NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
Pressure
Biosciences, Inc. (“we”, “our”, “the Company”) develops and sells innovative, broadly enabling,
pressure-based platform solutions for the worldwide life sciences industry. Our solutions are based on the unique properties of
both constant (i.e., static) and alternating (i.e., pressure cycling technology, or “PCT”) hydrostatic pressure. PCT
is a patented enabling technology platform that uses alternating cycles of hydrostatic pressure between ambient and ultra-high
levels to safely and reproducibly control bio-molecular interactions (e.g., cell lysis, biomolecule extraction). Our primary focus
is in the development of PCT-based products for biomarker and target discovery, drug design and development, biotherapeutics characterization
and quality control, soil & plant biology, forensics, and counter-bioterror applications. Additionally, major new market opportunities
have emerged in the use of our pressure-based technologies in the following areas: (1) the use of our recently acquired, patented
technology from BaroFold, Inc. (the “BaroFold” technology) to allow entry into the bio-pharma contract services sector,
and (2) the use of our recently-patented, scalable, high-efficiency, pressure-based Ultra Shear Technology (“UST”)
platform to (i) create stable nanoemulsions of otherwise immiscible fluids (e.g., oils and water) and to (ii) prepare higher quality,
homogenized, extended shelf-life or room temperature stable low-acid liquid foods that cannot be effectively preserved using existing
non-thermal technologies.
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, 2020,
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 5 and 6. In addition we raised cash through debt and equity financing after
March 31, 2020 as described in Note 7. 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)
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The
unaudited interim financial statements of Pressure BioSciences, Inc. and its consolidated subsidiaries (collectively, the “Company”)
included herein have been prepared by the Company in accordance with the instructions to Form 10-Q and the rules and regulations
of the U.S. Securities and Exchange Commission. Under these rules and regulations, some information and footnote disclosures normally
included in financial statements prepared under accounting principles generally accepted in the United States of America have
been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and
the results of operations for the periods shown have been made. All adjustments are normal and recurring. These financial statements
should be read together with the Company’s audited financial statements included in its Form 10-K for the fiscal year ended
December 31, 2019. Certain comparative amounts for the prior fiscal year period have been reclassified to conform to the financial
statement presentation as of and for the period ended March 31, 2020.
Use
of Estimates
The
Company’s consolidated financial statements and accompanying notes are prepared in accordance with accounting
principles generally accepted in the United States of America, which require the use of estimates, judgements and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. Global concerns about the COVID-19 pandemic have adversely affected,
and we expect will continue to adversely affect, our business, financial condition and results of operations including the
estimates and assumptions made by management. Significant estimates and assumptions include valuations of share-based
awards, investments in equity securities and intangible asset impairment. Actual results could differ from the estimates, and such
differences may be material to the Company’s consolidated financial statements.
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.
Recent
Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The standard is effective for the
Company for interim and annual periods beginning after December 15, 2022. The Company is evaluating the impact of this standard
on its Consolidated Financial Statements.
In
December 2019, the FASB, issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The standard is effective for the
Company for interim and annual periods beginning after December 15, 2020 for the Company and for annual periods beginning
after December 15, 2021 and interim periods beginning after December 15, 2022. The Company is evaluating the impact of this standard
on its Consolidated Financial Statements.
Revenue
Recognition
We
recognize revenue in accordance with FASB 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
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
North America
|
|
$
|
144
|
|
|
$
|
224
|
|
Europe
|
|
|
1
|
|
|
|
40
|
|
Asia
|
|
|
109
|
|
|
|
246
|
|
|
|
$
|
254
|
|
|
$
|
510
|
|
Major
products/services lines
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
Instruments
|
|
$
|
130
|
|
|
$
|
138
|
|
Consumables
|
|
|
56
|
|
|
|
62
|
|
Others
|
|
|
68
|
|
|
|
310
|
|
|
|
$
|
254
|
|
|
$
|
510
|
|
Timing of revenue recognition
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Products transferred at a point in time
|
|
$
|
225
|
|
|
$
|
501
|
|
Services transferred over time
|
|
|
29
|
|
|
|
9
|
|
|
|
$
|
254
|
|
|
$
|
510
|
|
Contract
balances
In thousands of US dollars ($)
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Receivables, which are included in ‘Accounts Receivable’
|
|
|
121
|
|
|
|
229
|
|
Contract liabilities (deferred revenue)
|
|
|
70
|
|
|
|
41
|
|
Transaction
price allocated to the remaining performance obligations
The
following table includes estimated revenue expected to be recognized in the future related to performance obligations that are
unsatisfied (or partially unsatisfied) at the end of the reporting period.
In thousands of US dollars ($)
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
Extended warranty service
|
|
|
28
|
|
|
|
42
|
|
|
|
70
|
|
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.
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,
2020 and 2019. The Top Five Customers category may include federal agency revenues if applicable.
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Top Five Customers
|
|
|
68
|
%
|
|
|
73
|
%
|
Federal Agencies
|
|
|
6
|
%
|
|
|
18
|
%
|
The
following table illustrates the level of concentration as a percentage of net accounts receivable balance as of March 31, 2020
and December 31, 2019. The Top Five Customers category may include federal agency receivable balances if applicable.
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Top Five Customers
|
|
|
77
|
%
|
|
|
83
|
%
|
Federal Agencies
|
|
|
4
|
%
|
|
|
17
|
%
|
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, 2020, 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. As of March 31, 2020, our consolidated
balance sheet reflected the fair value of our investment in Everest to be approximately $166,014. We recorded $149,371 as an
unrealized gain during the three months ended March 31, 2020 for changes in Everest 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, 2020 and 2019:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(4,278,471
|
)
|
|
$
|
(3,470,982
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Weighted average common stock shares outstanding
|
|
|
2,648,039
|
|
|
|
1,723,557
|
|
|
|
|
|
|
|
|
|
|
Loss per common share – basic and diluted
|
|
$
|
(1.62
|
)
|
|
$
|
(2.01
|
)
|
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,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
1,393,551
|
|
|
|
366,734
|
|
Convertible debt
|
|
|
3,125,633
|
|
|
|
471,015
|
|
Common stock warrants
|
|
|
11,295,764
|
|
|
|
8,380,875
|
|
Convertible preferred stock:
|
|
|
|
|
|
|
|
|
Series D Convertible Preferred
|
|
|
25,000
|
|
|
|
25,000
|
|
Series G Convertible Preferred
|
|
|
26,857
|
|
|
|
26,857
|
|
Series H Convertible Preferred
|
|
|
33,334
|
|
|
|
33,334
|
|
Series H2 Convertible Preferred
|
|
|
70,000
|
|
|
|
70,000
|
|
Series J Convertible Preferred
|
|
|
115,267
|
|
|
|
115,267
|
|
Series K Convertible Preferred
|
|
|
229,334
|
|
|
|
229,334
|
|
Series AA Convertible Preferred
|
|
|
7,939,000
|
|
|
|
7,059,822
|
|
|
|
|
24,253,740
|
|
|
|
16,778,238
|
|
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 $241,769 and $245,392 for the three months ended March 31, 2020 and 2019,
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,
|
|
|
|
2020
|
|
|
2019
|
|
Cost of sales
|
|
$
|
7,956
|
|
|
$
|
8,316
|
|
Research and development
|
|
|
38,826
|
|
|
|
34,624
|
|
Selling and marketing
|
|
|
13,936
|
|
|
|
22,119
|
|
General and administrative
|
|
|
181,051
|
|
|
|
180,333
|
|
Total stock-based compensation expense
|
|
$
|
241,769
|
|
|
$
|
245,392
|
|
Fair
Value of Financial Instruments
Due
to their short maturities, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and debt approximate their fair value. Long-term liabilities include only deferred revenue with a
carrying value that approximates 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 fair value measurement.
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 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, 2020:
|
|
|
|
|
Fair
value measurements at
March 31, 2020 using:
|
|
|
|
31-Mar-20
|
|
|
Quoted
prices in active markets (Level 1)
|
|
|
Significant
other observable inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Equity
Securities
|
|
|
166,014
|
|
|
|
166,014
|
|
|
|
-
|
|
|
|
-
|
|
Total
Financial Assets
|
|
$
|
166,014
|
|
|
$
|
166,014
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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, 2019:
|
|
|
|
|
Fair
value measurements at
December 31, 2019 using:
|
|
|
|
|
31-Dec-19
|
|
|
|
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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
4)
|
Commitments
and Contingencies
|
Operating
Leases
The
Company accounts for its leases under ASC 842. 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 on our Medford lease with a corresponding Right-Of-Use
(“ROU”) asset of the same amount based on present value of the minimum rental payments of the lease. As of
March 31, 2020 the Company carries a ROU asset and operating lease liability of $59,178.
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 31, 2019, that expires December 31, 2020, 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 subject
to annual cost of living increases. The lease shall be automatically extended for an additional three years unless either party
terminates at least six months prior to the expiration of the current lease term.
Following
is a schedule by years of future minimum rental payments required under operating leases with initial or remaining non-cancelable
lease terms as of March 31, 2020:
2020
|
|
$
|
126,720
|
|
Thereafter
|
|
|
-
|
|
Total Minimum Payments Required
|
|
$
|
126,720
|
|
|
5)
|
Convertible
Debt and Other Debt
|
Convertible
Debt
On
various dates during the quarter ended March 31, 2020, the Company issued convertible notes for net proceeds of
approximately $1.9 million which contained varied terms and conditions as follows: a) 12 month maturity date;
b) interest rate of 10%; c) convertible to the Company’s common stock at issuance at a fixed rate of $2.50.
These notes were issued with warrants to purchase common stock that were fair valued at issuance date. The aggregate
relative fair value of $995,615 of the warrants issued with the notes was recorded as a debt discount to be amortized over
the term of the notes. We then computed the effective conversion price of the notes, and recorded a $404,608 beneficial
conversion feature as a debt discount to be amortized over the term of the notes. We also evaluated the convertible notes for
derivative liability treatment and determined that the notes did not quality for derivative accounting treatment at March 31, 2020.
The
specific terms of the convertible notes and outstanding balances as of March 31, 2020 are listed in the tables below.
Inception
Date
|
|
Term
|
|
Loan
Amount
|
|
|
Outstanding
balance with OID
|
|
|
Original
Issue Discount (OID)
|
|
|
Interest
Rate
|
|
|
Conversion
Price
|
|
|
Deferred
Finance Fees
|
|
|
Discount
for conversion feature and warrants/shares
|
|
February
15, 2018 (2)
|
|
6
months
|
|
$
|
100,000
|
|
|
$
|
115,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3) (6) 2.5
|
|
|
$
|
9,000
|
|
|
$
|
17,738
|
|
May
17, 2018
|
|
12
months
|
|
$
|
380,000
|
|
|
$
|
166,703
|
|
|
$
|
15,200
|
|
|
|
8
|
%
|
|
|
(3)
2.5
|
|
|
$
|
15,200
|
|
|
$
|
332,407
|
|
May
30, 2018 (1)
|
|
2
months
|
|
$
|
150,000
|
|
|
$
|
75,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
7.5
|
|
|
$
|
-
|
|
|
$
|
6,870
|
|
June
8, 2018 (1)
|
|
6
months
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
2,500
|
|
|
|
2
|
%
|
|
|
(6)
7.5
|
|
|
$
|
2,500
|
|
|
$
|
3,271
|
|
June
12, 2018
|
|
6
months
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
|
2.5
|
%
|
|
|
(3)
(6) 7.5
|
|
|
$
|
5,000
|
|
|
$
|
-
|
|
June
16, 2018
|
|
9
months
|
|
$
|
130,000
|
|
|
$
|
79,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3)
2.5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
June
16, 2018
|
|
6
months
|
|
$
|
110,000
|
|
|
$
|
79,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3)
2.5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
June
26, 2018 (2)
|
|
3
months
|
|
$
|
150,000
|
|
|
$
|
86,250
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3)
(6) 2.5
|
|
|
$
|
-
|
|
|
$
|
30,862
|
|
June
28, 2018
|
|
6
months
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
|
2.5
|
%
|
|
|
(3)
(6) 7.5
|
|
|
$
|
-
|
|
|
$
|
10,518
|
|
July
17, 2018 (2)
|
|
3
months
|
|
$
|
100,000
|
|
|
$
|
105,000
|
|
|
$
|
15,000
|
|
|
|
5
|
%
|
|
|
(3)
(6) 2.5
|
|
|
$
|
-
|
|
|
$
|
52,897
|
|
July
19, 2018
|
|
12
months
|
|
$
|
184,685
|
|
|
$
|
150,000
|
|
|
$
|
34,685
|
|
|
|
10
|
%
|
|
|
(3) 2.5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
October
19, 2018 (1)
|
|
6
months
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
7.5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
November
13, 2018 (2)
|
|
6
months
|
|
$
|
200,000
|
|
|
$
|
220,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3)
(6) 2.5
|
|
|
$
|
-
|
|
|
$
|
168,634
|
|
January
2, 2019
|
|
12
months
|
|
$
|
125,000
|
|
|
$
|
97,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
6,250
|
|
|
$
|
89,120
|
|
January
3, 2019
|
|
6
months
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
2,500
|
|
|
|
24
|
%
|
|
|
(6)
7.5
|
|
|
$
|
2,500
|
|
|
$
|
-
|
|
February
21, 2019
|
|
12
months
|
|
$
|
215,000
|
|
|
$
|
215,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
15,000
|
|
|
$
|
107,709
|
|
February
22, 2019
|
|
9
months
|
|
$
|
115,563
|
|
|
$
|
115,562
|
|
|
$
|
8,063
|
|
|
|
7
|
%
|
|
|
(3)
2.5
|
|
|
$
|
2,500
|
|
|
$
|
-
|
|
March
18, 2019 (1)
|
|
6
months
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
7.5
|
|
|
$
|
-
|
|
|
$
|
10,762
|
|
June
4, 2019
|
|
9
months
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
$
|
-
|
|
|
|
8
|
%
|
|
|
(3)
2.5
|
|
|
$
|
40,500
|
|
|
$
|
70,631
|
|
May
28, 2019
|
|
12
months
|
|
$
|
115,500
|
|
|
$
|
115,500
|
|
|
$
|
5,500
|
|
|
|
8
|
%
|
|
|
(3)
2.5
|
|
|
$
|
-
|
|
|
$
|
33,531
|
|
April
30, 2019
|
|
12
months
|
|
$
|
105,000
|
|
|
$
|
105,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
5,000
|
|
|
$
|
3,286
|
|
June
19, 2019
|
|
12
months
|
|
$
|
105,000
|
|
|
$
|
105,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
5,000
|
|
|
$
|
2,646
|
|
April
9, 2019
|
|
12
months
|
|
$
|
118,800
|
|
|
$
|
88,800
|
|
|
$
|
8,800
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
3,000
|
|
|
$
|
-
|
|
April
10, 2019 (2)
|
|
3
months
|
|
$
|
75,000
|
|
|
$
|
86,250
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3) (6) 2.5
|
|
|
$
|
-
|
|
|
$
|
61,091
|
|
May
20, 2019
|
|
3
months
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3)
(6) 2.5
|
|
|
$
|
-
|
|
|
$
|
13,439
|
|
June
7, 2019
|
|
6
months
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3)
(6) 7.5
|
|
|
$
|
-
|
|
|
$
|
18,254
|
|
July
1, 2019
|
|
12
months
|
|
$
|
107,500
|
|
|
$
|
107,500
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
7,500
|
|
|
$
|
85,791
|
|
July
8, 2019 (5)
|
|
12
months
|
|
$
|
65,000
|
|
|
$
|
65,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3)
2.5
|
|
|
$
|
8,500
|
|
|
$
|
4,376
|
|
July
29, 2019
|
|
6
months
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
-
|
|
|
$
|
36,835
|
|
July
19, 2019
|
|
12
months
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
5,750
|
|
|
$
|
15,460
|
|
July
19, 2019
|
|
12
months
|
|
$
|
130,000
|
|
|
$
|
130,000
|
|
|
$
|
-
|
|
|
|
6
|
%
|
|
|
(3)
2.5
|
|
|
$
|
6,500
|
|
|
$
|
-
|
|
August
6, 2019
|
|
12
months
|
|
$
|
108,000
|
|
|
$
|
108,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
11,000
|
|
|
$
|
-
|
|
August
14, 2019 (1)
|
|
6
months
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
|
2
|
%
|
|
|
(6)
7.5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
September
11, 2019 (5)
|
|
12
months
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
|
(3)
2.5
|
|
|
$
|
6,500
|
|
|
$
|
3,823
|
|
September
27, 2019
|
|
12
months
|
|
$
|
78,750
|
|
|
$
|
78,750
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
3,750
|
|
|
$
|
13,759
|
|
October
24, 2019
|
|
12
months
|
|
$
|
103,000
|
|
|
$
|
103,000
|
|
|
$
|
-
|
|
|
|
8
|
%
|
|
|
(4)
2.5
|
|
|
$
|
3,000
|
|
|
$
|
-
|
|
October
24, 2019
|
|
12
months
|
|
$
|
78,750
|
|
|
$
|
78,750
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
(3)
2.5
|
|
|
$
|
3,750
|
|
|
$
|
-
|
|
October
25, 2019
|
|
12
months
|
|
$
|
105,000
|
|
|
$
|
105,000
|
|
|
$
|
-
|
|
|
|
8
|
%
|
|
|
2.5
|
|
|
$
|
5,000
|
|
|
$
|
-
|
|
October
30, 2019
|
|
12
months
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
|
8
|
%
|
|
|
2.5
|
|
|
$
|
12,500
|
|
|
$
|
5,964
|
|
November
1, 2019
|
|
12
months
|
|
$
|
270,000
|
|
|
$
|
270,000
|
|
|
$
|
-
|
|
|
|
6
|
%
|
|
|
(3)
2.5
|
|
|
$
|
13,500
|
|
|
$
|
-
|
|
October
8, 2019
|
|
6
months
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
|
7.5
|
|
|
$
|
-
|
|
|
$
|
5,725
|
|
November
15, 2019
|
|
12
months
|
|
$
|
385,000
|
|
|
$
|
385,000
|
|
|
$
|
35,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
35,000
|
|
|
$
|
90,917
|
|
December
4, 2019
|
|
12
months
|
|
$
|
495,000
|
|
|
$
|
495,000
|
|
|
$
|
45,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
45,000
|
|
|
$
|
56,387
|
|
December
20, 2019
|
|
12
months
|
|
$
|
275,000
|
|
|
$
|
275,000
|
|
|
$
|
25,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
25,000
|
|
|
$
|
40,601
|
|
January
2, 2020
|
|
12
months
|
|
$
|
330,000
|
|
|
$
|
330,000
|
|
|
$
|
30,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
30,000
|
|
|
$
|
91,606
|
|
January
23, 2020
|
|
12
months
|
|
$
|
247,500
|
|
|
$
|
247,500
|
|
|
$
|
22,500
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
22,500
|
|
|
$
|
89,707
|
|
January
29, 2020
|
|
12
months
|
|
$
|
363,000
|
|
|
$
|
363,000
|
|
|
$
|
33,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
33,000
|
|
|
$
|
297,000
|
|
February
12, 2020
|
|
12
months
|
|
$
|
275,000
|
|
|
$
|
275,000
|
|
|
$
|
25,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
25,000
|
|
|
$
|
225,000
|
|
February
19, 2020
|
|
12
months
|
|
$
|
165,000
|
|
|
$
|
165,000
|
|
|
$
|
15,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
15,000
|
|
|
$
|
135,000
|
|
March
5, 2020
|
|
12
months
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
|
$
|
15,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
15,000
|
|
|
$
|
46,231
|
|
March
11, 2020
|
|
12
months
|
|
$
|
330,000
|
|
|
$
|
330,000
|
|
|
$
|
30,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
30,000
|
|
|
$
|
232,810
|
|
March
13, 2020
|
|
12
months
|
|
$
|
165,000
|
|
|
$
|
165,000
|
|
|
$
|
15,000
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
15,000
|
|
|
$
|
60,705
|
|
March
13, 2020
|
|
12
months
|
|
$
|
28,750
|
|
|
$
|
28,750
|
|
|
$
|
3,750
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
|
-
|
|
|
$
|
7,825
|
|
March
13, 2020
|
|
12
months
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
|
$
|
18,750
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
12,500
|
|
|
$
|
29,737
|
|
March
26, 2020
|
|
12
months
|
|
$
|
111,100
|
|
|
$
|
111,100
|
|
|
$
|
10,100
|
|
|
|
10
|
%
|
|
|
2.5
|
|
|
$
|
10,100
|
|
|
$
|
90,900
|
|
|
|
|
|
|
|
|
|
$
|
8,450,415
|
|
|
$
|
415,348
|
|
|
|
|
|
|
|
|
|
|
$
|
511,800
|
|
|
$
|
2,699,825
|
|
|
(1)
|
The
Note is past due. The Company and the lender are negotiating in good faith to extend the loan.
|
|
(2)
|
Interest
was capitalized and added to the outstanding principal.
|
|
(3)
|
As
of March 31, 2020 lender entered into a Standstill and Forbearance agreement (as described below). Loan is convertible at
$2.50 until the expiration of the agreement.
|
|
(4)
|
Note
is not convertible at March 31, 2020.
|
|
(5)
|
The
Company’s Chief Executive Officer signed a Confession of Judgement with lenders representing his personal guarantee.
|
|
(6)
|
During the quarter ended March 31, 2020 the Company entered into Rate
Modification Agreements with these lenders. In these agreements five lenders agreed to reduce their interest rate and were
granted the right to convert loans using a variable conversion price if other variable rate lenders converted at a variable
rate.
|
For
the quarter ended March 31, 2020, the Company recognized amortization expense related to the debt discounts indicated above of
$565,985. The unamortized debt discounts as of March 31, 2020 related to the convertible debentures and other convertible
notes amounted to $1,843,315.
Standstill
and Forbearance Agreements
On
December 13, 2019, the Company entered into Standstill and Forbearance Agreements with lenders who hold convertible promissory
notes with a total principal of $2,267,066. Pursuant to the Standstill and Forbearance Agreements, the lenders agreed to not convert
any portion of their notes into shares of common stock at a variable rate until either January 30th or January 31st
of 2020, and to waive, through January 30th or January 31st of 2020, all of the Company’s defaults
under their notes including, but not limited to, the late filing of the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2019.
On
January 31, 2020 and again on March 3, 2020 the Company extended these Standstill and Forbearance Agreements until April 6, 2020.
For the three months ended March 31, 2020, the Company incurred fees of approximately $556,000 to extend the agreements.
(See Note 7 - Subsequent Events)
Convertible
Loan Modifications and Extinguishments
We
refinanced certain convertible loans during the quarter ended March 31, 2020 at substantially the same terms for extensions ranging
over a period of three to 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 several loans. We recorded losses on extinguishment
of liabilities of $1,136,367 by calculating the difference of the fair value of the new debt and the carrying value of
the old debt. The reported loss on extinguishment of liabilities includes $635,000 of non-cash expenses for warrants issued
and amortization of debt discount.
The
following table provides a summary of the changes in convertible debt, net of unamortized discounts,
during 2020:
|
|
2020
|
|
Balance at January 1,
|
|
$
|
6,121,338
|
|
Issuance of convertible
debt, face value
|
|
|
2,255,350
|
|
Deferred financing
cost
|
|
|
(389,850
|
)
|
Beneficial conversion feature on convertible note
|
|
|
(404,608
|
)
|
Debt discount from
warrants issued with debt
|
|
|
(995,615
|
)
|
Payments
|
|
|
(520,500
|
)
|
Conversion of debt into equity
|
|
|
(25,000
|
)
|
Accretion
of interest and amortization of debt discount to interest expense
|
|
|
565,985
|
|
Balance at March 31,
|
|
|
6,607,100
|
|
Less:
current portion
|
|
|
6,607,100
|
|
Convertible
debt, long-term portion
|
|
$
|
–
|
|
Other
Notes
On
September 9, 2019 and February 28, 2020 we received a total of $966,500 unsecured non-convertible loans from a
private investor with a one-month term. During the three months ended March 31, 2020 the Company received net proceeds of
$463,500, issued 150,000 warrants to purchase common stock (five year term and $3.50 exercise price), and repaid $275,000.
The relative fair value of $185,660 of the warrants issued with the note was recorded as a debt discount to be amortized over
the term of the notes. As of March 31, 2020 the Company owes $691,500 on these notes which are past due. The Company and the
investor are negotiating in good faith to extend the loans.
On
October 1, 2019, the Company and the holder of the $170,000 non-convertible loan issued in May 2017 agreed to extend the
term of the loan to December 31, 2019. The Company agreed to issue 1,200 shares of its common stock per month while the note remains
outstanding. The note will continue to earn 10% annual interest. The loan is currently past due and the Company and the investor
are negotiating in good faith to extend the loan.
On
October 11, 2019 we received a non-convertible loan with a one month term and a 2% interest charge for $25,000 from a private
investor. The loan is past due and the Company and the investor are negotiating in good faith to extend the loan.
For
the quarter ended March 31, 2020 the Company recognized amortization expense related to debt discounts attributable to Other Notes
of $312,257.
Merchant
Agreements
We
have signed various Merchant Agreements which are secured by second position rights to all customer receipts until the loan has
been repaid in full and subject to interest rates of 6% - 76%. As illustrated in the following table, under the terms of these
agreements, we received the disclosed Purchase Price and agreed to repay the disclosed Purchase Amount, which is collected by
the Merchant lenders at the disclosed Daily Payment Rate. The following table shows our Merchant Agreements as of March 31, 2020:
Inception Date
|
|
Purchase Price
|
|
|
Purchased Amount
|
|
|
Outstanding Balance
|
|
|
Daily
Payment rate
|
|
|
Deferred
Finance Fees
|
|
August 5, 2019
|
|
$
|
600,000
|
|
|
$
|
816,000
|
|
|
$
|
384,621
|
|
|
$
|
4,533
|
|
|
$
|
6,000
|
|
August 19, 2019
|
|
|
350,000
|
|
|
|
479,500
|
|
|
|
273,510
|
|
|
|
2,664
|
|
|
|
3,000
|
|
August 23, 2019
|
|
|
175,000
|
|
|
|
239,750
|
|
|
|
117,597
|
|
|
|
1,410
|
|
|
|
1,750
|
|
September 19, 2019
|
|
|
275,000
|
|
|
|
384,275
|
|
|
|
263,855
|
|
|
|
2,138
|
|
|
|
5,000
|
|
|
|
$
|
1,400,000
|
|
|
$
|
1,919,525
|
|
|
$
|
1,039,583
|
|
|
$
|
10,745
|
|
|
$
|
15,750
|
|
The
following table shows our Merchant Agreements as of December 31, 2019:
Inception
Date
|
|
Purchase
Price
|
|
|
Purchased
Amount
|
|
|
Outstanding
Balance
|
|
|
Daily
Payment Rate
|
|
|
Deferred
Finance Fees
|
|
August
5, 2019
|
|
$
|
600,000
|
|
|
$
|
816,000
|
|
|
$
|
421,024
|
|
|
|
4,533
|
|
|
$
|
6,000
|
|
August 19, 2019
|
|
|
350,000
|
|
|
|
479,500
|
|
|
|
272,315
|
|
|
|
2,664
|
|
|
|
3,000
|
|
August 23, 2019
|
|
|
175,000
|
|
|
|
239,750
|
|
|
|
132,284
|
|
|
|
1,410
|
|
|
|
1,750
|
|
September
19, 2019
|
|
|
275,000
|
|
|
|
384,275
|
|
|
|
256,812
|
|
|
|
2,138
|
|
|
|
5,000
|
|
|
|
$
|
1,400,000
|
|
|
$
|
1,919,525
|
|
|
$
|
1,082,435
|
|
|
$
|
10,745
|
|
|
$
|
15,750
|
|
We
have 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. The difference between the Purchase Amount and the Purchase Price is imputed interest
that is recorded as interest expense when paid each day.
On
November 15, 2019 the Company and its Merchant lenders agreed to a temporary reduction in the Daily Payment Rate from $10,745
to $2,500. On January 31, 2020 and then subsequently on March 2, 2020 the Company and its Merchant lenders agreed to extend
the term of the reduction of its Daily Payment Rate to March 2, 2020 and April 6, 2020, respectively. The Company
issued 307,500 warrants (valued at $609,143) to lenders as compensation for these agreements. The warrants have a three year life
and a $3.50 exercise Price. During the three months ended March 31, 2020, $132,314 of interest was
capitalized into principal (and recorded as interest expense). (See Note 7 - Subsequent Events)
The
Company’s Chief Executive Officer is personally guaranteeing $1,039,583 of loans outstanding as of March 31, 2020
under our Merchant Agreements.
Related
Party Notes
In
June 2018, we received a non-convertible loan of $15,000 from a private investor. The loan includes a one-year term and 15% guaranteed
interest. This loan remains outstanding at March 31, 2020 and is currently past due.
As of March 31, 2020 we also hold $75,000 of short-term non-convertible loans from related parties.
These notes bear interest ranging from 0% to 15% interest and are due upon demand.
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, 2020, there were no shares of Junior A, and Series A, B, C and E issued and outstanding. See our Annual Report
on Form 10-K for the year ended December 31, 2019 for the pertinent disclosures of preferred stock.
Stock
Options and Warrants
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, 2020, options to acquire 1,393,551 shares were outstanding under the 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.
As
of March 31, 2020, total unrecognized compensation cost related to the unvested stock-based awards was $650,726, which
is expected to be recognized over weighted average period of 1.74 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, 2020, based on the March 31, 2020 closing stock price of $2.20, was $494,653.
The
following tables summarize information concerning options and warrants outstanding and exercisable:
|
|
Stock Options
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
price per share
|
|
|
Shares
|
|
|
price per share
|
|
|
Shares
|
|
|
Total
Exercisable
|
|
Balance outstanding, January 1, 2019
|
|
|
366,734
|
|
|
$
|
3.39
|
|
|
|
7,764,821
|
|
|
$
|
3.50
|
|
|
|
8,131,555
|
|
|
|
7,792,570
|
|
Granted
|
|
|
1,447,420
|
|
|
$
|
0.81
|
|
|
|
2,153,214
|
|
|
|
3.50
|
|
|
|
3,600,634
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(25,001
|
)
|
|
|
14.82
|
|
|
|
(25,001
|
)
|
|
|
|
|
Forfeited
|
|
|
(417,852
|
)
|
|
$
|
3.39
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(417,852
|
)
|
|
|
|
|
Balance outstanding, December 31, 2019
|
|
|
1,396,302
|
|
|
$
|
0.71
|
|
|
|
9,893,034
|
|
|
$
|
3.52
|
|
|
|
11,289,336
|
|
|
|
10,148,543
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
1,402,730
|
|
|
|
3.50
|
|
|
|
1,402,730
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(2,751
|
)
|
|
|
3.40
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,751
|
)
|
|
|
|
|
Balance outstanding, March 31, 2020
|
|
|
1,393,551
|
|
|
$
|
0.69
|
|
|
|
11,295,764
|
|
|
$
|
3.50
|
|
|
|
12,689,315
|
|
|
|
11,633,349
|
|
As
of March 31, 2020, the 1,393,551 stock options outstanding have a $0.69 Exercise Price and 9.45 weighted average remaining
term. Of these options, 337,585 are currently exercisable.
Common
Stock and Warrant Issuances
On
various dates in the quarter ended March 31, 2020 the Company issued a total of 115,021 shares of restricted common stock at
a fair value of approximately $213,415 to accredited investors and consultants. 66,500 of the shares with a
fair value of $127,855 were issued to settle accrued liabilities to consultants, 38,521 of the shares with a fair value of $60,560
were issued for debt extension and interest payments and 10,000 shares with a fair value of $25,000 were issued for debt
settlement. During the quarter ended March 31, 2020, the Company also issued 1,095,230 warrants to acquire common
stock at a fair value of $1,205,010 in conjunction with the signing of new convertible loans and 307,500 warrants
to acquire common stock at a fair value of $609,143 to lenders for debt extension.
On
various dates in the three months ended March 31, 2019, the Company issued a total of 34,308 shares of common stock at a fair
value of $89,721 in connection with issuance of new loans and extension of loan to existing noteholders and 50,000 shares with
a fair value of $168,000 were issued for services rendered.
On
April 29, 2020 the Company signed a binding letter of intent to acquire Cannaworx, Inc. (USA). The planned acquisition is subject
to certain closing conditions, including completion of all due diligence and acquisition financing.
From
April 1, 2020 through June 27, 2020 the Company issued loans convertible into common stock at $2.50/share for $2.94 million. The
loans carry 10% interest rates and one-year terms. To secure these loans, the Company issued warrants exercisable into 1,175,340
common shares (five-year life and a $3.50 exercise price). The Company also issued 30,000 shares of common stock to two lenders
for loans issued during the quarter ended March 31,2020. Additionally, the Company issued two loans for $575,000 to its pending
merger partner, Cannaworx who agreed to repay the loans directly to the lender, on the Company’s behalf. The Cannaworx loans
have one-year terms and interest (12% for a $325,000 note and 18% for a $250,000 note) is only payable upon an event of default.
During the same period the Company also paid off seven convertible loans totaling $885,707. These loans were issued July 8, 2019,
September 11, 2019, October 24, 2019, October 30, 2019, March 5, 2020, March 13, 2020 and March 13, 2020.
From
April 1, 2020 through June 27, 2020, the Company also borrowed $377,039 under government programs sponsored for the COVID-19 crisis
(principally $367,039 from the Payroll Protection Program or “PPP”). PPP loans have a two- year term and bear interest
at 1% per annum. Under the PPP, the Company can be granted forgiveness for all or a portion of these loans based on the Company’s
spending on payroll, mortgage interest, rent and utilities. Additionally, the Company sold $120,000 of Series AA Convertible Preferred
Stock with warrants exercisable into 48,000 common shares (10-year life and a $3.50 exercise price) and issued a $110,000 loan
which is convertible into Series AA Convertible Preferred Stock (one year term and 10% interest rate). The Company also issued
314,706 shares of common stock to settle $786,766 of convertible loan principal and 96,041 shares of common stock to settle $240,102
of convertible loan interest and fees. Finally, in this period the Company agreed to pay $100,000 and issued 25,000 shares of
common stock to a vendor for services rendered.
On
April 6, 2020 the Company entered into a extension of the Standstill and Forbearance Agreements with lenders who hold convertible
notes with a total principal of approximately $2.9 million through April 30, 2020. During the second quarter, the Company incurred
fees of approximately $275,000 in connection with the extension.
On
April 6, 2020, the Company and its Merchant lenders agreed to extend the term of the reduction to $2,500 of its Daily Payment
Rate to its Merchant lenders to April 30, 2020. The Company issued 187,500 warrants to the Merchant lenders as compensation for
this agreement. The warrants have a three-year life and a $3.50 exercise price. After April 30, 2020 the Company and its lenders
agreed to increase the Daily Payment Rate to $7,670.