NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(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 nine months ending September
30, 2017 or in fiscal year 2016.
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, 2017,
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, we received $4,610,967 in net proceeds from loans and warrant exercises
in the nine months ended September 30, 2017. We have financing efforts in place to continue to raise cash through debt and equity
offerings.
Management
has developed a plan to continue operations. This plan includes obtaining equity or debt financing. During the nine months ended
September 30, 2017 we received $4,610,967 in net proceeds from warrant exercises, additional convertible and non-convertible
debt. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans
to address these matters in the future will be successful.
We
need substantial additional capital to fund normal operations in future periods. In the event that we are unable to obtain financing
on acceptable terms, or at all, we will likely be required to cease our operations, pursue a plan to sell our operating assets,
or otherwise modify our business strategy, which could materially harm our future business prospects. These financial statements
do not include any adjustments that might result from this uncertainty.
|
3)
|
Interim
Financial Reporting
|
The
accompanying unaudited consolidated balance sheet as of December 31, 2016, 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 and nine months ended September 30, 2017 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2017. 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, 2016 as filed with the Securities and Exchange Commission on March 22, 2017.
On
June 5, 2017, we effected a 1-for-30 reverse stock split of our common stock. All common shares, stock options, and per share
information presented in the consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive
basis for all periods presented. In lieu of issuing fractional shares, stockholders who otherwise would have been entitled to
receive fractional shares because they held a number of shares not evenly divisible by the reverse stock split ratio were automatically
entitled to receive an additional fraction of a share of Common Stock to round up to the next whole share. There was no change
in the par value of the Company’s common stock. The ratio by which shares of preferred stock are convertible into shares
of common stock were adjusted to reflect the effects of the reverse stock split.
|
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.
Recent
Accounting Standards
In
July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and
Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for
certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity transactions.
Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption
permitted. The Company early adopted the ASU 2017-11 in the third quarter of 2017.
Adoption
of ASU 2017-11
The
Company changed its method of accounting for the Debentures and Warrants through the early adoption of ASU 2017-11 during the
three months ended September 30, 2017 on a modified retrospective basis. Accordingly, the Company reclassified the warrant derivative
and conversion option derivative liabilities to additional paid in capital on its January 1, 2017 consolidated balance sheets
totaling approximately $2.6 million, reduced debt discount by approximately $0.9 million and recorded the cumulative effect of
the adoption to the beginning balance of accumulated deficit of approximately $2.2 million. This resulted to an increase in stock
warrants by $2.5 million and additional paid-in capital by $1.4 million. In addition, because of the modified retrospective adoption,
the Company credited the change in fair value of warrant derivative and conversion option derivative liabilities on its consolidated
statements of operations by $245,215 and reduced amortization of debt discount by $812,904 for the nine months ended September
30, 2017. The following table provides a reconciliation of the warrant derivative liability, convertible debt, conversion option
derivative liability, stock warrant, additional paid-in capital and accumulated deficit on the consolidated balance sheet as of
December 31, 2016:
|
|
Convertible
debt, current portion
|
|
|
Convertible
debt, long term portion
|
|
|
Warrant
Derivative Liability
|
|
|
Conversion
Option Liability
|
|
|
Warrants
to acquire common stock
|
|
|
Additional
Paid-in Capital
|
|
|
Accumulated
deficit
|
|
Balance,
January 1, 2017 (Prior to adoption of ASU 2017-11)
|
|
$
|
4,005,702
|
|
|
$
|
529,742
|
|
|
$
|
1,685,108
|
|
|
$
|
951,059
|
|
|
$
|
6,325,102
|
|
|
$
|
27,544,265
|
|
|
$
|
(42,264,190
|
)
|
Reclassified
derivative liabilities and cumulative effect of adoption
|
|
|
(769,316
|
)
|
|
|
(154,152
|
)
|
|
$
|
(1,661,795
|
)
|
|
|
(951,059
|
)
|
|
$
|
2,525,623
|
|
|
|
1,377,108
|
|
|
|
(2,213,345
|
)
|
Balance,
January 1, 2017 (After adoption of ASU 2017-11)
|
|
$
|
3,236,386
|
|
|
$
|
375,590
|
|
|
$
|
23,313
|
|
|
$
|
-
|
|
|
$
|
8,850,725
|
|
|
$
|
28,921,373
|
|
|
$
|
(44,477,535
|
)
|
Use
of Estimates
To
prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America, we are required to make significant estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. In addition, significant estimates were made in projecting future cash flows to quantify
deferred tax assets, the costs associated with fulfilling our warranty obligations for the instruments that we sell, and the estimates
employed in our calculation of fair value of stock options awarded and warrant derivative liability. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from the estimates and assumptions used.
Concentrations
Credit
Risk
Our
financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents,
and trade receivables. We have cash investment policies which, among other things, limit investments to investment-grade securities.
We perform ongoing credit evaluations of our customers, and the risk with respect to trade receivables is further mitigated by
the fact that many of our customers are government institutions, large pharmaceutical and biotechnology companies, and academic
laboratories.
The
following table illustrates the level of concentration as a percentage of total revenues during the three months and nine months
ended September 30, 2017 and 2016. The Top Five Customers category may include federal agency revenues if applicable.
|
|
For
the Three Months Ended
|
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
Top
Five Customers
|
|
|
73
|
%
|
|
|
60
|
%
|
Federal
Agencies
|
|
|
30
|
%
|
|
|
9
|
%
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
Top
Five Customers
|
|
|
38
|
%
|
|
|
31
|
%
|
Federal
Agencies
|
|
|
19
|
%
|
|
|
3
|
%
|
The
following table illustrates the level of concentration as a percentage of net accounts receivable balance as of September 30,
2017 and December 31, 2016. The Top Five Customers category may include federal agency revenues if applicable
|
|
September
30, 2017
|
|
|
December,
31, 2016
|
|
Top
Five Customers
|
|
|
74
|
%
|
|
|
82
|
%
|
Federal
Agencies
|
|
|
28
|
%
|
|
|
1
|
%
|
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 the established relationship with CBM and transfer manufacturing
of the entire Barocycler® product line, future instruments, and other products to CBM.
The
Barocycler® NEP3229, launched in 2008, and manufactured by the BIT Group, will be phased out over the next several years and
replaced by the new state-of-the-art Barocycler® HUB and Barozyme HT48 product lines.
Investment
in Available-For-Sale Equity Securities
As
of September 30, 2017, 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 320
“Investments — Debt and Equity Securities”
as securities available for sale. On September 30, 2017, our
consolidated balance sheet reflected the fair value of our investment in Everest to be approximately $30,000, based on the closing
price of Everest shares of $0.29 USD per share on that day. The carrying value of our investment in Everest common stock
held will change from period to period based on the closing price of the common stock of Everest as of the balance sheet date.
The change in market value since the receipt of stock was determined to be other than temporary. We recorded $6,069 as an impairment
loss in the first quarter of 2017. The carrying value increased in the first nine months of 2017 by $6,190 and was reflected as
an unrealized gain in our Comprehensive Loss Statement.
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, 2017 and
2016:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,343,576
|
)
|
|
$
|
(945,207
|
)
|
|
$
|
(7,889,676
|
)
|
|
$
|
(5,933,768
|
)
|
Denominator
for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock shares outstanding
|
|
|
1,133,791
|
|
|
|
980,846
|
|
|
|
1,084,370
|
|
|
|
871,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L
oss
per common share – basic and diluted
|
|
$
|
(2.07
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
(7.28
|
)
|
|
$
|
(6.81
|
)
|
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 and Series K Convertible Preferred Stock are presented
below as if they were converted into common shares according to the conversion terms.
|
|
As
of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Stock
options
|
|
|
249,636
|
|
|
|
175,642
|
|
Convertible
debt
|
|
|
828,870
|
|
|
|
899,058
|
|
Common
stock warrants
|
|
|
902,033
|
|
|
|
827,490
|
|
Convertible
preferred stock:
|
|
|
|
|
|
|
|
|
Series
D Convertible Preferred Stock
|
|
|
25,000
|
|
|
|
25,000
|
|
Series
G Convertible Preferred Stock
|
|
|
26,857
|
|
|
|
28,857
|
|
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
|
|
|
|
117,367
|
|
Series
K Convertible Preferred Stock
|
|
|
227,200
|
|
|
|
227,200
|
|
|
|
|
2,478,197
|
|
|
|
2,403,948
|
|
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 $139,399 and $90,500 for the three months ended September 30, 2017 and
2016, respectively. The Company recognized stock-based compensation expense of $318,910 and $282,811 for the nine months ended
September 30, 2017 and 2016, 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Research
and development
|
|
$
|
37,345
|
|
|
$
|
14,735
|
|
|
$
|
76,263
|
|
|
$
|
50,766
|
|
Selling
and marketing
|
|
|
21,778
|
|
|
|
9,911
|
|
|
|
46,112
|
|
|
|
32,404
|
|
General
and administrative
|
|
|
80,276
|
|
|
|
65,854
|
|
|
|
196,535
|
|
|
|
199,641
|
|
Total
stock-based compensation expense
|
|
$
|
139,399
|
|
|
$
|
90,500
|
|
|
$
|
318,910
|
|
|
$
|
282,811
|
|
Fair
Value of Financial Instruments
Due
to their short maturities, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate their fair value. Long-term liabilities are primarily related to convertible debentures and deferred revenue
with carrying values that approximate fair value.
Fair
Value Measurements
The
Company follows the guidance of FASB ASC Topic 820, “
Fair Value Measurements and Disclosures
” (“ASC 820”)
as it related to all financial assets and financial liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis.
The
Company generally defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (exit price). The Company uses a three-tier fair value
hierarchy, which classifies the inputs used in measuring fair values. These tiers include: Level 1, defined as observable inputs
such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market
data exists, therefore requiring the Company to develop its own assumptions. A slight change in an unobservable input like volatility
could have a significant impact on the fair value measurement of the derivative liability.
Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement. The Company has determined that its financial assets are classified within Level 1 and its financial liabilities
are currently classified within Level 3 in the fair value hierarchy. The development of the unobservable inputs for Level 3 fair
value measurements and fair value calculations are the responsibility of the Company’s management.
The
following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring
basis as of September 30, 2017:
|
|
|
|
|
Fair
value measurements at
September 30, 2017 using:
|
|
|
|
September
30, 2017
|
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level
3)
|
|
Available-For-Sale
Equity Securities
|
|
|
25,986
|
|
|
|
25,986
|
|
|
|
-
|
|
|
|
-
|
|
Total
Financial Assets
|
|
$
|
25,986
|
|
|
$
|
25,986
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for the nine months ended September
30, 2017:
|
|
December 31,
2016
|
|
|
Issuance
fair
value
|
|
|
Change in
fair value
|
|
|
Settlement
|
|
|
Adjustment due to ASU 2017-11
|
|
|
September 30, 2017
|
|
Series D Preferred Stock Purchase Warrants
|
|
$
|
23,313
|
|
|
$
|
-
|
|
|
$
|
26,014
|
|
|
$
|
(49,327
|
)
|
|
|
-
|
|
|
$
|
-
|
|
Warrants Issued with Convertible Debt
|
|
|
1,661,795
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,661,795
|
)
|
|
|
-
|
|
Conversion Option Derivative Liabilities
|
|
|
951,059
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(951,059
|
)
|
|
|
-
|
|
Total Derivatives
|
|
$
|
2,636,167
|
|
|
$
|
-
|
|
|
$
|
26,014
|
|
|
$
|
(49,327
|
)
|
|
$
|
(2,612,854
|
)
|
|
|
-
|
|
Refer
to this Note for accounting of early adoption of ASU 2017-11.
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, 2016:
|
|
|
|
|
Fair
value measurements at
December 31, 2016 using:
|
|
|
|
December
31, 2016
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Available-For-Sale
Equity Securities
|
|
|
25,865
|
|
|
|
25,865
|
|
|
|
-
|
|
|
|
-
|
|
Total
Financial Assets
|
|
$
|
25,865
|
|
|
$
|
25,865
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
December
31, 2016
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Series
D Preferred Stock Purchase Warrants
|
|
$
|
23,313
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
23,313
|
|
Warrants
Issued with Convertible Debt
|
|
|
1,661,795
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,661,795
|
|
Conversion
Option Derivative Liabilities
|
|
|
951,059
|
|
|
|
-
|
|
|
|
-
|
|
|
|
951,059
|
|
Total
Derivatives
|
|
$
|
2,636,167
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,636,167
|
|
|
5)
|
Commitments
and Contingencies
|
Operating
Leases
Our
corporate offices are currently located at 14 Norfolk Avenue, South Easton, Massachusetts 02375. We are currently paying $4,800
per month, on a lease extension, signed on December 29, 2016, that expires December 31, 2017, for our corporate office. We expanded
our space to include offices, warehouse and a loading dock on the first floor starting May 1, 2017 with an increase in monthly
rent of $2,150.
On
October 18, 2017 we signed a lease extension for our lab space in Medford, MA. The lease will now expire December 30, 2020 and
requires monthly payments of $6,912.75 starting January 1, 2018 subject to annual cost of living increases.
Rental
costs are expensed as incurred. During the nine months ended September 30, 2017 and 2016 we incurred $112,438 and $108,038 in
rent expense, respectively for the use of our corporate office and research and development facilities.
Government
Grants
We
have received a $1.02 million NIH SBIR Phase II Grant. Under the grant, the NIH has committed to pay the Company to develop a
high-throughput, high pressure-based DNA Shearing System for Next Generation Sequencing and other genomic applications.
|
6)
|
Convertible
Debt and Other Debt
|
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
various dates for the nine months ended September 30, 2017, the Company issued 38,606 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 March 31, 2017 for an aggregate amount of $309,465. We recognized a $123,862 gain on extinguishment
of debt by calculating the difference of the shares valued on the issuance date and the amount of accrued interest through March
31, 2017.
At
any time after the Issuance Date until the maturity date, the Company has the option, subject to certain conditions, to redeem
some or all of the then outstanding principal amount of the Debenture for cash in an amount equal to the sum of (i) 120% of the
then outstanding principal amount of the Debenture, (ii) accrued but unpaid interest and (iii) any liquidated damages and other
amounts due in respect of the Debenture.
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.
Warrants
The
Company issued warrants exercisable into a total of 376,757 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 in the event that we issue any securities at a price lower than the exercise price then in effect. The Warrants
have an expiration period of five years from the original issue date. The Warrants are subject to adjustment for stock splits,
stock dividends or recapitalizations and also include anti-dilution price protection for subsequent equity sales below the exercise
price. The warrants were issued pursuant to an exemption to the registration requirements of the Securities Act and are considered
restricted securities. Upon exercise, the warrant shares will be considered restricted securities and will be issued with
a restrictive legend unless the shares have been registered or the legend can be removed pursuant to Rule 144 promulgated pursuant
to the Securities Act.
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.
Security
Agreement
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.
ASC
470-20 states that the proceeds from the issuance of debt with detachable stock warrants should be allocated between the debt
and warrants on the basis of their relative fair market values. The debt discount will be amortized to interest expense over the
two year term of these loans. We amortized $4,736,571 of the debt discount to interest expense through the third quarter
of 2017. The warrants issued in connection with the convertible debentures are classified as warrant derivative liabilities because
the warrants are entitled to certain rights in subsequent financings and the warrants contain “down-round protection”
and therefore, do not meet the scope exception for treatment as a derivative under ASC 815, Derivatives and Hedging, (“ASC
815”). Since “down-round protection” is not an input into the calculation of the fair value of the warrants,
the warrants cannot be considered indexed to the Company’s own stock which is a requirement for the scope exception as outlined
under ASC 815. The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of
$2,847,624 to the total warrants out of the gross proceeds of $6,329,549. The fair value will be affected by changes in inputs
to that model including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate.
We reclassified the fair value of the warrant derivative liabilities to stockholders’ equity when we adopted ASU 2017-11.
The
specific terms of the convertible debts and outstanding balances as of September 30, 2017 are listed in the table below.
Inception
Date
|
|
Term
|
|
Loan
Amount
|
|
|
Outstanding
Balance
|
|
|
Original
Issue
Discount
|
|
|
Interest
Rate
|
|
|
Deferred
Finance
Fees
|
|
|
Discount
related
to fair
value of
conversion
feature
and
warrants/shares
|
|
July
22, 2015
|
|
30
months
1
|
|
$
|
2,180,000
|
|
|
$
|
2,180,000
|
|
|
$
|
218,000
|
2
|
|
|
10
|
%
3
|
|
$
|
388,532
|
|
|
$
|
2,163,074
|
|
September
25, 2015
|
|
30
months
1
|
|
|
1,100,000
|
|
|
|
1,100,000
|
|
|
|
110,000
|
2
|
|
|
10
|
%
3
|
|
|
185,956
|
|
|
|
1,022,052
|
|
October
2, 2015
|
|
30
months
1
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
15,000
|
2
|
|
|
10
|
%
3
|
|
|
26,345
|
|
|
|
140,832
|
|
October
6, 2015
|
|
30
months
1
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
3,000
|
2
|
|
|
10
|
%
3
|
|
|
5,168
|
|
|
|
26,721
|
|
October
14, 2015
|
|
30
months
1
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
2
|
|
|
10
|
%
3
|
|
|
8,954
|
|
|
|
49,377
|
|
November
2, 2015
|
|
30
months
1
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
25,000
|
2
|
|
|
10
|
%
3
|
|
|
43,079
|
|
|
|
222,723
|
|
November
10, 2015
|
|
24
months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
2
|
|
|
10
|
%
3
|
|
|
8,790
|
|
|
|
46,984
|
|
November
12, 2015
|
|
24
months
|
|
|
215,000
|
|
|
|
215,000
|
|
|
|
21,500
|
2
|
|
|
10
|
%
3
|
|
|
38,518
|
|
|
|
212,399
|
|
November
20, 2015
|
|
24
months
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
20,000
|
2
|
|
|
10
|
%
3
|
|
|
37,185
|
|
|
|
200,000
|
|
December
4, 2015
|
|
24
months
|
|
|
170,000
|
|
|
|
170,000
|
|
|
|
17,000
|
2
|
|
|
10
|
%
3
|
|
|
37,352
|
|
|
|
170,000
|
|
December
11, 2015
|
|
24
months
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
36,000
|
2
|
|
|
10
|
%
3
|
|
|
75,449
|
|
|
|
360,000
|
|
December
18, 2015
|
|
24
months
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
5,500
|
2
|
|
|
10
|
%
3
|
|
|
11,714
|
|
|
|
55,000
|
|
December
31, 2015
|
|
24
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
10,000
|
2
|
|
|
10
|
%
3
|
|
|
20,634
|
|
|
|
100,000
|
|
January
11, 2016
|
|
24
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
10,000
|
2
|
|
|
10
|
%
3
|
|
|
24,966
|
|
|
|
80,034
|
|
January
20, 2016
|
|
24
months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
2
|
|
|
10
|
%
3
|
|
|
9,812
|
|
|
|
40,188
|
|
January
29, 2016
|
|
24
months
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
30,000
|
2
|
|
|
10
|
%
3
|
|
|
60,887
|
|
|
|
239,113
|
|
February
26, 2016
|
|
24
months
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
20,000
|
2
|
|
|
10
|
%
3
|
|
|
43,952
|
|
|
|
156,048
|
|
March
10, 2016
|
|
24
months
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
12,500
|
2
|
|
|
10
|
%
3
|
|
|
18,260
|
|
|
|
106,740
|
|
March
18, 2016
|
|
24
months
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
36,000
|
2
|
|
|
10
|
%
3
|
|
|
94,992
|
|
|
|
265,008
|
|
March
24, 2016
|
|
24
months
|
|
|
106,667
|
|
|
|
106,667
|
|
|
|
10,667
|
2
|
|
|
10
|
%
3
|
|
|
15,427
|
|
|
|
91,240
|
|
March
31, 2016
|
|
24
months
|
|
|
177,882
|
|
|
|
177,882
|
|
|
|
17,788
|
2
|
|
|
10
|
%
3
|
|
|
2,436
|
|
|
|
175,446
|
|
June
15, 2016
|
|
6
months
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,680
|
|
June
17, 2016
|
|
6
months
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,899
|
|
June
22, 2016
|
|
6
months
|
|
|
35,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,373
|
|
July
6, 2016
|
|
6
months
|
|
|
85,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
15,048
|
|
July
29, 2016
|
|
6
months
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
25,518
|
|
September
15, 2016
|
|
8
months
|
|
|
500,000
|
|
|
|
-
|
|
|
|
85,541
|
|
|
|
9
|
%
|
|
|
-
|
|
|
|
65,972
|
|
April
3, 2017
|
|
8
months
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,179,549
|
|
|
$
|
6,329,549
|
|
|
$
|
718,496
|
|
|
|
|
|
|
$
|
1,158,408
|
|
|
$
|
6,040,469
|
|
1
The loan term was extended by 180 days.
2
The original issue discount is reflected in the first year.
3
The annual interest starts accruing in the second year.
The
closings above included a total of approximately $291,000 of convertible debentures purchased by related parties who were members
of the Company’s Board of Directors and management and their family members.
At
any time after six months from the original Issue Date until the maturity date, the Company has the right to prepay the above
Debentures in cash for 120% of the principal amount outstanding and any accrued interest.
In
January 2017, we executed an amendment to the July 6, 2016 convertible note that was due on January 6, 2017. We received an extension
of up to three months on the note’s due date. In exchange for the extension, we agreed to issue 1,667 shares of restricted
common stock and pay the investor $10,000 for each 30-day extension. The shares issued for the extension were valued at $10,000
and recorded as interest expense. We made a payment of $34,000 in January 2017 for the first one-month extension and 12% annual
interest on the note from the initial close date through February 6, 2017. The Investor had the right, at any time, to convert
all or part of the outstanding and unpaid principal sum and accrued interest into shares of common stock at the conversion price
of $13.50. On February 28, 2017, the note was paid in full.
We
accounted for the loan extension as a debt modification.
On
April 3, 2017, we signed a six-month agreement with an investor relations firm. The agreement includes a cash payment of $10,000
plus a convertible 8-month note for $50,000 with the following significant terms: (i) convertible at $12.00/share, (ii) bears
10% annual interest, (iii) a 20% pre-payment penalty if the Company wants to pre-pay the Note, and (iv) a default rate of 18%.
We terminated the agreement on June 7, 2017 and the investor relations firm agreed to forgive the loan. Since we did not receive
any cash in connection with the note and neither did the IR firm provide any services, the forgiveness did not result in any gain
upon termination of the agreement.
Revolving
Note Payable
On
October 28, 2016, an accredited investor (the “
Investor
”) purchased from us a promissory note in the aggregate
principal amount of up to $2,000,000 (the “
Revolving Note
”) due and payable on the earlier of October 28, 2017
(the “
Maturity Date
”) or on the seventh business day after the closing of a Qualified Offering (as defined
in the Revolving Note). 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 and we issued to the Investor warrants to purchase 250,000 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 was accounted for as a note discount and are amortized to interest expense over the life of
the loan. We evaluated the accounting impact of the Revolving Note amendment and deemed that the amendment did not have a material
impact on our consolidated financial statements.
The
Revolving Note was further amended on August 18, 2017 to increase the aggregate principal amount to $3,500,000 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.
In
the event that a Qualified Offering had not 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 shall pay a cash fee equal to five percent (5%) of the total outstanding
amount owed by the Company to the Holder 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 Maturity Date divided by (y) the VWAP of the Company’s common stock for the last ten trading days preceding the
Maturity Date. 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 $296,500, the one-time interest of $350,000 and the fair value of the 250,000 warrants issued to the Investor
amounting to $1,148,275 were recorded as debt discounts and amortized over the term of the revolving note. The unamortized debt
discounts as of September 30, 2017 related to the Revolving Note amounted to $335,833.
The
Revolving Note was still outstanding as of October 28, 2017. We continue to accrue interest on the note.
The
following table provides a summary of the changes in convertible debt and revolving note payable, net of unamortized discount,
during 2017:
|
|
2017
|
|
Balance
at January 1,
|
|
$
|
5,273,937
|
|
Adjustment
due to ASU 2017-11
|
|
|
923,468
|
|
Issuance
of convertible debt, face value
|
|
|
2,300,000
|
|
Forgiveness
of Debt
|
|
|
(50,000
|
)
|
Deferred
financing cost
|
|
|
(180,000
|
)
|
Debt
discount related to one-time interest charge
|
|
|
(225,000
|
)
|
Debt
discount from incentive shares to increase the Revolving Note aggregate principal limit
|
|
|
(150,000
|
)
|
Debt
discount from shares and warrants issued with the notes
|
|
|
(668,544
|
)
|
Payments
|
|
|
(840,541
|
)
|
Accretion
of interest and amortization of debt discount to interest expense through September 30,
|
|
|
3,322,736
|
|
Balance
at September 30,
|
|
|
9,706,056
|
|
Less:
current portion
|
|
|
9,706,056
|
|
Convertible
debt, long-term portion
|
|
$
|
-
|
|
Other
Notes
On
January 6, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $250,000 in exchange for second
position rights to all customer receipts until the lender is paid $322,500, which is collected at the rate of $1,280 per business
day. The payments were secured by second position rights to all customer receipts until the loan has been paid in full. $138,840
of the proceeds were used to pay off the outstanding balance of a previous loan from another lender. The Company recognized a
gain on the settlement of the previous loan of $5,044 which was credited to interest expense. The Company paid $2,500 in fees
in connection with this loan. We received an additional $93,161 in June 2016 under the existing Merchant Agreement. The note is
no longer outstanding as of September 30, 2017.
On
February 8, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $100,000 in exchange for third
position rights to all customer receipts until the lender is paid $129,900, which is collected at the rate of $927 per business
day. The Company paid $2,000 in fees in connection with this loan. We received an additional $125,000 in June 2016 under the existing
Merchant Agreement of which $48,420 was used to pay off the prior loan. The lender provided an additional $70,000 on August 16,
2016. As of September 30, 2017, the outstanding balance on this note was zero.
On
August 26, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $122,465 net proceeds in exchange
for third position rights to all customer receipts which is collected at the rate of $1,386 per business day. As of September
30, 2017, the outstanding balance on this note was zero.
On
February 6, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $125,000. The Company
paid $1,250 in fees in connection with this loan. Under the agreement, $16,180 was used to pay off the prior loan. The loan was
no longer outstanding as of September 30, 2017.
On
February 15, 2017, we received six-month, non-convertible loans in the aggregate of $220,000 from two accredited investors. We
agreed to issue each investor 5,667 shares of restricted common stock. The loans earn no interest but carry a 10% original issue
fee. We recorded the fair value of the shares amounting to $43,616 as debt discounts that will be amortized to interest expense
during the term of the loans. We received a one-month extension on one loan and two one-month extensions on the other. Each extension
required a 10% fee to the lender. We treated these extensions as loan extinguishments and accordingly wrote off the original
debt and recorded new debt to include the extension fees as part of the principal amount. The extension fees of $33,000 were recorded
as losses on extinguishment of debt in the consolidated financial statements. One loan remains outstanding as of September 30,
2017 with a balance of $132,000 that was subsequently paid off entirely by October 31, 2017. We amortized $59,794 of debt
discounts in the nine months ended September 30, 2017. The unamortized debt discounts as of September 30, 2017 were $3,822.
On
March 2, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $75,750. The Company paid
no fees in connection with this loan. The loan was no longer outstanding as of September 30, 2017.
On
March 14, 2017, we received an eight-month, non-convertible loan of $250,000 from a privately-held investment firm. The loan earns
an annual interest rate of 10% and includes a 10% original issue discount. We also agreed to issue the investor 8,333 shares of
restricted common stock. We recorded the fair value of the shares amounting to $46,748 as a debt discount that will be amortized
to interest expense during the term of the loan. The loan still remains outstanding as of September 30, 2017 with a balance of
$250,000. We amortized $62,651 of the debt discount in the nine months ended September 30, 2017. The unamortized
debt discount as of September 30, 2017 was $14,097. In the event of default and at the option of the holder, the loan is convertible
into common stock at a 35% discount to the lowest closing stock price for the 15 trading days prior to conversion.
On
March 21, 2017, we received an eight-month, non-convertible loan of $170,000 from an accredited investor. The loan earns an annual
interest rate of 10% and includes a 10% original issue discount. We also agreed to issue the investor 5,667 shares of restricted
common stock. We recorded the fair value of the shares amounting to $35,079 as a debt discount that will be amortized to interest
expense during the term of the loan. The loan still remains outstanding as of September 30, 2017 with a balance of $170,000. We
amortized $41,025 of debt discounts in the nine months ended September 30, 2017. The unamortized debt discount as of September
30, 2017 was $11,054.
On
April 19, 2017, we received a 7-month non-convertible loan of $250,000 from a privately-held investment firm. The loan earns an
annual interest rate of 10% and includes a 10% original issue discount. We agreed to issue 833 shares at closing. Until the loan
was repaid, we agreed that over the next one hundred eighty (180) days to issue 2,500 shares to the Investor every sixty (60)
days for a total issuance of 8,333 shares. The loan remains outstanding and we have issued 5,833 shares including the closing
shares since inception of the loan. We recorded the fair value of the 5,833 shares amounting to $32,684 as a debt discount that
will be amortized to interest expense during the term of the loan. We amortized $45,264 of debt discounts in the nine months
ended September 30, 2017. The unamortized debt discount as of September 30, 2017 was $12,420. In the event of default and
at the option of the holder, the loan is convertible into common stock at a 35% discount to the lowest closing stock price for
the 15 trading days prior to conversion.
On
May 19, 2017, we received a 45-day non-convertible loan of $630,000 from a private investor. The loan provides guaranteed interest
of $63,000 and has an origination fee of $32,000. We paid a broker $31,500 in connection with this loan. The unamortized debt
discount as of September 30, 2017 was zero. We used these proceeds to pay off in full our September 2016 loan of $589,189. The
loan remains outstanding and accrues interest at a 20% annual rate from the maturity date.
On
June 6, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $250,000. The lender
is entitled to receipts which are collected at the rate of $1,833 per business day. The Company paid $6,250 in fees in connection
with this loan. Under the agreement, $119,021 was used to pay off three prior loans. The unamortized debt discount as of September
30, 2017 was $2,357. The loan remains outstanding as of September 30, 2017 with a balance of approximately $157,820.
On
June 21, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $150,000. The lender
is entitled to receipts which are collected at the rate of $1,361 per business day. The Company paid $1,498 in fees in connection
with this loan. The unamortized debt discount as of September 30, 2017 was $509. The loan remains outstanding as of September
30, 2017 with a balance of approximately $81,000. We accounted for the Merchant Agreement as a loan under ASC 860 because while
we provided rights to current and future receipts, we still had control over the receipts.
On
July 17, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $125,000. The lender
is entitled to receipts which are collected at the rate of $1,250 per business day. The Company paid $1,250 in fees in connection
with this loan. The loan remains outstanding as of September 30, 2017 with a balance of approximately $82,000.
On
August 1, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $75,000. The loan includes
$18,750 representing an original issue discount, interest and fees resulting in a total payable of $93,750. The loan remains outstanding
as of September 30, 2017 with a balance of approximately $56,000.
On
September 12, 2017, we received a 9-month non-convertible loan of $225,000 from a privately-held investment firm. The loan earns
an annual interest rate of 10%. The Company paid total fees of $25,000 including original issue discount and other costs related
to this loan. We agreed to issue 3,333 shares at closing. We recorded the fair value of the shares as a debt discount that will
be amortized to interest expense during the term of the loan. We amortized $2,505 of debt discounts in the nine months ended
September 30, 2017. The unamortized debt discount as of September 30, 2017 was $35,495. In the event of default and at the
option of the holder, the loan is convertible into common stock at a 35% discount to the average of the two lowest daily volume
weighted average closing stock price for the 20 trading days prior to conversion.
Preferred
Stock
We
are authorized to issue 1,000,000 shares of preferred stock with a par value of $0.01. Of the 1,000,000 shares of preferred stock:
|
1)
|
20,000
shares have been designated as Series A Junior Participating Preferred Stock (“
Junior A
”)
|
|
|
|
|
2)
|
313,960
shares have been designated as Series A Convertible Preferred Stock (“
Series A
”)
|
|
|
|
|
3)
|
279,256
shares have been designated as Series B Convertible Preferred Stock (“
Series B
”)
|
|
|
|
|
4)
|
88,098
shares have been designated as Series C Convertible Preferred Stock (“
Series C
”)
|
|
|
|
|
5)
|
850
shares have been designated as Series D Convertible Preferred Stock (“
Series D
”)
|
|
|
|
|
6)
|
500
shares have been designated as Series E Convertible Preferred Stock
(“Series E”)
|
|
|
|
|
7)
|
240,000
shares have been designated as Series G Convertible Preferred Stock (“
Series G
”)
|
|
|
|
|
8)
|
10,000
shares have been designated as Series H Convertible Preferred Stock (“
Series H
”)
|
|
|
|
|
9)
|
21
shares have been designated as Series H2 Convertible Preferred Stock (“
Series H2
”)
|
|
|
|
|
10)
|
6,250
shares have been designated as Series J Convertible Preferred Stock (“
Series J
”)
|
|
|
|
|
11)
|
15,000
shares have been designated as Series K Convertible Preferred Stock (“
Series K
”)
|
As
of September 30, 2017, 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, 2016 for the pertinent disclosures of preferred stock.
Stock
Options and Warrants
Our
stockholders approved our amended 2005 Equity Incentive Plan (the “Plan”) pursuant to which an aggregate of 1,800,000
shares of our common stock were reserved for issuance upon exercise of stock options or other equity awards made under the Plan.
Under the Plan, we may award stock options, shares of common stock, and other equity interests in the Company to employees, officers,
directors, consultants, and advisors, and to any other persons the Board of Directors deems appropriate. As of September 30, 2017,
options to acquire 35,274 shares were outstanding under the Plan.
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, 2017, options to acquire 84,425 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, 2017, non-qualified options to
acquire 129,937 shares were outstanding under the Plan.
All
of the outstanding non-qualified options had an exercise price that was at or above the Company’s common stock share price
at time of issuance.
The
following tables summarize information concerning options and warrants outstanding and exercisable:
|
|
Stock
Options
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
Price
per share
|
|
|
Shares
|
|
|
Price
per share
|
|
|
Shares
|
|
|
Exercisable
|
|
Balance
outstanding, 12/31/16
|
|
|
175,642
|
|
|
$
|
12.60
|
|
|
|
881,990
|
|
|
$
|
12.00
|
|
|
|
1,057,632
|
|
|
|
991,032
|
|
Granted
|
|
|
87,198
|
|
|
|
8.40
|
|
|
|
230,610
|
|
|
|
11.40
|
|
|
|
317,808
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
(19,889
|
)
|
|
|
7.50
|
|
|
|
(19,889
|
)
|
|
|
|
|
Expired
|
|
|
(3,202
|
)
|
|
|
30.00
|
|
|
|
(190,678
|
)
|
|
|
11.70
|
|
|
|
(193,880
|
)
|
|
|
|
|
Forfeited
|
|
|
(10,002
|
)
|
|
|
10.10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,002
|
)
|
|
|
|
|
Balance
outstanding, 9/30/2017
|
|
|
249,636
|
|
|
$
|
10.93
|
|
|
|
902,033
|
|
|
$
|
12.00
|
|
|
|
1,151,669
|
|
|
|
1,061,140
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
Range
of
Exercise Prices
|
|
Number
of
Options
|
|
|
Remaining
Contractual
Life (Years)
|
|
|
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Remaining
Contractual
Life (Years)
|
|
|
Exercise
Price
|
|
$7.50
- $11.99
|
|
|
135,524
|
|
|
|
8.5
|
|
|
$
|
8.63
|
|
|
|
70,995
|
|
|
|
7.7
|
|
|
$
|
8.83
|
|
12.00
– 14.99
|
|
|
88,705
|
|
|
|
8.0
|
|
|
|
12.00
|
|
|
|
62,705
|
|
|
|
7.9
|
|
|
|
12.00
|
|
15.00
– 17.99
|
|
|
7,547
|
|
|
|
4.9
|
|
|
|
15.00
|
|
|
|
7,547
|
|
|
|
4.9
|
|
|
|
15.00
|
|
18.00
– 20.99
|
|
|
12,854
|
|
|
|
2.4
|
|
|
|
18.00
|
|
|
|
12,854
|
|
|
|
2.4
|
|
|
|
18.00
|
|
21.00
– 30.00
|
|
|
5,006
|
|
|
|
2.9
|
|
|
|
30.00
|
|
|
|
5,006
|
|
|
|
2.9
|
|
|
|
30.00
|
|
$7.50
- $30.00
|
|
|
249,636
|
|
|
|
7.8
|
|
|
$
|
10.93
|
|
|
|
159,107
|
|
|
|
7.0
|
|
|
$
|
11.78
|
|
As
of September 30, 2017, the total estimated fair value of unvested stock options to be amortized over their remaining vesting period
was $488,912. The non-cash, stock-based compensation expense associated with the vesting of these options is expected to be $87,359
remaining in 2017, $272,539 in 2018, $106,477 in 2019 and $22,537 in 2020. The fair value of options granted in 2017 was $487,914.
The
aggregate intrinsic value associated with the options outstanding and exercisable as of September 30, 2017 was zero. The aggregate
intrinsic value associated with the warrants outstanding and exercisable as of September 30, 2017 was zero.
In
January 2017, we issued warrants to purchase 3,334 shares of restricted common stock with a fair value of $15,558 to an investor
relations firm for services performed.
Common
Stock Issuances
On
various dates from January to March 2017, the Company issued 27,000 shares of restricted common stock to investors as compensation
for loans provided to us.
On
June 9, 2017, one shareholder converted 6,000 shares of Series G Convertible Preferred Stock into 2,000 shares of common stock
and converted 6,300 shares of Series J Convertible Preferred Stock into 2,100 shares of common stock.
On
various dates for the nine months ended September 30, 2017, the Company issued 38,606 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 March 31, 2017 for an aggregate amount of $309,466. We recognized a $123,862 gain on extinguishment of
debt by calculating the difference of the shares valued on the issuance date and the amount of accrued interest through March
31, 2017.
On
April 1, 2017, we issued 1,667 shares of restricted common stock to an investor relations firm and recorded the common stock’s
fair value of $15,000 as administrative expense in the nine months ended September 30, 2017.
On
April 19, 2017, we received a 7-month non-convertible loan of $250,000 from a privately-held investment firm. The loan earns an
annual interest rate of 10% and includes a 10% original issue discount. We agreed to issue 833 shares at closing. Until the loan
was repaid, we agreed that over the next one hundred eighty (180) days to issue 2,500 shares to the Investor every sixty (60)
days for a total issuance of 8,333 shares. The loan remains outstanding and we have issued 5,833 shares including the closing
shares since inception of the loan.
The
Revolving Note was amended on May 2, 2017 to increase the aggregate principal amount to $3,000,000. In exchange for this increase,
we agreed 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 a qualified offering,
and to change the trigger date in the Revolving Note from April 28, 2017 (the six month anniversary of October 28, 2016) to July
25, 2017. The Revolving Note was further amended on August 18, 2017 to increase the aggregate principal amount to $3,500,000 with
all other terms unchanged.
On
May 10, 2017, we received $149,164 from the exercise of 19,889 stock purchase warrants from the Series D registered direct offering
on November 10, 2011. We paid $8,949 to a broker in connection with the warrant exercises. In consideration for the warrant exercises,
we issued to the investors warrants to purchase 39,778 shares of our Common Stock at an exercise price per share equal to $8.40
per share. The warrants expire on the third year anniversary date. We determined the fair value of $186,802 for these warrants
and recorded the value as other expenses.
On
September 12, 2017, we received a 9-month non-convertible loan of $225,000 from a privately-held investment firm. The loan earns
an annual interest rate of 10%. The Company paid total fees of $25,000 including original issue discount and other costs related
to this loan. We agreed to issue 3,333 shares at closing. We recorded the fair value of the shares amounting to $13,000 as a debt
discount that will be amortized to interest expense during the term of the loan.
On
September 20, 2017, we issued 4,000 shares of restricted common stock to an investor relations firm and recorded the common
stock’s fair value of $16,000 as administrative expense in the nine months ended September 30, 2017.
On
September 29, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $75,000 that was disbursed
to us on October 4, 2017. The lender is entitled to receipts which are collected at the rate of $1,200 per business day for approximately
four months. The Company paid $1,500 in fees in connection with this loan. We accounted for the Merchant Agreement as a loan under
ASC 860 because while we provided rights to current and future receipts, we still had control over the receipts.
On
October 11, 2017, we received a one-year convertible loan of $85,000 from a privately-held investment firm. The Company paid total
fees of $4,250 related to this loan. This loan was repaid in full on October 27, 2017.
On
October 25, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $110,000. The lender
is entitled to receipts which are collected at the rate of $1,539 per business day for approximately five months. The Company
paid $1,250 in fees in connection with this loan. We accounted for the Merchant Agreement as a loan under ASC 860 because while
we provided rights to current and future receipts, we still had control over the receipts.
On
October 25, 2017, we received a nine month convertible loan of $103,000 from a privately-held investment firm. The Company paid
total fees of $3,000 related to this loan and will pay 12% interest annually. Six months after the issuance date and at the
option of the holder, the loan is convertible into common stock at a 42% discount to the average of the two lowest closing stock
prices for the 15 trading days prior to conversion.
On
October 27, 2017, we received a one-year convertible loan of $170,000 less $4,250 fees and less $85,000 used to retire the convertible
note dated October 11, 2017. Six months after the issuance date and at the option of the holder, the loan is convertible into
common stock at a 38% discount to the lowest daily volume weighted average closing stock price for the 15 trading days prior to
conversion.
On
November 2, 2017, EMA Financial, LLC issued us a one-year convertible loan of $150,000 less $7,500 fees. The loan is convertible
at $7.50 per share and has 5% annual interest rate. In the event of default and at the option of the holder, the loan is convertible
into common stock at a 35% discount to the lowest daily volume weighted average closing stock price for the 20 trading days prior
to conversion.