Quarterly Report (10-q)

Date : 05/15/2019 @ 8:51PM
Source : Edgar (US Regulatory)
Stock : Pressure Biosciences, Inc. (QB) (PBIO)
Quote : 0.76  0.01 (1.33%) @ 4:42PM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] Q uarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2019

 

or

 

[  ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

For the transition period from _____________ to _____________

 

Commission File Number 001-38185

 

PRESSURE BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

Massachusetts   04-2652826
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

14 Norfolk Avenue    
South Easton, Massachusetts   02375
(Address of principal executive offices)   (Zip Code)

 

(508) 230-1828

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

[X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer [  ] Accelerated filer [  ]
  Non-accelerated filer [X] Smaller reporting company [X]
  Emerging Growth Company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).

 

[  ] Yes [X] No

 

The number of shares outstanding of the Issuer’s common stock as of May 15, 2019 was 1,852,691.

 

 

 

   
 

 

PRESSURE BIOSCIENCES, INC.

 

TABLE OF CONTENTS

 

  Page
   
PART I - FINANCIAL INFORMATION 3
   
Item 1. Financial Statements 3
   
Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 3
   
Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 4
   
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 5
   
Consolidated Statements of Statements of Equity for the Three Months Ended March 31, 2019 and 2018 6
   
Notes to Consolidated Financial Statements 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
   
Item 3. Quantitative and Qualitative Disclosure About Market Risk 32
   
Item 4. Controls and Procedures 32
   
PART II - OTHER INFORMATION 33
   
Item 1. Legal Proceedings 33
   
Item 1A. Risk Factors 33
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
   
Item 3. Defaults Upon Senior Securities 33
   
Item 4. Mine Safety Disclosures 33
   
Item 5. Other Information 33
   
Item 6. Exhibits 34
   
SIGNATURES 35

 

  2  

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PRESSURE BIOSCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    March 31, 2019     December 31, 2018  
ASSETS                
CURRENT ASSETS                
Cash and cash equivalents   $ 269,714     $ 103,118  
Accounts receivable     443,162       474,830  
Inventories, net of $273,547 reserve at March 31, 2019 and at December 31, 2018     753,132       765,478  
Prepaid expenses and other current assets     183,341       170,734  
Total current assets     1,649,349       1,514,160  
Investment in equity securities     16,643       16,643  
Property and equipment, net     79,932       69,272  
Right of use asset     122,792       136,385  
Intangible assets, net     641,827       663,462  
TOTAL ASSETS   $ 2,510,543     $ 2,399,922  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
CURRENT LIABILITIES                
Accounts payable   $ 474,418     $ 658,856  
Accrued employee compensation     394,980       456,932  
Accrued professional fees and other     1,172,115       1,112,995  
Other current liabilities     1,584,507       1,233,325  
Deferred revenue     36,952       20,623  
Operating lease liability    

63,614

     

59,799

 
Convertible debt, net of unamortized debt discounts of $239,675 and $156,180, respectively     4,504,188       4,000,805  
Other debt, net of unamortized discounts of $10,011 and $9,118, respectively     944,374       852,315  
Related party debt other     15,000       15,000  
Total current liabilities     9,190,148       8,410,650  
LONG TERM LIABILITIES                
Operating lease liability, net of current portion     59 ,178       76,586  
Deferred revenue     33,958       37,757  
TOTAL LIABILITIES     9,283,284       8,524,993  
COMMITMENTS AND CONTINGENCIES (Note 5)                
STOCKHOLDERS’ DEFICIT                
Series D Convertible Preferred Stock, $.01 par value; 850 shares authorized; 300 shares issued and outstanding on March 31, 2019 and December 31, 2018, respectively (Liquidation value of $300,000)     3       3  
Series G Convertible Preferred Stock, $.01 par value; 240,000 shares authorized; 80,570 shares issued and outstanding on March 31, 2019 and December 31, 2018, respectively     806       806  
Series H Convertible Preferred Stock, $.01 par value; 10,000 shares authorized; 10,000 shares issued and outstanding on March 31, 2019 and December 31, 2018, respectively     100       100  
Series H2 Convertible Preferred Stock, $.01 par value; 21 shares authorized; 21 shares issued and outstanding on March 31, 2019 and December 31, 2018, respectively     -       -  
Series J Convertible Preferred Stock, $.01 par value; 6,250 shares authorized; 3,458 shares issued and outstanding on March 31, 2019 and December 31, 2018, respectively     35       35  
Series K Convertible Preferred Stock, $.01 par value; 15,000 shares authorized; 6,880 shares issued and outstanding on March 31, 2019 and December 31, 2018, respectively     68       68  
Series AA Convertible Preferred Stock, $.01 par value; 10,000 shares authorized; 7,059 and 6,499 shares issued and outstanding on March 31, 2019 and December 31, 2018, respectively     71       65  
Common stock, $.01 par value; 100,000,000 shares authorized; 1,768,492 and 1,684,182 shares issued and outstanding on March 31, 2019 and December 31, 2018, respectively     17,685       16,842  
Warrants to acquire common stock     20,706,539       19,807,247  
Additional paid-in capital     40,640,273       39,777,301  
Accumulated deficit     (68,138,321 )     (65,727,538 )
Total stockholders’ deficit     (6,772,741 )     (6,125,071 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 2,510,543     $ 2,399,922  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

  3  

 

 

PRESSURE BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   

For the Three Months

Ended

March,

 
    2019     2018  
Revenue:            
Products, services, other   $ 510,240     $ 585,244  
Grant revenue     -       25,530  
Total revenue     510,240       610,774  
                 
Costs and expenses:                
Cost of products and services     309,712       324,789  
Research and development     264,704       324,976  
Selling and marketing     188,215       274,468  
General and administrative     1,144,421       794,605  
Total operating costs and expenses     1,907,052       1,718,838  
                 
Operating loss     (1,396,812 )     (1,108,064 )
                 
Other (expense) income:                
Interest expense, net     (512,706 )     (872,328 )
Other expense     (104,845 )    

(250,817

)  
Impairment loss on investment     -       (4,730 )
(Loss) Gain on extinguishment of debt     (40,810 )     4,285  
Total other expense     (658,361 )     (1,123,590 )
                 
Net loss     (2,055,173 )     (2,231,654 )
                 
Deemed dividends on beneficial conversion feature     (1,060,199 )     -  
Preferred stock dividends     (355,610 )     -  
Net loss attributable to common shareholders     (3,470,982 )     2,231,654  
                 
Net loss per share – basic and diluted   $ (2.01 )   $ (1.64 )
                 
Weighted average common stock shares outstanding used in the basic and diluted net loss per share calculation     1,723,557       1,363,326  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

  4  

 

 

PRESSURE BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    For the Three Months Ended March 31,  
    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (2,055,173 )   $ (2,231,654 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Right of use asset    

13,593

     

-

 
Common stock issued for debt extension     -       28,490  
Depreciation and amortization     23,590       23,499  
Accretion of interest and amortization of debt discount     103,933       459,232  
Inventory reserve recovery     -       (19,950 )
Loss/(g ain) on extinguishment of debt     40,810       (4,285 )
Stock-based compensation expense     245,392       86,020  
Shares issued for services     168,000       -  
Shares issued with debt     -       7,800  
Impairment loss on investment     -       4,730  
Changes in operating assets and liabilities:                
Accounts receivable     31,668       (115,736 )
Inventories     12,346       (14,795 )
Prepaid expenses and other assets     (12,606 )     22,886  
Accounts payable     (184,438 )     51,823  
Accrued employee compensation     (61,952 )     (15,668 )
Operating lease liability    

(13,593

)  

-

 
Deferred revenue and other accrued expenses     70,506     440,096  
Net cash used in operating activities     (1,617,924 )     (1,277,512 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of property plant and equipment     (12,615 )     -  
Net cash used in investing activities    

(12,615

)     -  
               
CASH FLOWS FROM FINANCING ACTIVITIES:                
Net proceeds from revolving note payable     -       460,000  
Net proceeds from preferred stock     1,260,000       -  
Net proceeds from convertible debt     1,490,368       819,350  
Net proceeds from non-convertible debt – third party     644,000       298,600  
Net proceeds from non-convertible debt – related party     -       50,000  
Payments on convertible debt     (1,040,185 )     (102,500 )
Payments on non-convertible debt     (557,048 )     (247,809 )
Net cash provided by financing activities     1,797,135       1,277,641  
                 
NET INCREASE IN CASH     166,596       129  
CASH AT BEGINNING OF YEAR     103,118       81,033  
CASH AT END OF PERIOD   $ 269,714     $ 81,162  
                 
SUPPLEMENTAL INFORMATION                
Interest paid in cash   $ 299,192     $ 120,970  
NON CASH TRANSACTIONS:                
Common stock issued in lieu of cash for interest     -       80,755  
Common stock issued with debt     50,733       51,463  
Discount from warrants issued with convertible debt     -       118,416  
Discount from one-time interest     -       72,500  
Preferred stock dividend     355,610       -  
Deemed dividend-beneficial conversion feature     1,060,199       -  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

  5  

 

 

PRESSURE BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

    Series D Preferred Stock     Series G Preferred Stock     Series H Preferred Stock     Series H(2)Preferred Stock     Series J Preferred Stock     Series K Preferred Stock     Series AA Preferred Stock     Common Stock     Stock     Additional Paid-In     Accumulated other comprehensive     Accumulated     Total Stockholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Warrants     Capital     loss     Deficit     Deficit  
BALANCE, December 31, 2017     300     $ 3       80,570     $ 806       10,000     $ 100       21     $ -       3,458     $ 35       6,880       68 .     $ -       -       1,342,858     $ 13,429     $ 9,878,513     $ 30,833,549     $ -     $ (55,349,299 )   $ (14,622,796 )
Stock-based compensation     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       86,020       -       -       86,020  
Issuance of common stock for services     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Down round feature triggered     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -               -       -       -       -  
Warrant exercise     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Series AA Preferred Stock dividend     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of warrants for services     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Conversion of debt and interest for preferred stock     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of common stock for dividends paid-in-kind     -       -       -       -       -       -       -       -       -       -       -       -       -       -       22,606       226       -       80,529       -       -       80,755  
Deemed dividend-beneficial conversion feature     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Conversion of Series AA convertible preferred stock     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Preferred Stock offering     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Offering costs for issuance of preferred stock     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Common Stock issued for debt extension                                                                                                                     7,000       70       -       28,420       -       -       28,490  
Stock issued with debt     -       -       -       -       -       -       -       -       -       -       -       -       -       -       15,750       157       -       59,106       -       -       59,263  
Warrants issued with debt     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       118,416       -       -       -       118,416  
Unrealized loss on investments, net of tax     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Net loss     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       (2,231,654 )     (2,231,654 )
BALANCE, March 31, 2018     300     $ 3       80,570     $ 806       10,000     $ 100       21     $ -       3,458     $ 35       6,880     $ 68       -     $ -       1,388,214     $ 13,882     $ 9,996,929     $ 31,087,624     $ -     $ (57,580,953 )   $ (16,481,506 )

 

    Series D Preferred Stock     Series G Preferred Stock     Series H Preferred Stock     Series H(2)Preferred Stock     Series J Preferred Stock     Series K Preferred Stock     Series AA Preferred Stock     Common Stock     Stock     Additional Paid-In     Accumulated other comprehensive     Accumulated     Total Stockholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Warrants     Capital     loss     Deficit     Deficit  
BALANCE, December 31, 2018     300     $ 3       80,570     $ 806       10,000     $ 100       21     $ -       3,458     $ 35       6,880       65       6,499       65.00       1,684,184     $ 16,842     $ 19,807,247     $ 39,777,301             $ (65,727,538 )   $ (6,125,071 )
Stock-based compensation     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       245,392       -       -       245,392  
Issuance of common stock for services     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Series AA Preferred Stock dividend     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -                       -       (355,610 )     (355,610 )
Warrant exercise     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -               -       -  
Series AA Preferred Stock dividend     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of shares for services     -       -       -       -       -       -       -       -       -       -       -       -       -       -       50,000       500               167,500       -       -       168,000  
Conversion of debt and interest for preferred stock     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of common stock for dividends paid-in-kind     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Beneficial conversion feature on Series AA convertible preferred stock     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       1,060,199  
                                                                                                                                                                         
Deemed dividend-beneficial conversion feature     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       1,060,199  
Conversion of Series AA convertible preferred stock     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Preferred Stock offering     -       -       -       -       -       -       -       -       -       -       -       -       560       6       -       -       738,528       661,466       -       -       1,400,000  
Offering costs for issuance of preferred stock     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       160,764       (300,764 )     -       -       (140,000 )
Common Stock issued for debt extension                                                                                                                     16,350       164       -       38,824       -       -       38,988  
Stock issued with debt     -       -       -       -       -       -       -       -       -       -       -       -       -       -       17,958       180       -       50,553       -       -       50,733  
Warrants issued with debt     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Unrealized loss on investments, net of tax     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Net loss     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       (2,055,173 )     (2,055,173 )
BALANCE, March 31, 2019     300     $ 3       80,570     $ 806       10,000     $ 100       21     $ -       3,458     $ 35       6,880     $ 68       7,059     $ 71       1,768,492     $ 17,685     $ 20,706,539     $ 40,640,273     $ -     $ (68,138,321 )   $ (6,772,741 )

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

  6  

 

 

PRESSURE BIOSCIENCES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(UNAUDITED)

 

  1) Business Overview, Liquidity and Management Plans

 

Pressure BioSciences, Inc. (“we”, “our”, “the Company”) is focused on solving the challenging problems inherent in biological sample preparation, a crucial laboratory step performed by scientists worldwide working in biological life sciences research. Sample preparation is a term that refers to a wide range of activities that precede most forms of scientific analysis. Sample preparation is often complex, time-consuming, and in our belief, one of the most error-prone steps of scientific research. It is a widely-used laboratory undertaking, the requirements of which drive what we believe is a large and growing worldwide market. We have developed and patented a novel, enabling technology platform that can control the sample preparation process. It is based on harnessing the unique properties of high hydrostatic pressure. This process, called pressure cycling technology, or PCT, uses alternating cycles of hydrostatic pressure between ambient and ultra-high levels (45,000 psi or greater) to safely, conveniently and reproducibly control the actions of molecules in biological samples, such as cells and tissues from human, animal, plant, and microbial sources.

 

Our pressure cycling technology uses internally developed instrumentation that is capable of cycling pressure between ambient and ultra-high levels - at controlled temperatures and specific time intervals - to rapidly and repeatedly control the interactions of bio-molecules, such as DNA, RNA, proteins, lipids, and small molecules. Our laboratory instrument, the Barocycler®, and our internally developed consumables product line, including PULSE® (Pressure Used to Lyse Samples for Extraction) Tubes, other processing tubes, and application specific kits (which include consumable products and reagents) together make up our PCT Sample Preparation System, or PCT SPS.

 

In 2015, together with an investment bank, we formed a subsidiary called Pressure BioSciences Europe (“PBI Europe”) in Poland. We have 49% ownership interest with the investment bank retaining 51%. As of now, PBI Europe does not have any operating activities and we cannot reasonably predict when operations will commence. Therefore, we do not have control of the subsidiary and did not consolidate in our financial statements. PBI Europe did not have any operations in the three months ended March 31, 2019 or in fiscal year 2018.

 

  2) Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. However, we have experienced negative cash flows from operations with respect to our pressure cycling technology business since our inception. As of March 31, 2019, we do not have adequate working capital resources to satisfy our current liabilities and as a result, there is substantial doubt regarding our ability to continue as a going concern. We have been successful in raising cash through debt and equity offerings in the past and as described in Notes 6 and 7. In addition we raised cash through debt and equity financing after March 31, 2019 as described in Note 8. We have financing efforts in place to continue to raise cash through debt and equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful. These financial statements do not include any adjustments that might result from this uncertainty.

 

  7  

 

 

  3) Interim Financial Reporting

 

The accompanying unaudited consolidated balance sheet as of December 31, 2018, which was derived from audited financial statements, and the unaudited interim consolidated financial statements of Pressure BioSciences, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K (the “Form 10-K”) for the fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission on April 16, 2019.

 

  4) Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Pressure BioSciences, Inc., and its wholly-owned subsidiary PBI BioSeq, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to our current year presentation.

 

Recent Accounting Standards

 

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

 

In February 2016, the FASB issued ASU 2016-02, Leases (ASC Topic 842). The new standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods therein. The Company early adopted ASC 842 for 2018.

 

  8  

 

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting , which clarifies that an entity should account for the effects of a modification unless the fair value, vesting terms and classification as liability or equity of the modified and original awards do not change on the modification date. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this ASU effective on January 1, 2018, on a prospective basis which did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

Effective January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The standard amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The most significant impact to our consolidated financial statements relates to the recognition and measurement of equity investments at fair value with changes recognized in Net income. The amendment also updates certain presentation and disclosure requirements. The adoption of ASU 2016-01 did not have a material impact on the consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-07, Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting as an amendment and update expanding the scope of Topic 718. The amendment specifies that Topic 718 now applies to all share-based payment transactions, even non-employee awards, in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Under the new guidance, awards to nonemployees are measured on the grant date, rather than on the earlier of the performance commitment date or the date at which the nonemployee’s performance is complete. Also, the awards would be measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can be measured more reliably. In addition, entities may use the expected term to measure nonemployee awards or elect to use the contractual term as the expected term, on an award-by-award basis. The new guidance is effective for the Company in annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. Based on the new guidance, the Company will measure its nonemployee stock awards at grant date not when the stock awards are vested. This new guidance did not have a material impact on the Company’s consolidated financial statements.

 

Revenue Recognition

 

We recognize revenue in accordance with FASB ASC 606, ASC 606, Revenue from Contracts with Customers, and ASC 340-40, Other Assets and Deferred Costs—Contracts with Customers . Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period. We measure and allocate revenue according to ASC 606-10.

 

We identify a performance obligation as distinct if both the following criteria are true: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determining the standalone selling price (“SSP”) and allocation of consideration from a contract to the individual performance obligations, and the appropriate timing of revenue recognition, is the result of significant qualitative and quantitative judgments. Management considers a variety of factors such as historical sales, usage rates, costs, and expected margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenue recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.

 

  9  

 

 

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.

 

  10  

 

 

Deferred revenue represents amounts received from grants and service contracts for which the related revenues have not been recognized because one or more of the revenue recognition criteria have not been met. Revenue from service contracts is recorded ratably over the length of the contract.

 

Disaggregation of revenue

 

In the following table, revenue is disaggregated by primary geographical market, major product line, and timing of revenue recognition.

 

In thousands of US dollars ($)            
Primary geographical markets   Q1 2019     Q1 2018  
North America     224       365  
Europe     40       155  
Asia     246       91  
      510       611  

 

Major products/services lines   Q1 2019     Q1 2018  
Instruments     138       420  
Grants     0       25  
Consumables     62       75  
Others     310       91  
      510       611  

 

Timing of revenue recognition   Q1 2019     Q1 2018  
Products transferred at a point in time     501       576  
Products and services transferred over time     9       35  
      510       611  

 

Contract balances

 

In thousands of US dollars ($)   March 31, 2019     December 31, 2018  
Receivables, which are included in ‘Accounts Receivable’     443       475  
Contract liabilities (deferred revenue)     71       59  

 

Transaction price allocated to the remaining performance obligations

 

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.

 

In thousands of US dollars ($)   2019     2020     2021     Total  
Extended warranty service     37       34       -       71  

 

All consideration from contracts with customers is included in the amounts presented above.

 

Contract Costs

 

The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general, and administrative expenses. The costs to obtain a contract are recorded immediately in the period when the revenue is recognized either upon shipment or installation. The costs to obtain a service contract are considered immaterial when spread over the life of the contract so the Company records the costs immediately upon billing.

 

Use of Estimates

 

To prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In addition, significant estimates were made in projecting future cash flows to quantify deferred tax assets, the costs associated with fulfilling our warranty obligations for the instruments that we sell, and the estimates employed in our calculation of fair value of stock options awarded and warrant derivative liability. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from the estimates and assumptions used.

 

  11  

 

 

Concentrations

 

Credit Risk

 

Our financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, and trade receivables. We have cash investment policies which, among other things, limit investments to investment-grade securities. We perform ongoing credit evaluations of our customers, and the risk with respect to trade receivables is further mitigated by the fact that many of our customers are government institutions, large pharmaceutical and biotechnology companies, and academic laboratories.

 

The following table illustrates the level of concentration as a percentage of total revenues during the three months ended March 31, 2019 and 2018. The Top Five Customers category may include federal agency revenues if applicable.

 

    For the Three Months Ended  
    March 31,  
    2019     2018  
Top Five Customers     73 %     40 %
Federal Agencies     18 %     4 %

 

The following table illustrates the level of concentration as a percentage of net accounts receivable balance as of March 31, 2019 and December 31, 2018. The Top Five Customers category may include federal agency receivable balances if applicable.

 

    March 31, 2019     December, 31, 2018  
Top Five Customers     77 %     54 %
Federal Agencies     18 %     5 %

 

Product Supply

 

CBM Industries (Taunton, MA) has recently become the manufacturer of the Barocycler® 2320EXT. CBM is ISO 13485:2003 and 9001:2008 Certified. CBM provides us with precision manufacturing services that include management support services to meet our specific application and operational requirements. Among the services provided by CBM to us are:

 

  CNC Machining
     
  Contract Assembly & Kitting
     
  Component and Subassembly Design
     
  Inventory Management
     
  ISO certification

 

At this time, we believe that outsourcing the manufacturing of our new Barocycler® 2320EXT to CBM is the most cost-effective method for us to obtain and maintain ISO Certified, CE and CSA Marked instruments. CBM’s close proximity to our South Easton, MA facility is a significant asset enabling interactions between our Engineering, R&D, and Manufacturing groups and their counterparts at CBM. CBM was instrumental in helping PBI achieve CE Marking on our Barocycler 2320EXT, as announced on February 2, 2017.

 

Although we currently manufacture and assemble the Barozyme HT48, Barocycler® HUB440, the SHREDDER SG3, and most of our consumables at our South Easton, MA facility, we plan to take advantage of outsourced manufacturing relationships such as that with CBM and outsource manufacturing of the entire Barocycler® product line, future instruments, and other products to CBM.

 

  12  

 

 

Investment in Equity Securities

 

As of March 31, 2019, we held 100,250 shares of common stock of Everest Investments Holdings S.A. (“Everest”), a Polish publicly traded company listed on the Warsaw Stock Exchange. We account for this investment in accordance with ASC 321 “Investments —Equity Securities” . ASC 321 requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. On March 31, 2019, our consolidated balance sheet reflected the fair value of our investment in Everest to be approximately $17,000. We recorded $3,182 as realized losses in 2018 for the changes in market value.

 

Computation of Loss per Share

 

Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding. Diluted loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. For purposes of this calculation, convertible preferred stock, common stock dividends, and warrants and options to acquire common stock, are all considered common stock equivalents in periods in which they have a dilutive effect and are excluded from this calculation in periods in which these are anti-dilutive to our net loss.

 

The following table illustrates our computation of loss per share for the three months ended March 31, 2019 and 2018:

 

    For the Three Months Ended  
    March 31,  
    2019     2018  
Numerator:                
Net loss attributable to common shareholders   $

(3,470,982

)   $ (2,231,654 )
                 
Denominator for basic and diluted loss per share:                
Weighted average common stock shares outstanding     1,723,557       1,363,326  
                 
Loss per common share – basic and diluted   $ (2.01 )   $ (1.64 )

 

  13  

 

 

The following table presents securities that could potentially dilute basic loss per share in the future. For all periods presented, the potentially dilutive securities were not included in the computation of diluted loss per share because these securities would have been anti-dilutive to our net loss. The Series D Convertible Preferred Stock, Series G Convertible Preferred Stock, Series H and H2 Convertible Preferred Stock, Series J Convertible Preferred Stock, Series K Convertible Preferred Stock and Series AA Convertible Preferred Stock are presented below as if they were converted into common shares according to the conversion terms.

 

    As of March 31,  
    2019     2018  
Stock options     366,734       247,136  
Convertible debt     471,015       1,020,603  
Common stock warrants     8,380,875       928,541  
Convertible preferred stock:                
Series D Convertible Preferred Stock     25,000       25,000  
Series G Convertible Preferred Stock     26,857       26,857  
Series H Convertible Preferred Stock     33,334       33,334  
Series H2 Convertible Preferred Stock     70,000       70,000  
Series J Convertible Preferred Stock     115,267       115,267  
Series K Convertible Preferred Stock     229,334       229,334  
Series AA Convertible Preferred Stock     7,059,822       -  
      16,778,238       2,696,072  

 

Accounting for Stock-Based Compensation Expense

 

We maintain equity compensation plans under which incentive stock options and non-qualified stock options are granted to employees, independent members of our Board of Directors and outside consultants. We recognize stock-based compensation expense over the requisite service period using the Black-Scholes formula to estimate the fair value of the stock options on the date of grant.

 

Determining Fair Value of Stock Option Grants

 

Valuation and Amortization Method - The fair value of each option award is estimated on the date of grant using the Black-Scholes pricing model based on certain assumptions. The estimated fair value of employee stock options is amortized to expense using the straight-line method over the vesting period.

 

Expected Term - The Company uses the simplified calculation of expected life, as the Company does not currently have sufficient historical exercise data on which to base an estimate of expected term. Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted.

 

Expected Volatility - Expected volatility is based on the Company’s historical stock volatility data over the expected term of the award.

 

Risk-Free Interest Rate - The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.

 

Forfeitures - The Company records stock-based compensation expense only for those awards that are expected to vest. The Company estimated a forfeiture rate of 5% for awards granted based on historical experience and future expectations of options vesting. The Company used this historical rate as our assumption in calculating future stock-based compensation expense.

 

  14  

 

 

The Company recognized stock-based compensation expense of $245,392 and $86,020 for the three months ended March 31, 2019 and 2018, respectively. The following table summarizes the effect of this stock-based compensation expense within each of the line items of our costs and expenses within our Consolidated Statements of Operations:

 

    For the Three Months Ended  
    March 31,  
    2019     2018  
Cost of sales   $ 8,316     $ -  
Research and development     34,624       15,499  
Selling and marketing     22,119       7,197  
General and administrative     180,333       63,324  
Total stock-based compensation expense   $ 245,392     $ 86,020  

 

Fair Value of Financial Instruments

 

Due to their short maturities, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair value. Long-term liabilities are primarily related to convertible debentures and deferred revenue with carrying values that approximate fair value.

 

Fair Value Measurements

 

The Company follows the guidance of FASB ASC Topic 820, “ Fair Value Measurements and Disclosures ” (“ASC 820”) as it related to all financial assets and financial liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.

 

The Company generally defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions. A slight change in an unobservable input like volatility could have a significant impact on the fair value measurement of the derivative liability.

 

  15  

 

 

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company has determined that its financial assets are classified within Level 1 and its financial liabilities are currently classified within Level 3 in the fair value hierarchy. The development of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management.

 

 

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2019:

 

          Fair value measurements at
March 31, 2019 using:
 
    March 31, 2019     Quoted
prices in
active
markets
(Level 1)
   

Significant
other
observable
inputs
(Level 2)

   

Significant
unobservable
inputs
(Level 3)

 
Equity Securities     16,643       16,643                  -                      -  
Total Financial Assets   $ 16,643     $ 16,643     $ -     $ -  

 

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2018:

 

          Fair value measurements at
December 31, 2018 using:
 
    December 31, 2018     Quoted
prices in
active
markets
(Level 1)
    Significant
other
observable
inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
 
Equity Securities     16,643       16,643                -                    -  
Total Financial Assets   $ 16,643     $ 16,643     $ -     $ -  

 

Adoption of ASU No. 2016-02

 

The Company has early adopted ASU No. 2016-02, Leases (Topic 842). The amendment requires companies to recognize leased assets and liabilities on the balance sheet and to disclose key information regarding lease arrangements. This guidance is effective for annual periods, and interim periods within those annual periods, after December 15, 2018. Early application of this amendment is permitted for all entities. While we do not anticipate that going forward, leases will be material to our balance sheet, we chose to early-adopt as of December 31, 2018. We have one lease that is required to be included on our balance sheet under the new standard. This lease is an operating lease and, therefore, will have no income statement impact resulting from the adoption of this standard.

 

  16  

 

 

  5) Commitments and Contingencies

 

Operating Leases

 

As disclosed in Note 4, the Company early adopted ASC 842 to our existing leases. The Company has elected to apply the short-term lease exception to leases of one year or less. Consequently, as a result of adoption of ASC 842, we recognized an operating liability of $136,385 with a corresponding Right-Of-Use (“ROU”) asset of the same amount based on present value of the minimum rental payments of the lease which is included in non-current assets and long-term liabilities in the consolidated balance sheet. The discount rate used for leases accounted for under ASC 842 is the Company’s estimated borrowing rate of 25%.

 

Our corporate office is currently located at 14 Norfolk Avenue, South Easton, Massachusetts 02375. We are currently paying $6,950 per month, on a lease extension, signed on December 28, 2018, that expires December 31, 2019, for our corporate office. We expanded our space to include offices, warehouse and a loading dock on the first floor starting May 1, 2017 with a monthly rent increase already reflected in the current payments.

 

We extended our lease for our space in Medford, MA to December 30, 2020. The lease requires monthly payments of $7,130.50 subject to annual cost of living increases. The lease can be extended by the Company for an additional three years unless either party terminates at least six months prior to the expiration of the current lease term.

 

Rental costs are expensed on a straight-line basis subject to future cost of living increases that are not known until the anniversary date of each year. During the three months ended March 31, 2019 and 2018 we incurred $44,241 and $46,723 in rent expense, respectively for the use of our corporate office and research and development facilities.

 

Following is a schedule by years of future minimum rental payments required under operating leases with initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2019:

 

2019   $ 62,215  
2020     82,953  
2021        
2022     -  
Thereafter     -  
    $ 145,168  

 

  6) Convertible Debt and Other Debt

 

Conversion of Notes

 

We issued 5,075.40 shares of our Series AA Convertible Preferred Stock in satisfaction of $12,688,635 of convertible promissory notes, Revolving Note and short-term loans issued:

 

    Debt converted
to stock
 
Current liabilities        
Convertible Debentures, face value   $ 6,962,635  
Revolving Note with interest     4,750,000  
May 19, 2017 Promissory Note with interest     750,000  
Other Notes with interest     226,000  
Total debt converted during the year 2018   $ 12,688,635  

 

  17  

 

 

Senior Secured Convertible Debentures and Warrants

 

We entered into Subscription Agreements (the “ Subscription Agreement ”) with various individuals (each, a “ Purchaser ”) between July 23, 2015 and March 31, 2016, pursuant to which the Company sold Senior Secured Convertible Debentures (the “ Debentures ”) and warrants to purchase shares of common stock equal to 50% of the number of shares issuable pursuant to the subscription amount (the “ Warrants ”) for an aggregate purchase price of $6,329,549 (the “ Purchase Price ”).

 

The Company issued a principal aggregate amount of $6,962,504 in Debentures which includes a 10% original issue discount on the Purchase Price. The Debenture does not accrue any additional interest during the first year it is outstanding but accrues interest at a rate equal to 10% per annum for the second year it is outstanding. The Debenture has a maturity date of two years from issuance. The Debenture is convertible any time after its issuance date. The Purchaser has the right to convert the Debenture into shares of the Company’s common stock at a fixed conversion price equal to $8.40 per share, subject to applicable adjustments. In the second year that the Debenture is outstanding, any interest accrued shall be payable quarterly in either cash or common stock, at the Company’s discretion. On September 11, 2017, we notified Debenture holders that their Debentures will be extended 180 days beyond the original maturity date as permitted in the Debenture agreement. We will continue to pay interest on the Debentures until the extended maturity date. We accounted for the Debenture extensions as debt modifications and not extinguishment of debt since the changes in fair value are not substantial in accordance with ASC 470-50. We started amortizing the remaining unamortized discount as of September 11, 2017 over the new term, which extends 180 days beyond the original maturity date.

 

In connection with the Debentures issued, the Company issued warrants exercisable into a total of 376,759 shares of our common stock. The Warrants issued in this transaction are immediately exercisable at an exercise price of $12.00 per share, subject to applicable adjustments including full ratchet anti-dilution if we issue any securities at a price lower than the exercise price then in effect. The Warrants have an expiration period of five years from the original issue date. The Warrants are subject to adjustment for stock splits, stock dividends or recapitalizations and also include anti-dilution price protection for subsequent equity sales below the exercise price.

 

On May 2, 2018, the Company entered into a Securities Purchase Agreement with an existing shareholder pursuant to which the Company sold an aggregate of 100 shares of Series AA Convertible Preferred Stock for an aggregate Purchase Price of $250,000. We issued to the shareholder a new warrant to purchase 100,000 shares of common stock with an exercise price of $3.50 per share.

 

The Company, pursuant to a price protection provision triggered on May 2, 2018 with the sale of Series AA units, amended the Debentures and Warrants to purchase Common Stock held by the Debenture Holders entered into between July 22, 2015 and March 31, 2016 as first disclosed in the Company’s Current Report on Form 8-K filed on July 28, 2015. The fair value of $207,899 relating to the reduction in exercise price was treated as a deemed dividend and recorded as a charge against additional paid-in capital within equity. The amended Debenture conversion price was exempt from revaluation because a beneficial conversion feature had already been recorded on the Debenture at issuance.

 

Subject to the terms and conditions of the Warrants, at any time commencing six months from the Final Closing, the Company has the right to call the Warrants for cancellation if the volume weighted average price of its Common Stock on the OTCQB (or other primary trading market or exchange on which the Common Stock is then traded) equals or exceeds three times the per share exercise price of the Warrants for 15 out of 20 consecutive trading days.

 

In connection with the Subscription Agreement and Debenture, the Company entered into Security Agreements with the Purchasers whereby the Company agreed to grant to Purchasers an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, Warrants and the other Transaction Documents. On May 14 and June 11, 2018, the Company signed letter agreements with the Debenture holders as explained below that discharged all of the Company’s obligations within the Debenture Agreement

 

  18  

 

 

Conversion of Debentures

 

On May 14, 2018, we entered into letter agreements (the “Letter Agreements”) with 22 investors (each a “Debenture Holder” and together the “Debenture Holders”) holding convertible debentures (collectively the “Debentures”) and warrants to purchase common stock (the “Debenture Warrants”) whereby the Debenture Holders agreed to convert a total of $6,220,500 in principal and original issue discount due them under the Debentures into 2,448.20 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended Debenture Warrants such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of $3.50 per share to purchase 2,448,200 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the Debenture conversions). The Debenture Holders also agreed to waive any and all defaults or events of default by the Company with respect to any failure by the Company to comply with any covenants contained in the Debentures. The fair value of $29,865 relating to the adjustment in exercise price was treated as a loan modification and recorded as a gain toward the extinguishment of debt.

 

On June 11, 2018, the Company entered into additional Letter Agreements with 15 Debenture Holders whereby the Debenture Holders agreed to convert a total of $742,135 in principal and original issue discount due them under the Debentures into 296.80 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended Debenture Warrants such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of $3.50 per share to purchase 296,800 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the Debenture conversions). The Debenture Holders also agreed to waive any and all defaults or events of default by the Company with respect to any failure by the Company to comply with any covenants contained in the Debentures. The fair value of $3,155 relating to the adjustment in exercise price was treated as a loan modification and recorded as a gain toward the extinguishment of debt.

 

In connection with the above Debenture conversions and cancellation of the debt term, the Company recorded the full amount of the remaining unamortized Debenture discounts of $157,908 as interest expense by June 11, 2018. The Company recorded $287,676 of the Debenture discounts during 2018 through the cancellation date of June 11, 2018.

 

On various dates for the three months ended March 31, 2018, the Company issued 22,606 shares of common stock based on the 10-day VWAP prior to quarter end to holders of the Debentures in payment of the quarterly interest accrued from the Debentures first anniversary date through December 31, 2017 for an aggregate amount of $85,040. We recognized a $4,285 gain on extinguishment of debt by calculating the difference of the shares valued on the issuance date and the amount of accrued interest through December 31, 2017.

 

Convertible notes

 

The Company, pursuant to a price protection provision triggered on May 2, 2018 with the sale of Series AA units, amended the conversion price of a March 12, 2018 loan to $2.50 per share. The fair value of $253,000, limited to the face value of the loan, relating to the reset in the conversion price was recorded as a debt discount and amortized as interest expense over the remaining loan term.

 

On various dates during the quarter ended March 31, 2019, the Company issued convertible notes for net proceeds of approximately $1.5 million which contained varied terms and conditions as follows: a) maturity dates ranging from 2 to 12 months; b) interest rates that accrue per annum ranging from 4% to 15%; c) convertible to the Company’s common stock at issuance at a fixed rate of $7.50 or convertible at variable conversion rates either after 6 months after issuance or in the event of a default. Certain of these notes were issued with shares of common stock or warrants to purchase common stock that were fair valued at issuance dates. The aggregate relative fair value of $47,459 of the shares of common stock to purchase common stock issued with the notes was recorded as a debt discount and amortized over the term of the notes. We then computed the effective conversion price of the notes, noting that no beneficial conversion feature exists. We also evaluated the convertible notes for derivative liability treatment and determined that the notes did not qualify for derivative accounting treatment as of March 31, 2019.

 

  19  

 

 

The specific terms of the convertible notes and outstanding balances as of March 31, 2019 are listed in the tables below.

 

Inception Date   Term   Loan
Amount
    Outstanding
Balance
with OID
    Original
Issue
Discount
    Interest
Rate
    Conversion
Price
(Convertible
at Inception
Date)
    Deferred
Finance
Fees
    Discount
related to fair
value of
conversion
feature and
warrants/shares
 
February 15, 2018 1   6 months     100,000       100,000       -       15 %   $ 7.50       9,000       10,474  
April 11, 2018 1   6 months     100,000       100,000       4,000       15 %   $ 7.50       20,000       7,218  
April 24, 2018 1   9 months     77,000       77,000       -       12 %   $ 7.50       2,000       -  
April 25, 2018 1   12 months     105,000       105,000       -       4 %   $ 7.50       5,000       4,590  
April 25, 2018 1   12 months     105,000       105,000       -       4 %   $ 7.50       5,000       4,590  
May 17, 2018 1   12 months     380,000       380,000       15,200       8 %   $ 7.50       15,200       43,607  
May 30, 2018 1   2 months     150,000       100,000       -       8 %   $ 7.50       -       6,870  
June 4, 2018   12 months     75,000       75,000       7,500       5 %     -       2,000       3,869  
June 8, 2018 1   6 months     50,000       50,000       2,500       15 %   $ 7.50       2,500       3,271  
June 12, 2018 1   6 months     100,000       100,000       -       5 %   $ 7.50       5,000       -  
June 16, 2018 1   9 months     130,000       101,500       -       5 %     -       -       -  
June 16, 2018 1   6 months     110,000       101,500       -       5 %     -       -       -  
June 26, 2018 1   3 months     150,000       75,000       -       15 %   $ 7.50       -       20,242  
June 28, 2018 1   6 months     50,000       50,000       -       15 %   $ 7.50       -       10,518  
July 17, 2018 1   3 months     100,000       100,000       15,000       15 %   $ 7.50       -       16,944  
July 19, 2018   12 months     184,685       150,000       34,685       10 %   $ 7.50       -       -  
September 7, 2018 1   6 months     85,000       75,000       -       5 %     -       -       4,364  
October 1, 2018   6 months     118,800       118,800       8,800       25 %   $ 7.50       3,000          
October 19, 2018   6 months     100,000       100,000       -       5 %   $ 7.50                  
October 23, 2018   6 months     103,000       103,000               12 %     -       3,000          
October 29, 2018   6 months     77,000       77,000               12 %   $ 7.50       2,000          
November 5, 2018   6 months     105,000       105,000               4 %     -       5,000       3,872  
November 5, 2018   6 months     130,000       130,000               6 %   $ 7.50       6,500          
November 7, 2018   6 months     205,000       205,000               4 %   $ 7.50       5,000       17,906  
November 13, 2018   6 months     75,000       75,000       7,500       5 %     -       2,000       4,656  
November 13, 2018   6 months     200,000       185,000               15 %   $ 7.50               30,026  
November 21, 2018   9 months     103,000       103,000               12 %     -       3,000          
November 27, 2018   12 months     70,000       70,000               4 %     -       2,500       1,922  
January 2, 2019   12 months     125,000       125,000               4 %   $ 7.50       6,250       6,620  
January 9, 2019   12 months     105,000       105,000               4 %   $ 7.50       5,000       2,416  
January 9, 2019   12 months     118,750       118,750               5 %   $ 7.50       8,750          
January 11, 2019   9 months     103,000       103,000               8 %     -       3,000          
January 31, 2019   12 months     100,000       100,000               6 %   $ 7.50       5,000          
January 31, 2019   12 months     108,000       108,000       8,000       4 %   $ 7.50       3,000          
February 8, 2019   12 months     237,500       237,500       14,750       5 %   $ 7.50       7,000          
February 21, 2019   12 months     215,000       215,000               4 %   $ 7.50       15,000       18,582  
February 22, 2019   12 months     65,500       65,000       6,500       5 %   $ 7.50       2,000       4,198  
February 22, 2019   9 months     115,563       115,563       8,063       7 %   $ 7.50       2,500          
February 27, 2019   10 months     103,000       103,000               8 %     -       3,000          
March 18, 2019   6 months     100,000       100,000               4 %   $ 7.50       -       10,762  
March 19, 2019   12 months     131,250       131,250               4 %   $ 7.50       6,250       4,509  
        $ 4,966,048     $ 4,743,863     $ 132,498                     $ 164,450     $ 242,046  

 

1) The notes were extended for an additional term.

 

  20  

 

 

For the three months ended March 31, 2019, the Company recognized amortization expense related to the debt discounts indicated above of $101,752. The unamortized debt discounts as of March 31, 2019 related to the convertible debentures and other convertible notes amounted to $239,675.

 

Revolving Note Payable and May 19,2017 Promissory Note

 

On October 28, 2016, an accredited investor (the “ Investor ”) purchased from us a promissory note in the aggregate principal amount of up to $2,000,000 (the “ Revolving Note ”) due and payable on the earlier of October 28, 2017 (the “ Maturity Date ”) or on the seventh business day after the closing of a Qualified Offering (as defined in the Revolving Note). Although the Revolving Note is dated October 26, 2016, the transaction did not close until October 28, 2016, when we received its initial $250,000 advance pursuant to the Revolving Note. As a result, on the same day and pursuant to the Revolving Note, we issued to the Investor a Common Stock Purchase Warrant to purchase 20,834 shares of our common stock at an exercise price per share equal to $12.00 per share. The Investor is obligated to provide us with advances of $250,000 under the Revolving Note, but the Investor shall not be required to advance more than $250,000 in any individual fifteen (15) day period and no more than $500,000 in the thirty (30) day period immediately following the date of the initial advance. We received $3,500,000 pursuant to the Revolving Note as amended of which $2,070,000 net proceeds was received in 2017 and we issued to the Investor warrants to purchase 291,667 shares of our Common Stock at an exercise price per share equal to $12.00 per share. The terms of the Warrants are identical except for the exercise date, issue date, and termination date which are based on the advance date.

 

The Revolving Note was amended on May 2, 2017 to increase the aggregate principal amount to $3,000,000, to issue 16,667 shares of our Common Stock to the Investor, to decrease the exercise price per share of the warrants to the lower of (i) $12.00 or (ii) the per share purchase price of the shares of our Common Stock sold in the Qualified Offering, and to change the references in the Revolving Note from “the six (6) month anniversary of October 28, 2016” to “July 25, 2017.” The fair value of the 16,667 shares issued of $149,018 was accounted for as a note discount and are amortized to interest expense over the life of the loan. We evaluated the accounting impact of the Revolving Note amendment and deemed that the amendment did not have a material impact on our consolidated financial statements.

 

  21  

 

 

The Revolving Note was amended on August 18, 2017 to increase the aggregate principal amount to $3,500,000 with all other terms unchanged. The Revolving Note, previously amended, was further amended on January 30, 2018 to increase the aggregate principal amount to $4,000,000 with all other terms unchanged.

 

In the event that a Qualified Offering had occurred after July 25, 2017, but prior to the Maturity Date, within seven (7) Business Days of the closing of the Qualified Offering, the Company was to pay a cash fee equal to five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering or, at the option of the Company, issue to the Holder a number of restricted shares of the Company’s common stock equal to (x) five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering divided by (y) the purchase price provided by the documents governing the Qualified Offering. A Qualified Offering means the completion of a public offering of the Company’s securities pursuant to which the Company receives aggregate gross proceeds of at least Seven Million United States Dollars (US$7,000,000) in consideration of the purchase of its securities and resulting in, pursuant to the effectiveness of the registration statement for such offering, the Company’s common stock being traded on the NASDAQ Capital Market, NASDAQ Global Select Market or the New York Stock Exchange. A Qualified Offering did not occur on or prior to the Maturity Date.

 

Interest on the principal balance of the Revolving Note shall be paid in full on the Maturity Date, unless otherwise paid prior to the Maturity Date. Interest shall be assessed as follows: (i) a one-time interest of 10% on all principal amounts advanced prior to April 28, 2017; (ii) the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between April 28, 2017 and July 28, 2017; or (iii) both of the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between July 28, 2017 and October 28, 2017.

 

Broker fees amounting to $336,500, the one-time interest of $400,000 and the relative fair value of the 333,334 warrants issued to the Investor amounting to $1,266,691 were recorded as debt discounts and amortized over the term of the revolving note. The unamortized debt discounts related to the Revolving Note were fully amortized as of December 31, 2017. The finance costs from advances after December 31, 2017 were charged to interest expense directly because the maturity date had passed.

 

On May 19, 2017, we received a 45-day non-convertible loan of $630,000 from the Investor. The loan provided guaranteed interest of $63,000 and had an origination fee of $32,000. We paid a broker $31,500 in connection with this loan.

 

Conversion of October 26, 2016 Revolving Note and May 19, 2017 Promissory Note

 

On June 11, 2018, the Company entered into a Letter Agreement with the Investor to convert a total of $5,500,000 in principal and interest due to the Investor pursuant to the Revolving Note and the May 19, 2017 promissory note into 2,200 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Company also amended the Line of Credit Warrants held by the Investor. The Company lowered the Line of Credit Warrants’ exercise price from $12.00 per share to $3.50 per share. The fair value of $82,904 relating to the reduction in exercise price was treated as a loan modification and recorded as a charge against the extinguishment of debt.

 

The Company also issued a new warrant to the Investor with an exercise price of $3.50 per share to purchase 2,200,000 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the conversion of a total of $5,500,000). In connection with the Letter Agreement, the Investor also waived $520,680 of interest and fees owed as of September 30, 2018. We recognized $520,680 as a gain on extinguishment of debt.

 

Convertible Loan Modifications and Extinguishments

 

We refinanced certain convertible loans during the quarter ended March 31, 2019 at substantially the same terms for extensions of six months. We amortized any remaining unamortized debt discount as of the modification date over the remaining, extended term of the new loans. We applied ASC 470 of modification accounting to the debt instruments which were modified during the quarter or those settled with new notes issued concurrently for the same amounts but different maturity dates. The terms such as the interest rate, prepayment penalties, and default rates will be the same over the new extensions. According to ASC 470, an exchange of debt instruments between or a modification of a debt instrument by a debtor and a creditor in a nontroubled debt situation is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. If the terms of a debt instrument are changed or modified and the cash flow effect on a present value basis is less than 10 percent, the debt instruments are not considered to be substantially different and will be accounted for as modifications.

 

  22  

 

 

The cash flows of new debt exceeded 10% of the remaining cash flows of the original debt on three loans. We recorded losses on debt extinguishment of $40,810 per income statement on these three loans by calculating the difference of the fair value of the new debt and the carrying value of the old debt. The loss was primarily from the fair value of common stock issued in connection with these refinancings and cash fees paid.

 

The following table provides a summary of the changes in convertible debt and revolving note payable, net of unamortized discounts, during 2019:

 

    2019  
Balance at January 1,   $ 4,000,805  
Issuance of convertible debt, face value     1,627,063  
Deferred financing cost     (136,695 )
Debt discount from shares issued with the notes     (48,552 )
Payments     (1,040,185 )
Accretion of interest and amortization of debt discount to interest expense     101,752  
Balance at March 31,     4,504,188  
Less: current portion     4,504,188  
Convertible debt, long-term portion   $ -  

 

Other Notes

 

In March 2018, we received non-convertible loans totaling $150,000 from private investors. The loans include one-year term and 10% guaranteed interest. We converted these loans into Series AA Units. See below.

 

In April 2018, we received a non-convertible loan for $10,000 from a private investor. The loan includes a one-year term and 10% guaranteed interest. We converted this loan into Series AA Units. See below.

 

In January 2019, we received a non-convertible loan for $50,000 from a private investor. The loan includes a six-month term and 15% guaranteed interest.

 

On January 1, 2019, the Company and the holder of the $170,000 convertible loan issued in May 2017 agreed to extend the terms of the loan until September 30, 2019. The Company agreed to issue 1,200 shares of its common stock per month while the note remains outstanding. The loan will continue to earn 10% annual interest.

 

On February 28, 2019 we signed a Merchant Agreement with a lender. Under the agreement we received $600,000, of which approximately $349,000 was used to pay off the outstanding balances on two merchant agreements, in exchange for rights to all customer receipts until the lender is paid $804,000, which is collected at the rate of $4,020.00 per business day. The $240,000 imputed interest will be recorded as interest expense when paid each day. Fees of $6,000 were deducted from the initial advance. The payments were secured by second position rights to all customer receipts until the loan has been paid in full.

 

  23  

 

 

Conversion of Non-Convertible Notes

 

On June 11, 2018, the Company entered into Letter Agreements with certain private investors to convert a total of $176,000 in principal and interest due to the private investors pursuant to certain loan documents into 70.4 Series AA Units representing 70.4 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share and warrants to purchase 70,400 shares of common stock.

 

Merchant Agreements

 

We have signed various Merchant Agreements which entitle the lenders to our customer receipts. We accounted for the Merchant Agreements as loans under ASC 860 because while we provided rights to current and future receipts, we still had control over the receipts. Certain of these loans are guaranteed by an officer of the Company. The following table shows our Merchant Agreements as of March 31, 2019.

 

Inception Date   Purchase
Price
    Purchased
Amount
    Outstanding
Bal