NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2020
(UNAUDITED)
|
1)
|
Business
Overview, Liquidity and Management Plans
|
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 September 30, 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 debt and equity capital in the past and
as described in Notes 6 and 7. In addition we raised debt and equity capital after September 30, 2020 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)
|
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.
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.
In
August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, Debt with Conversion and Other
Options and Derivatives and Hedging - Contracts in Entity’s Own Equity. The standard is effective for interim and annual
periods beginning after December 15, 2023 for the Company. 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 ($)
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
Primary
geographical markets
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
North
America
|
|
$
|
387
|
|
|
$
|
381
|
|
|
$
|
694
|
|
|
$
|
973
|
|
Europe
|
|
|
2
|
|
|
|
9
|
|
|
|
6
|
|
|
|
103
|
|
Asia
|
|
|
145
|
|
|
|
111
|
|
|
|
356
|
|
|
|
454
|
|
|
|
$
|
534
|
|
|
$
|
501
|
|
|
$
|
1,056
|
|
|
$
|
1,530
|
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
Major
products/services lines
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Hardware
|
|
$
|
313
|
|
|
$
|
186
|
|
|
$
|
569
|
|
|
$
|
571
|
|
Consumables
|
|
|
49
|
|
|
|
112
|
|
|
|
156
|
|
|
|
265
|
|
Contract
research services
|
|
|
84
|
|
|
|
149
|
|
|
|
128
|
|
|
|
498
|
|
Sample
preparation accessories
|
|
|
40
|
|
|
|
19
|
|
|
|
98
|
|
|
|
61
|
|
Technical
support/extended service contracts
|
|
|
33
|
|
|
|
25
|
|
|
|
69
|
|
|
|
93
|
|
Shipping
and handling
|
|
|
11
|
|
|
|
8
|
|
|
|
26
|
|
|
|
27
|
|
Other
|
|
|
4
|
|
|
|
2
|
|
|
|
10
|
|
|
|
15
|
|
|
|
$
|
534
|
|
|
$
|
501
|
|
|
$
|
1,056
|
|
|
$
|
1,530
|
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
Timing
of revenue recognition
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Products
transferred at a point in time
|
|
$
|
417
|
|
|
$
|
326
|
|
|
$
|
859
|
|
|
$
|
939
|
|
Services
transferred over time
|
|
|
117
|
|
|
|
175
|
|
|
|
197
|
|
|
|
591
|
|
|
|
$
|
534
|
|
|
$
|
501
|
|
|
$
|
1,056
|
|
|
$
|
1,530
|
|
Contract
balances
In
thousands of US dollars ($)
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Receivables,
which are included in ‘Accounts Receivable’
|
|
$
|
330
|
|
|
$
|
229
|
|
Contract
liabilities (deferred revenue)
|
|
|
74
|
|
|
|
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
|
|
|
2022
|
|
|
Total
|
|
Extended
warranty service
|
|
$
|
48
|
|
|
|
26
|
|
|
|
-
|
|
|
$
|
74
|
|
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 and nine months
ended September 30, 2020 and 2019.
|
|
For
the Three Months Ended
|
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
Top
Five Customers
|
|
|
59
|
%
|
|
|
56
|
%
|
Federal
Agencies
|
|
|
2
|
%
|
|
|
12
|
%
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
Top
Five Customers
|
|
|
36
|
%
|
|
|
41
|
%
|
Federal
Agencies
|
|
|
3
|
%
|
|
|
13
|
%
|
The
following table illustrates the level of concentration as a percentage of net accounts receivable balance as of September 30,
2020 and December 31, 2019. The Top Five Customers category may include federal agency receivable balances if applicable.
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Top
Five Customers
|
|
|
76
|
%
|
|
|
83
|
%
|
Federal
Agencies
|
|
|
1
|
%
|
|
|
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 September 30, 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 September 30, 2020, our consolidated
balance sheet reflected the fair value of our investment in Everest to be approximately $503,366. We recorded $486,723
as an unrealized gain during the nine months ended September 30, 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 and nine months ended September 30, 2020 and
2019:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,278,748
|
)
|
|
$
|
(3,156,829
|
)
|
|
$
|
(11,801,415
|
)
|
|
$
|
(7,978,844
|
)
|
Deemed
dividend on beneficial conversion feature
|
|
|
-
|
|
|
|
(675,979
|
)
|
|
|
-
|
|
|
|
(2,625,710
|
)
|
Preferred
stock dividends
|
|
|
(396,970
|
)
|
|
|
(492,494
|
)
|
|
|
(1,118,526
|
)
|
|
|
(1,268,593
|
)
|
Net
loss applicable to common shareholders
|
|
$
|
(3,675,718
|
)
|
|
$
|
(4,325,302
|
)
|
|
$
|
(12,919,941
|
)
|
|
$
|
(11,873,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock shares outstanding
|
|
|
3,612,958
|
|
|
|
1,967,872
|
|
|
|
3,059,095
|
|
|
|
1,887,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share – basic and diluted
|
|
$
|
(1.02
|
)
|
|
$
|
(2.20
|
)
|
|
$
|
(4.22
|
)
|
|
$
|
(6.29
|
)
|
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 September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Stock
options
|
|
|
1,392,370
|
|
|
|
409,064
|
|
Convertible
debt
|
|
|
4,610,868
|
|
|
|
984,703
|
|
Common
stock warrants
|
|
|
13,831,497
|
|
|
|
9,297,034
|
|
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
|
|
|
7,983,000
|
|
|
|
7,899,422
|
|
|
|
|
28,317,527
|
|
|
|
19,090,015
|
|
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 $66,542 and $115,002 for the three months ended September 30, 2020
and 2019, respectively. The Company recognized stock-based compensation expense of $373,652 and $722,576 for the nine months
ended September 30, 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
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cost
of sales
|
|
$
|
5,164
|
|
|
$
|
5,468
|
|
|
$
|
18,227
|
|
|
$
|
25,865
|
|
Research
and development
|
|
|
26,423
|
|
|
|
22,464
|
|
|
|
91,386
|
|
|
|
107,037
|
|
Selling
and marketing
|
|
|
6,428
|
|
|
|
14,520
|
|
|
|
26,722
|
|
|
|
65,598
|
|
General
and administrative
|
|
|
28,527
|
|
|
|
72,550
|
|
|
|
237,317
|
|
|
|
524,076
|
|
Total
stock-based compensation expense
|
|
$
|
66,542
|
|
|
$
|
115,002
|
|
|
$
|
373,652
|
|
|
$
|
722,576
|
|
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 debt and 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 September 30, 2020:
|
|
|
|
|
Fair
value measurements at
September
30, 2020 using:
|
|
|
|
September
30, 2020
|
|
|
Quoted
prices
in
active
markets
(Level
1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level
3)
|
|
Equity
Securities
|
|
$
|
503,366
|
|
|
$
|
503,366
|
|
|
|
-
|
|
|
|
-
|
|
Total
Financial Assets
|
|
$
|
503,366
|
|
|
$
|
503,366
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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:
|
|
|
|
December
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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
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 September 30, 2020 the Company carries a ROU asset and operating lease liability of $20,958.
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 September 30, 2020:
2020
|
|
$
|
42,240
|
|
Thereafter
|
|
|
-
|
|
Total
Minimum Payments Required
|
|
$
|
42,240
|
|
In
the nine months ended September 30, 2020, the Company issued three loans for $875,000 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, 18% for a $250,000 note and 18%, for a $300,000 note) that is only
payable upon an event of default. Cannaworx loans receivable are carried on the Company’s consolidated balance sheet
net of a $73,750 debt discount.
|
6)
|
Convertible
Debt and Other Debt
|
Convertible
Debt
On
various dates during the nine months ended September 30, 2020, the Company issued convertible notes for net proceeds of approximately
$7.0 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 common stock and warrants
to purchase common stock that were fair valued at issuance date. The aggregate relative fair value of common stock issued with
the notes of $0.15 million was recorded as a debt discount to be amortized over the term of the notes. The aggregate relative fair
value of the warrants issued with the notes of $4.0 million was also 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 $1.4 million 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 qualify for derivative accounting treatment at September 30, 2020.
The
specific terms of the convertible notes and outstanding balances as of September 30, 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
|
|
May
17, 2018 (2)
|
|
12
months
|
|
$
|
380,000
|
|
|
$
|
166,703
|
|
|
$
|
15,200
|
|
|
|
8
|
%
|
|
$
|
2.50
|
|
|
$
|
15,200
|
|
|
$
|
332,407
|
|
June
8, 2018 (1) (4)
|
|
6
months
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
2,500
|
|
|
|
2
|
%
|
|
$
|
7.50
|
|
|
$
|
2,500
|
|
|
$
|
3,271
|
|
June
16, 2018 (2)
|
|
9
months
|
|
$
|
110,000
|
|
|
$
|
79,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
$
|
2.50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
July
17, 2018 (1) (3) (4)
|
|
3
months
|
|
$
|
100,000
|
|
|
$
|
56,250
|
|
|
$
|
15,000
|
|
|
|
5
|
%
|
|
$
|
2.50
|
|
|
$
|
-
|
|
|
$
|
52,897
|
|
October
19, 2018 (1)
|
|
6
months
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
$
|
7.50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
November
13, 2018 (1) (3) (4)
|
|
6
months
|
|
$
|
200,000
|
|
|
$
|
220,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
$
|
2.50
|
|
|
$
|
-
|
|
|
$
|
168,634
|
|
January
3, 2019 (4)
|
|
6
months
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
2,500
|
|
|
|
24
|
%
|
|
$
|
7.50
|
|
|
$
|
2,500
|
|
|
$
|
-
|
|
February
21, 2019 (2)
|
|
12
months
|
|
$
|
215,000
|
|
|
$
|
215,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
$
|
2.50
|
|
|
$
|
15,000
|
|
|
$
|
107,709
|
|
March
18, 2019 (1)
|
|
6
months
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
$
|
7.50
|
|
|
$
|
-
|
|
|
$
|
10,762
|
|
June
4, 2019 (2)
|
|
9
months
|
|
$
|
500,000
|
|
|
$
|
302,484
|
|
|
$
|
-
|
|
|
|
8
|
%
|
|
$
|
2.50
|
|
|
$
|
40,500
|
|
|
$
|
70,631
|
|
June
19, 2019 (2)
|
|
12
months
|
|
$
|
105,000
|
|
|
$
|
105,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
$
|
2.50
|
|
|
$
|
5,000
|
|
|
$
|
2,646
|
|
May
20, 2019 (1) (4)
|
|
3
months
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
$
|
2.50
|
|
|
$
|
-
|
|
|
$
|
13,439
|
|
June
7, 2019 (1) (4)
|
|
6
months
|
|
$
|
125,000
|
|
|
$
|
110,000
|
|
|
$
|
-
|
|
|
|
5
|
%
|
|
$
|
7.50
|
|
|
$
|
-
|
|
|
$
|
18,254
|
|
July
1, 2019 (2)
|
|
12
months
|
|
$
|
107,500
|
|
|
$
|
107,500
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
$
|
2.50
|
|
|
$
|
7,500
|
|
|
$
|
85,791
|
|
July
19, 2019 (2)
|
|
12
months
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
$
|
2.50
|
|
|
$
|
5,750
|
|
|
$
|
15,460
|
|
July
19, 2019 (2)
|
|
12
months
|
|
$
|
130,000
|
|
|
$
|
130,000
|
|
|
$
|
-
|
|
|
|
6
|
%
|
|
$
|
2.50
|
|
|
$
|
6,500
|
|
|
$
|
-
|
|
August
14, 2019 (1) (4)
|
|
6
months
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
|
2
|
%
|
|
$
|
7.50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
September
27,2019 (2)
|
|
12
months
|
|
$
|
78,750
|
|
|
$
|
78,750
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
$
|
2.50
|
|
|
$
|
3,750
|
|
|
$
|
13,759
|
|
October
24, 2019 (2)
|
|
12
months
|
|
$
|
78,750
|
|
|
$
|
78,750
|
|
|
$
|
-
|
|
|
|
4
|
%
|
|
$
|
2.50
|
|
|
$
|
3,750
|
|
|
$
|
-
|
|
November
1, 2019 (2)
|
|
12
months
|
|
$
|
270,000
|
|
|
$
|
270,000
|
|
|
$
|
-
|
|
|
|
6
|
%
|
|
$
|
2.50
|
|
|
$
|
13,500
|
|
|
$
|
-
|
|
November
15, 2019
|
|
12
months
|
|
$
|
385,000
|
|
|
$
|
385,000
|
|
|
$
|
35,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
35,000
|
|
|
$
|
90,917
|
|
December
4, 2019
|
|
12
months
|
|
$
|
495,000
|
|
|
$
|
495,000
|
|
|
$
|
45,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
45,000
|
|
|
$
|
56,387
|
|
December
20, 2019
|
|
12
months
|
|
$
|
275,000
|
|
|
$
|
275,000
|
|
|
$
|
25,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
25,000
|
|
|
$
|
40,601
|
|
January
2, 2020
|
|
12
months
|
|
$
|
330,000
|
|
|
$
|
330,000
|
|
|
$
|
30,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
30,000
|
|
|
$
|
91,606
|
|
January
24, 2020
|
|
12
months
|
|
$
|
247,500
|
|
|
$
|
247,500
|
|
|
$
|
22,500
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
22,500
|
|
|
$
|
89,707
|
|
January
29, 2020
|
|
12
months
|
|
$
|
363,000
|
|
|
$
|
363,000
|
|
|
$
|
33,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
33,000
|
|
|
$
|
297,000
|
|
February
12, 2020
|
|
12
months
|
|
$
|
275,000
|
|
|
$
|
275,000
|
|
|
$
|
25,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
25,000
|
|
|
$
|
225,000
|
|
February
19, 2020
|
|
12
months
|
|
$
|
165,000
|
|
|
$
|
165,000
|
|
|
$
|
15,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
15,000
|
|
|
$
|
135,000
|
|
March
11, 2020
|
|
12
months
|
|
$
|
330,000
|
|
|
$
|
330,000
|
|
|
$
|
30,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
30,000
|
|
|
$
|
232,810
|
|
March
13, 2020
|
|
12
months
|
|
$
|
165,000
|
|
|
$
|
165,000
|
|
|
$
|
15,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
15,000
|
|
|
$
|
60,705
|
|
March
26, 2020
|
|
12
months
|
|
$
|
111,100
|
|
|
$
|
111,100
|
|
|
$
|
10,100
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
10,100
|
|
|
$
|
90,900
|
|
April
8, 2020
|
|
12
months
|
|
$
|
276,100
|
|
|
$
|
276,100
|
|
|
$
|
25,100
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
25,000
|
|
|
$
|
221,654
|
|
April
17, 2020
|
|
12
months
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
|
$
|
18,750
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
-
|
|
|
$
|
96,208
|
|
April
30, 2020
|
|
12
months
|
|
$
|
546,250
|
|
|
$
|
546,250
|
|
|
$
|
71,250
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
47,500
|
|
|
$
|
427,500
|
|
May
6, 2020
|
|
12
months
|
|
$
|
460,000
|
|
|
$
|
460,000
|
|
|
$
|
60,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
40,000
|
|
|
$
|
360,000
|
|
May
18, 2020
|
|
12
months
|
|
$
|
546,250
|
|
|
$
|
546,250
|
|
|
$
|
71,250
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
35,500
|
|
|
$
|
439,500
|
|
June
2, 2020
|
|
12
months
|
|
$
|
902,750
|
|
|
$
|
902,750
|
|
|
$
|
117,750
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
58,900
|
|
|
$
|
708,500
|
|
June
12, 2020
|
|
12
months
|
|
$
|
57,500
|
|
|
$
|
57,500
|
|
|
$
|
7,500
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
5,000
|
|
|
$
|
45,000
|
|
June
22, 2020
|
|
12
months
|
|
$
|
138,000
|
|
|
$
|
138,000
|
|
|
$
|
18,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
12,000
|
|
|
$
|
108,000
|
|
July
7, 2020
|
|
12
months
|
|
$
|
586,500
|
|
|
$
|
586,500
|
|
|
$
|
76,500
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
51,000
|
|
|
$
|
400,234
|
|
July
17, 2020
|
|
12
months
|
|
$
|
362,250
|
|
|
$
|
362,250
|
|
|
$
|
47,250
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
31,500
|
|
|
$
|
185,698
|
|
July
29, 2020
|
|
12
months
|
|
$
|
345,000
|
|
|
$
|
345,000
|
|
|
$
|
45,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
30,000
|
|
|
$
|
241,245
|
|
July
21, 2020 (5)
|
|
12
months
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
|
$
|
15,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
10,000
|
|
|
$
|
24,875
|
|
August
14, 2020
|
|
12
months
|
|
$
|
762,450
|
|
|
$
|
762,450
|
|
|
$
|
99,450
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
66,300
|
|
|
$
|
580,124
|
|
September
10, 2020
|
|
12
months
|
|
$
|
391,000
|
|
|
$
|
391,000
|
|
|
$
|
51,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
34,000
|
|
|
$
|
231,043
|
|
September
21, 2020 (5)
|
|
12
months
|
|
$
|
345,000
|
|
|
$
|
345,000
|
|
|
$
|
45,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
30,000
|
|
|
$
|
66,375
|
|
September
23, 2020 (5)
|
|
12
months
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
|
$
|
15,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
10,000
|
|
|
$
|
20,500
|
|
September
25, 2020
|
|
12
months
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
|
$
|
15,000
|
|
|
|
10
|
%
|
|
$
|
2.50
|
|
|
$
|
-
|
|
|
$
|
19,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,833,837
|
|
|
$
|
1,119,600
|
|
|
|
|
|
|
|
|
|
|
$
|
893,750
|
|
|
$
|
6,481,874
|
|
|
(1)
|
The
Note is past due. The Company and the lender are negotiating in good faith to extend the loan.
|
|
(2)
|
As
of September 30, 2020 the Company and lender have verbally agreed to the extension of the Standstill and
Forbearance agreements (as described below). Loan is convertible at $2.50 as of September 30, 2020.
|
|
(3)
|
Interest
was capitalized and added to outstanding principal.
|
|
(4)
|
During
the nine months ended September 30, 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 more than one other variable rate lender converted at a variable rate.
|
|
(5)
|
The
Company has agreed to issue shares of its common stock to lenders if their notes are not repaid by a defined date.
|
As
of September 30, 2020 one lender holds approximately $8.7 million of the $11.8 million convertible notes outstanding.
For
the nine months ended September 30, 2020, the Company recognized amortization expense related to the debt discounts indicated
above of $3,100,990. The unamortized debt discounts as of September 30, 2020 related to the convertible debentures and
other convertible notes amounted to $4,738,724.
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, April 6, 2020, April 30, 2020, May 15, 2020, May 31, 2020, June 15, 2020, June
30, 2020, July 15, 2020, July 31, 2020, August 15, 2020, August 31, 2020, September 15, 2020 and September 30, 2020 the Company
extended these Standstill and Forbearance Agreements until dates ranging from November 16, 2020 to December 31, 2020. For
the nine months ended September 30, 2020, the Company incurred fees of approximately $2.1 million to extend the agreements.
Convertible
Loan Modifications and Extinguishments
We
refinanced certain convertible loans during the nine months ended September 30, 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. During the nine months
ended September 30, 2020 we recorded losses on extinguishment of liabilities of approximately $3.2 million 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 $1,036,638 of non-cash expenses for common stock and warrants issued and writeoffs of any unamortized discount at the
date of modification.
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
|
|
|
8,688,150
|
|
Deferred
financing cost
|
|
|
(1,710,350
|
)
|
Beneficial
conversion feature on convertible note
|
|
|
(1,353,694
|
)
|
Debt
discount from shares and warrants issued with debt
|
|
|
(4,156,442
|
)
|
Payments
|
|
|
(1,972,007
|
)
|
Conversion
of debt into equity
|
|
|
(1,622,872
|
)
|
Accretion
of interest and amortization of debt discount to interest expense
|
|
|
3,100,990
|
|
Balance
at September 30,
|
|
|
7,095,113
|
|
Less:
current portion
|
|
|
7,095,113
|
|
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 nine months ended September 30, 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 September 30, 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 nine months ended September 30, 2020, the Company recognized amortization expense related to debt discounts attributable to
other notes of $353,480.
Merchant
Agreements
During
2020 we had signed various Merchant Agreements which were
secured by second position rights to all customer receipts until the loan has been repaid in full and subject to interest
rates ranging from 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 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
|
|
On
November 15, 2019 the Company and its Merchant lenders agreed to a temporary reduction in the Daily Payment Rate.
Subsequently, on January 31, 2020, March 2, 2020 and April 6, 2020 the Company and its Merchant lenders agreed to extend the
term of the reduction of its Daily Payment Rate, ultimately to April 30, 2020. The Company issued 495,000 warrants to lenders
(valued at $969,745) as compensation for these agreements. The warrants have a three year life and a $3.50 exercise Price. During
the nine months ended September 30, 2020 the Company repaid these loans in full for $970,028 in cash, 112,885 shares of
common stock (valued at $225,770) and 56,442 warrants that have a three year life and a $3.50 exercise price (valued at
$97,654) and the loss incurred from the settlements is $58,476.
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 September 30, 2020 and is currently past due.
As
of September 30, 2020 we also hold $90,000 of short-term non-convertible loans from related parties. These notes bear interest
ranging from 0% to 15% interest and are due upon demand.
Long
term debt
During
the nine months ended September 30, 2020, the Company borrowed $527,039 through COVID-19 programs that were sponsored by the United
States and administered by the Small Business Administration (the “SBA”). The most notable programs were the Payroll
Protection Program (or “PPP”) and the Economic Injury Disaster Loan program (or “EIDL”). The Company’s
PPP loan, $377,039, has a two- year term and bears 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. The
Company’s EIDL loan, $150,000, accrues interest at 3.75% and requires monthly payments of $731 for principal and interest
beginning in June 2021. The balance of the principal will be due in 30 years. In connection with the EIDL loan the Company entered
into a security agreement with the SBA, whereby the Company granted the SBA a security interest in all of the Company’s
right, title and interest in all of the Company’s assets.
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 September 30, 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 September 30, 2020, options to acquire 1,392,370 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 September 30, 2020, total unrecognized compensation cost related to the unvested stock-based awards was $430,979, which
is expected to be recognized over weighted average period of 1.57 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 September 30, 2020, based on the September 30, 2020 closing stock price of $1.52, was $445,830.
The
following table summarizes 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, December 31, 2019
|
|
|
|
1,396,302
|
|
|
$
|
0.71
|
|
|
|
9,893,034
|
|
|
$
|
3.52
|
|
|
|
11,289,336
|
|
|
|
10,148,543
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,212,531
|
|
|
|
3.50
|
|
|
|
4,212,531
|
|
|
|
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(274,068
|
)
|
|
$
|
4.21
|
|
|
|
(274,068
|
)
|
|
|
|
|
Forfeited
|
|
|
|
(3,932
|
)
|
|
|
1.68
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,932
|
)
|
|
|
|
|
Balance
outstanding, September 30, 2020
|
|
|
|
1,392,370
|
|
|
$
|
0.69
|
|
|
|
13,831,497
|
|
|
$
|
3.50
|
|
|
|
15,223,867
|
|
|
|
14,368,641
|
|
As
of September 30, 2020, the 1,392,370 stock options outstanding have a $0.69 exercise price and 8.94 weighted average remaining
term. Of these options, 537,144 are currently exercisable.
Common
Stock and Warrant Issuances
During
the nine months ended September 30, 2020, we issued to Series AA holders 87,518 shares of common stock for dividends totaling
of $221,374 issued in stock in lieu of cash. During this period we also issued 1,202,118 shares of restricted common
stock at a fair value of $2.8 million to accredited investors and consultants. 709,788 of the shares with a fair value of $1.8
million were issued for conversions of debt principal and interest; 315,830 of the shares with a fair value of $616,900 were issued
for debt extensions, settlements and interest payments; 66,500 shares with a fair value of $127,855 were issued to settle an accrued
liability; 85,000 shares with a fair value of $147,775 were issued with new convertible debt issuances; and 25,000 shares with
a fair value of $87,963 were issued for services rendered. During this period, we also issued 4,168,531 warrants (three-year
or five-year term at a $3.50 exercise price) to acquire common stock at a fair value of $5.6 million to lenders in conjunction
with signing of new convertible loans and debt extensions and settlement. In this time we also converted $110,000 of
debt into 44 shares of Series AA preferred stock and 44,000 warrants to acquire common stock (five-year term and $3.50 exercise
price). The relative fair value of warrants is $38,783.
For our loan issued
July 21, 2020 we are obligated to issue the lesser of 5,000 shares of common stock or .0435% of the outstanding principal
in shares every 30 days after September 30, 2020 if the loan remains outstanding. Similarly, for our loan issued September 21,
2020 we are obligated 12,500 shares of common stock or .0362% of the outstanding principal in shares every week after
November 16, 2020 if the loan remains outstanding.
During
the nine months ended September 30, 2019, we issued Series AA holders 61,910 shares of common stock for dividends totaling $190,123
issued in stock in lieu of cash. Of the 61,910 shares issued, 5,432 were issued to members of the Company’s Board of Directors,
who are also Series AA holders. During this period shareholders also converted 16 shares of Series AA Convertible Preferred Stock
into 16,000 shares of common stock.
On
various dates during the nine months ended September 30, 2019 we issued a total of 335,069 shares of restricted common
stock at a fair value of $953,515 to accredited investors. 140,937 of the shares with a fair value of $385,132 were issued to
existing holders of convertible loans who agreed to extend the terms for various months; 74,132 of the shares with a fair value
of $226,133 were issued in conjunction with the signing of new convertible loans; and 120,000 shares were issued for the conversion
of $342,250 of convertible notes and related interest. During the nine months ended September 30, 2019 we also issued
75,000 shares with a fair value of $245,000 for services rendered.
Effective October
5, 2020 the Company and Cannaworx Holdings, Inc. (CWX) entered into a second amendment to the Company’s binding letter
of intent to acquire CWX, extending the execution deadline to October 31, 2020. On November 6, 2020 the Company and CWX
entered into a third amendment to the Company’s binding letter of intent to acquire CWX. Pursuant to this amendment the
parties extended the completion deadline from October 31, 2020 to December 31, 2020, however the amendment will expire
if CWX does not receive $335,000 by November 16, 2020.
From
October 1, 2020 through November 12, 2020 the Company issued loans convertible into common stock at $2.50 per share for
$356,500 (through November 12, 2020 the Company had received proceeds on $241,500 of the loans). The loans carry 10% interest
rates and one-year terms. To secure these loans, the Company issued 12,500 shares of common stock and warrants exercisable
into 50,600 common shares (five-year life and a $3.50 exercise price). During this period, the Company received $200,000
under a Merchant Agreement secured by second position rights to all customer receipts. Under the terms of this agreement the Company
agreed to repay $275,800 through daily payments of $1,724 over eight months. In this time, the Company also repaid a portion
of a convertible loan issued July 17,2018 for $25,000 and partially repaid three related party loans for
$49,175.