019, we received a non-convertible loan for $50,000 from a private investor. The loan includes a six-month term and 15%
guaranteed interest.
On January 1, 2019,
the Company and the holder of the $170,000 convertible loan issued in May 2017 agreed to extend the terms of the loan until September
30, 2019. The Company agreed to issue 1,200 shares of its common stock per month while the note remains outstanding. The loan
will continue to earn 10% annual interest.
On February 28, 2019 we
signed a Merchant Agreement with a lender. Under the agreement we received $600,000, of which approximately $349,000 was used
to pay off the outstanding balances on two merchant agreements, in exchange for rights to all customer receipts until the lender
is paid $804,000, which is collected at the rate of $4,020.00 per business day. The $240,000 imputed interest will be recorded
as interest expense when paid each day. Fees of $6,000 were deducted from the initial advance. The payments were secured by second
position rights to all customer receipts until the loan has been paid in full.
Conversion
of Non-Convertible Notes
On
June 11, 2018, the Company entered into Letter Agreements with certain private investors to convert a total of $176,000 in principal
and interest due to the private investors pursuant to certain loan documents into 70.4 Series AA Units representing 70.4 shares
of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share and warrants to purchase 70,400 shares of
common stock.
Merchant
Agreements
We
have signed various Merchant Agreements which entitle the lenders to our customer receipts. We accounted for the Merchant Agreements
as loans under ASC 860 because while we provided rights to current and future receipts, we still had control over the receipts.
Certain of these loans are guaranteed by an officer of the Company. The following table shows our Merchant Agreements as of March
31, 2019.
Inception
Date
|
|
Purchase
Price
|
|
|
Purchased
Amount
|
|
|
Outstanding
Balance
|
|
|
Daily
Payment
|
|
|
Deferred
Finance Fees
|
|
December 18, 2018
|
|
|
250,000
|
|
|
|
335,000
|
|
|
|
181,533
|
|
|
|
1,675.00
|
|
|
|
3,912
|
|
February 28,
2019
|
|
|
600,000
|
|
|
|
804,000
|
|
|
|
552,853
|
|
|
|
4,020.00
|
|
|
|
6,000
|
|
|
|
$
|
2,330,000
|
|
|
$
|
3,124,600
|
|
|
$
|
734,386
|
|
|
|
|
|
|
$
|
31,761
|
|
We
amortized $2,181 and $33,368 of debt discounts during the three months ended March 31, 2019 and 2018, respectively for
all non-convertible notes. The total unamortized discount for all non-convertible notes as of March 31, 2019 was $10,011.
Related
Party Notes
On
March 14, 2018, we received a one-year, non-convertible loan of $50,000 from a related party (a member of the Company’s
Board of Directors). This loan is included in net proceeds from non-convertible debt in the Statement of Cash Flows. The amount
of $50,000 was converted on June 11, 2018 into 20 shares of Series AA Convertible Preferred Stock and a Warrant to purchase 20,000
shares of common stock. The $7,500 guaranteed interest on the loan was recorded as a debt discount and amortized over the term
of the debt. The interest is outstanding as of December 31, 2018.
On
June 11, 2018, the Company entered into a Letter Agreement with one non-employee member of the Board, to convert $50,000 in principal
due to the board member pursuant to a certain loan document into 20 Series AA Units representing 20 shares of Series AA Convertible
Preferred Stock with a conversion price of $2.50 per share and warrants to purchase 20,000 shares of common stock.
In
June 2018, we received a non-convertible loan of $15,000 from a private investor. The loan includes a one-year term and 10% guaranteed
interest.
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
”)
|
|
|
|
|
12)
|
10,000
shares have been designated as Series AA Convertible Preferred Stock (“
Series AA
”)
|
As
of March 31, 2019, there were no shares of Junior A, and Series A, B, C, E and AA issued and outstanding. See our Annual Report
on Form 10-K for the year ended December 31, 2018 for the pertinent disclosures of preferred stock.
Series
AA Convertible Preferred Stock and Warrants
During
the three months ended March 31, 2019, the Company entered into Securities Purchase Agreements with shareholders pursuant to which
the Company sold an aggregate of 560 shares of Series AA Convertible Preferred Stock, each preferred share convertible into 1,000
shares of the Company’s common stock, par value $0.01 per share, for an aggregate Purchase Price of $1,400,000. Each share
of Series AA Convertible Preferred Stock will receive a cumulative dividend at the annual rate of eight percent (8%) payable quarterly
commencing on March 31, 2019 on those shares of Series AA Convertible Preferred Stock purchased from the Company. Broker fees
amounted to $140,000.
We
issued to the shareholders warrants to purchase 560,000 shares of common stock with an exercise price of $3.50 per share. The
Warrant will expire on the fifth-year anniversary after issuance. 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 AA 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.
Stock
Options and Warrants
Our
stockholders approved our amended 2005 Equity Incentive Plan (the “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 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. The Plan has expired
and on July 18, 2018, the outstanding options to acquire 32,605 shares were transferred as discussed below to one of the other
plans.
At
the Company’s December 12, 2013 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, 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 March 31, 2019, options to acquire 366,734 shares were outstanding under the Plan with 2,633,266 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, 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.
On
July 18, 2018, the Board of Directors approved the immediate termination of 244,467 outstanding stock options held by current
officers, employees and board members (32,605 stock options under the 2005 Plan, 81,925 stock options under the 2013 Plan, and
129,937 stock options under the 2015 Plan) and the issuance of new stock options to the same holders with an exercise price of
$3.40 per share equal to the closing market price on July 18, 2018 and an expiration date of July 18, 2028. The new stock options
for board members will vest 1/12th per month for 12 months. The new stock options for officers and employees will vest 1/36th
per month for 36 months. The 2005 Plan expired in 2015 so of the 32,605 terminated stock options, 16,641 stock options were issued
under the 2013 Plan and 15,964 stock options were issued under the 2015 Plan (in addition to the reissuance of 81,925 stock options
under the 2013 Plan, and 129,937 stock options under the 2015 Plan). The Board of Directors also awarded 101,267 stock options
to officers, employees and board members separately based on the annual compensation committee recommendation. Of the 101,267
stock options issued, 51,934 stock options were issued under the 2013 Plan and 49,333 stock options were issued under the 2015
Plan.
On
November 5, 2018 the Board of Directors approved the closing of the 2015 Plan and moved the 203,734 options outstanding in the
2015 Plan into the 2013 Plan which was then the only option plan still active. The unamortized expense related to this transfer
is $108,400 which will be amortized over the remaining life of the options.
We
evaluated this exchange and concluded that it was a modification under ASU 2017-09. Under ASU 2017-09, a cancelled equity award
accompanied by the concurrent grant of (or offer to grant) a replacement award or other valuable consideration shall be accounted
for as a modification of the terms of the cancelled award. Therefore, incremental compensation cost shall be measured as the excess
of the fair value of the replacement award or other valuable consideration over the fair value of the cancelled award at the cancellation
date in accordance with paragraph ASC 718-20-35-3. The total compensation cost measured at the date of a cancellation and replacement
shall be the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered
(or has already been rendered) at that date plus the incremental cost resulting from the cancellation and replacement. The compensation
value created by the termination and issuance of new stock options, as determined under the Black Scholes method, was approximately
$759,469 and under ASU 2017-09 results in a non-cash expense in current and future periods not to exceed the vesting periods of
the stock options.
As
of March 31, 2019, total unrecognized compensation cost related to the unvested stock-based awards was $714,218, which is expected
to be recognized over weighted average period of 1.03 years. The aggregate intrinsic value associated with the options outstanding
and exercisable and the aggregate intrinsic value associated with the warrants outstanding and exercisable as of March 31, 2019,
based on the March 29, 2019 closing stock price of $3.51, was $156,349.
The
following tables summarize information concerning options and warrants outstanding and exercisable:
|
|
Stock
Options
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
Price
per share
|
|
|
Shares
|
|
|
Price
per share
|
|
|
Shares
|
|
|
Exercisable
|
|
Balance
outstanding, 12/31/18
|
|
|
366,734
|
|
|
$
|
3.39
|
|
|
|
7,764,821
|
|
|
$
|
3.50
|
|
|
|
8,131,555
|
|
|
|
7,792,570
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
616,000
|
|
|
|
3.50
|
|
|
|
616,000
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance outstanding,
3/31/2019
|
|
|
366,734
|
|
|
$
|
3.39
|
|
|
|
8,380,821
|
|
|
$
|
3.55
|
|
|
|
8,747,555
|
|
|
|
8,493,987
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
Range
of Exercise
Prices
|
|
|
Number
of Options
|
|
|
Remaining
Contractual
Life
(Years)
|
|
Exercise
Price
|
|
|
Number
of Options
|
|
|
Remaining
Contractual Life (Years)
|
|
Exercise
Price
|
|
|
$
2.00 - $3.40
|
|
|
|
366,734
|
|
|
9.6
|
|
$
|
3.39
|
|
|
|
113,166
|
|
|
9.6
|
|
$
|
3.40
|
|
|
$
2.00 - $3.40
|
|
|
|
366,734
|
|
|
9.6
|
|
$
|
3.39
|
|
|
|
113,166
|
|
|
9.6
|
|
$
|
3.40
|
|
Common
Stock Issuances
During
the three months ended March 31, 2018, we issued to Debenture holders 22,606 shares of common stock for quarterly interest of
$85,040 issued in stock in lieu of cash. Of the 22,606 shares issued, 1,092 shares were issued to members of the Company’s
Board of Directors, who are also Debenture holders.
On
March 12, 2018, we received a six-month, convertible loan of $253,000 from an accredited investor. The loan has an original issue
discount of $53,000. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue
the investor 6,750 shares of restricted common stock with a relative fair value of $28,722 recorded as a debt discount to be amortized
over the six-month term.
On
February 12, 2018, we received a six-month, convertible loan of $100,000 from an accredited investor. The loan earns a one-time
interest of 10%. $50,000 of the proceeds were used to pay off the outstanding balance of a previous loan from this lender. The
loan can be converted at any time into common stock at a conversion price of $7.50. We issued the investor 5,000 shares of restricted
common stock with a relative fair value of $18,274 of which $10,474 was recorded as a debt discount to be amortized over the six-month
term while $7,800 was recorded to interest expense immediately because it related to the previous loan paid off.
On
February 12, 2018, we issued 3,500 shares of restricted common stock to an accredited investor to extend the maturity date of
our eight-month, non-convertible loan of $170,000 originated on March 21, 2017 to February 15, 2018. The accredited investor agreed
to a further extension to March 31, 2018 in exchange for 3,500 shares of restricted common stock issued on March 27, 2018. The
total fair value of $28,490 relating to these stock issuances were recorded as interest expense as compensation for the loan extensions.
On
January 19, 2018, we received a six-month, convertible loan of $150,000 from an accredited investor. The loan earns a one-time
interest of 10% and includes a 10% original issue discount. We also issued the investor 4,000 shares of restricted common stock
with a relative fair value of $12,267 recorded as a debt discount to be amortized over the six-month term. The loan can be converted
at any time into common stock at a conversion price of $7.50.
On various dates in
the three months ended March 31, 2019, the Company issued a total of 34,308 shares of common stock with a fair value of $89,721
in connection with the issuance of new loans and the extension of loans with existing noteholders and 50,000 shares with a
fair value of $168,000 were issued for services rendered.
From
April 1, 2019 through May 11, 2019 the Company issued Convertible notes for a total of $706,800. The notes required
6,181 shares of the Company’s common stock and included interest at rates ranging from 4% to 18% and are for terms of
six to twelve months. The Company also extended four notes (see below schedule) that required 6,000 shares of common stock.
On April 19, 2019 and on May 8, 2019 the Company entered into merchant loan agreements for a total of $325,000.
On
April 17, 2019, we received a short-term, non-convertible loan of $35,000 with 10% interest from a related party (a member of
the Company’s Board of Directors).
From
April 1, 2019 through May 11, 2019 the Company issued 120 shares of Series AA Convertible Preferred Stock at $2,500 per share
and received $270,000 net of $30,000 of broker fees. Each share of Series AA Convertible Preferred Stock carries 1,000 warrants
to purchase Common Stock at $3.50 per share and is convertible into 1,000 shares of Common Stock.
Convertible
Loan Modifications and Extinguishments
Subsequent to March 31, 2019, the Company modified or paid off the following loans:
Loan
inception date
|
|
Principal
|
|
|
Modification
date/Pay off date
|
|
Principal
and interest paid
|
|
|
Extinguished
or extended
|
|
|
|
|
|
|
|
|
|
|
|
October 5, 2018
|
|
$
|
118,800
|
|
|
April 5, 2019
|
|
$
|
150,786
|
|
|
Paid in full
|
April 11, 2018
|
|
|
100,000
|
|
|
April 11, 2019
|
|
|
9,000
|
|
|
Negotiating new terms
|
July 9, 2018
|
|
|
150,000
|
|
|
April 18, 2019
|
|
|
22,500
|
|
|
Extended to October 18, 2019
|
July 17, 2018
|
|
|
100,000
|
|
|
April 17, 2019
|
|
|
30,000
|
|
|
Extended to May 17, 2019
|
October 19, 2018
|
|
|
100,000
|
|
|
April 19, 2019
|
|
|
5,000
|
|
|
Extended to May 19, 2019
|
October 23, 2018
|
|
|
103,000
|
|
|
April 22, 2019
|
|
|
145,287
|
|
|
Paid in full
|
October 23, 2018
|
|
|
77,000
|
|
|
April 25, 2019
|
|
|
112,483
|
|
|
Paid in full
|
October 25, 2018
|
|
|
105,000
|
|
|
April 26, 2019
|
|
|
143,844
|
|
|
Paid in full
|
November 1, 2018
|
|
|
100,000
|
|
|
May 1, 2019
|
|
|
12,000
|
|
|
Extended to August 1, 2019
|
October 29, 2018
|
|
|
77,000
|
|
|
May 3, 2019
|
|
|
107,074
|
|
|
Paid in full
|
November 5, 2018
|
|
|
130,000
|
|
|
May 6, 2019
|
|
|
179,389
|
|
|
Paid in full
|
November 7, 2018
|
|
|
105,000
|
|
|
May 7, 2019
|
|
|
143,885
|
|
|
Paid in full
|
November 7, 2018
|
|
|
205,000
|
|
|
May 10, 2019
|
|
|
15,000
|
|
|
Conversion period extended to June 6th, 2019
|