NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Business Overview
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 (35,000 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 2017 or in 2016.
Reverse
Stock Split
On
June 5, 2017, the Company effected a 1-for-30 reverse stock split of its issued and outstanding shares of common stock All common
shares, stock options, and per share information presented in the financial statements have been adjusted to reflect the reverse
stock split on a retroactive basis for all periods presented. 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.
(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 December 31, 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 8 and 9, completed debt financing subsequent to December 31, 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 year ended December 31, 2017 we
received approximately $6.7 million
net proceeds,
in 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.
Management’s
plans to alleviate these conditions that raise substantial doubt regarding the Company’s ability to continue as a going
concern include pursuing one or more of the following options to raise additional funding, none of which can be guaranteed or
are entirely within the Company’s control:
|
●
|
Raise
funding through the possible additional sales of the Company’s common stock, including public or private equity financings.
|
|
●
|
Raise
additional loan funding.
|
|
●
|
Continue
to seek a partner to advance PCT technology.
|
|
●
|
Earn
payments pursuant to potential collaboration and license agreements for BaroFold patents.
|
There
can be no assurance, however, that the Company will receive cash proceeds from any of these potential resources or, to the extent
cash proceeds are received, those proceeds would be sufficient to support the Company’s operations for at least the next
twelve months from the date of filing this Annual Report on Form 10-K.
In
August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.
(“ASU 2015-14”). Under the new standard, management must evaluate whether
there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to
continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially
does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented
as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates
whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to
continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it
is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued,
and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial
doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements
are issued. This standard was adopted by the Company at January 1, 2017.
Generally,
under the new accounting standard, management’s plans must be approved before the date the financial statements are issued
to be considered probable of being effectively implemented. Under the new accounting standard, the future receipt of potential
funding from the Company’s collaborators and other resources is not considered probable at this time because none of the
Company’s current plans have been finalized at the time of filing this Annual Report on Form 10-K. Accordingly, substantial
doubt is deemed to exist about the Company’s ability to continue as a going concern within one year after the date these
financial statements are issued.
The
Company believes that its approximate $80,033 in cash and cash equivalents at December 31, 2017 would allow it to fund its
planned operations into the first quarter of 2018. This estimate assumes no additional funding from new partnership agreements,
no additional equity financings, no debt financings, and no accelerated repayment of its term loans. Accordingly, the timing and
nature of activities contemplated for the remainder of 2017 and thereafter will be conducted subject to the availability of sufficient
financial resources.
If
the Company is unable to raise capital when needed or on attractive terms, or if it is unable to procure partnership arrangements
to advance its programs, the Company would be forced to delay, reduce or eliminate its research and development programs and any
future commercialization efforts.
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might
result from the outcome of the uncertainties described above.
(3)
Summary of Significant Accounting Policies
i.
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.
ii.
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
impairment of assets, 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, beneficial conversion features
and derivative liabilities. 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.
iii.
Revenue Recognition
Revenue
is recognized when realized or when realizable and earned when all the following criteria have been met: persuasive evidence of
an arrangement exists; goods were shipped, delivery of service has occurred and risk of loss has passed to the customer;
the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured.
Our
current instruments, the Barocycler NEP3229 and NEP2320EXT, 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, we will send a highly trained technical representative to the customer site to install Barocyclers 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. Product revenue related to current Barocycler instrumentation is recognized upon shipment of the unit,
and in the case where the customer requests installation and training, the completion of the installation and introductory training
process of the instrumentation at the customer location, for domestic installations. Product revenue related to sales of PCT instrumentation
to our foreign distributors is recognized upon shipment through a common carrier. We provide for the expected costs of warranty
upon the recognition of revenue for the sales of our instrumentation. Our sales arrangements do not provide our customers with
a right of return. Product revenue related to the HUB440 and our consumable products such as PULSE Tubes, MicroTubes, and application
specific kits is recorded upon shipment through a common carrier. Shipping costs are included in sales and marketing expense.
Any shipping costs billed to customers are recognized as revenue.
The
Company applies 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.
|
The
Company currently records revenue for its non-cash transactions at recorded cost or carrying value of the assets or services sold.
We
account for our lease agreements under the operating method. 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 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 qualifying expenses are incurred under the grant in accordance with the terms of the grant
award.
Deferred
revenue represents amounts received from grants and the Company’s service contracts for which the related revenues have
not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred
revenue represents the amount to be recognized within one year from the balance sheet date based on the estimated performance
period of the underlying deliverables. Revenue from service contracts is recorded ratably over the length of the contract.
Our
transactions sometimes involve multiple elements (i.e., products and services). Revenue under multiple element arrangements is
recognized in accordance with FASB ASC 605-25
Multiple-Element Arrangements (“ASC 605”)
. When vendor specific
objective evidence or third party evidence of selling price for deliverables in an arrangement cannot be determined, the Company
develops a best estimate of the selling price to separate deliverables and allocates arrangement consideration using the relative
selling price method. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered
elements, we defer the fair value of the undelivered elements to such time as they are delivered. Fair value is determined based
upon the price charged when the element is sold separately. If there is not sufficient evidence of the fair value of the undelivered
elements the Company uses its best estimate of the value of those items and recognizes revenues based on the relative values of
the delivered and undelivered items. We provide certain customers with extended service contracts with revenue recognized ratably
over the life of the contract.
iv.
Cash and Cash Equivalents
Our
policy is to invest available cash in short-term, investment grade interest-bearing obligations, including money market funds,
and bank and corporate debt instruments. Securities purchased with initial maturities of three months or less are valued at cost
plus accrued interest, which approximates fair value, and are classified as cash equivalents. Restricted cash is included in cash
equivalents.
v.
Research and Development
Research
and development costs, which are comprised of costs incurred in performing research and development activities including wages
and associated employee benefits, facilities, consumable products and overhead costs that are expensed as incurred. In support
of our research and development activities we utilize our Barocycler instruments that are capitalized as fixed assets and depreciated
over their expected useful life.
vi.
Inventories
Inventories
are valued at the lower of cost (average cost) or net realizable value. The cost of Barocyclers consists of the cost charged
by the contract manufacturer. The current year allowance was increased by a $159,600 inventory allowance for the older generation
of Barocycler instruments held in stock, the NEP3229. The cost of manufactured goods includes material, freight-in, direct
labor, and applicable overhead. The composition of inventory as of December 31, is as follows:
|
|
2017
|
|
|
2016
|
|
Raw
materials
|
|
$
|
288,295
|
|
|
$
|
326,228
|
|
Finished
goods
|
|
|
748,967
|
|
|
|
599,056
|
|
Inventory
reserve
|
|
|
(179,600
|
)
|
|
|
(20,000
|
)
|
Total
|
|
$
|
857,662
|
|
|
$
|
905,284
|
|
vii.
Property and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, depreciation is recognized
using the straight-line method, allocating the cost of the assets over their estimated useful lives of three years for certain
laboratory equipment, from three to five years for management information systems and office equipment, and three years for all
PCT finished units classified as fixed assets.
viii.
Intangible Assets
We
have classified as intangible assets, costs associated with the fair value of acquired intellectual property. Intangible assets,
including patents, are being amortized on a straight-line basis over nine years. We perform an annual review of our intangible
assets for impairment. We capitalize any costs to renew or extend the term of our intangible assets. When impairment is
indicated, any excess of carrying value over fair value is recorded as a loss. As of December 31, 2017 and 2016, the outstanding
balance for intangible assets was $750,000 and $0, respectively.
ix.
Long-Lived Assets
The
Company’s long-lived assets are reviewed for impairment in accordance with the guidance of the FASB ASC 360-10-05,
Property,
Plant, and Equipment
, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to
the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Through December
31, 2017, the Company had not experienced impairment losses on its long-lived assets.
x.
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 and university labs. Allowances are provided for estimated amounts
of accounts receivable which may not be collected. At December 31, 2017, we determined that no allowance against accounts receivable
was necessary and wrote off the prior year allowance of $28,169 as unrecoverable.
The
following table illustrates the level of concentration of the below two groups within revenue as a percentage of total revenues
during the years ended December 31:
|
|
2017
|
|
|
2016
|
|
Top
Five Customers
|
|
|
37
|
%
|
|
|
29
|
%
|
Federal
Agencies
|
|
|
14
|
%
|
|
|
3
|
%
|
The
following table illustrates the level of concentration of the below two groups within accounts receivable as a percentage of total
accounts receivable balance as of December 31:
|
|
2017
|
|
|
2016
|
|
Top
Five Customers
|
|
|
85
|
%
|
|
|
82
|
%
|
Federal
Agencies
|
|
|
1
|
%
|
|
|
1
|
%
|
Investment
in Available-For-Sale Equity Securities
As
of December 31, 2017, we held 100,250 shares of common stock of Everest, a Polish publicly traded company listed on the Warsaw
Stock Exchange. We exchanged 33,334 shares of our common stock for the 100,250 shares from Everest. We account for this investment
in accordance with ASC 320
“Investments — Debt and Equity Securities”
as securities available for sale.
On December 31, 2017, our consolidated balance sheet reflected the fair value of our investment in Everest to be $19,825, based
on the closing price of Everest shares of $0.1978 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 amounting to $379,751 was determined to be other than temporary
and was recorded by us as an impairment loss starting in 2016. We recorded $6,069 as realized losses in 2017 for the changes
in market value.
xi.
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, warrants to acquire preferred stock
convertible into common stock, 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.
The following table illustrates our computation of loss per share for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,715,561
|
)
|
|
$
|
(2,706,984
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
1,114,225
|
|
|
|
911,312
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share - basic and diluted
|
|
$
|
(9.62
|
)
|
|
$
|
(2.97
|
)
|
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 for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
Stock
options
|
|
|
247,692
|
|
|
|
175,642
|
|
Convertible
debt
|
|
|
947,203
|
|
|
|
891,132
|
|
Common
stock warrants
|
|
|
899,542
|
|
|
|
881,990
|
|
Convertible
preferred stock:
|
|
|
|
|
|
|
|
|
Series
D Convertible Preferred
|
|
|
25,000
|
|
|
|
25,000
|
|
Series
G Convertible Preferred
|
|
|
26,857
|
|
|
|
28,857
|
|
Series
H Convertible Preferred
|
|
|
33,334
|
|
|
|
33,334
|
|
Series
H2 Convertible Preferred
|
|
|
70,000
|
|
|
|
70,000
|
|
Series
J Convertible Preferred
|
|
|
115,267
|
|
|
|
117,367
|
|
Series
K Convertible Preferred
|
|
|
229,334
|
|
|
|
227,200
|
|
|
|
|
2,594,229
|
|
|
|
2,450,522
|
|
xii.
Accounting for Income Taxes
We
account for income taxes under the asset and liability method, which requires recognition of deferred tax assets, subject to valuation
allowances, and liabilities for the expected future tax consequences of events that have been included in the consolidated financial
statements or tax returns. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting and income tax purposes. The Company considers many factors when assessing the
likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction,
expectations of future taxable income or loss, the carry-forward periods available to us for tax reporting purposes, and other
relevant factors. A valuation allowance is established if it is more likely than not that all or a portion of the net deferred
tax assets will not be realized. If substantial changes in the Company’s ownership should occur, as defined in Section 382
of the Internal Revenue Code, there could be significant limitations on the amount of net loss carry forwards that could be used
to offset future taxable income.
Tax
positions must meet a “more likely than not” recognition threshold at the effective date to be recognized. At December
31, 2017 and 2016, the Company did not have any uncertain tax positions. No interest and penalties related to uncertain tax positions
were accrued at December 31, 2017 and 2016.
xiii.
Accounting for Stock-Based Compensation
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 equity 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. Employee
awards are accounted for under ASC 718 where the awards are valued at grant date. Awards given to nonemployees are accounted for
under ASC 505 where the awards are valued at earlier of commitment date or completion of services.
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, which generally is over three years.
Expected
Term
- The Company uses the simplified calculation of expected life, described in the FASB ASC 718,
Compensation-Stock
Compensation
, 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
- As required by FASB ASC 718,
Compensation-Stock Compensation
, 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. We used this historical rate as our assumption in calculating future stock-based
compensation expense.
The
following table summarizes the assumptions we utilized for grants of stock options to the three sub-groups of our stock option
recipients during the year ended December 31, 2017:
Assumptions
|
|
Non-Employee
Board Members
|
|
|
CEO,
other
Officers and Employees
|
|
Expected
life
|
|
|
6.0
(yrs
|
)
|
|
|
6.0
(yrs
|
)
|
Expected
volatility
|
|
|
92.85%-104.83
|
%
|
|
|
105.71
|
%
|
Risk-free
interest rate
|
|
|
1.01%-1.53
|
%
|
|
|
1.63
|
%
|
Forfeiture
rate
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Expected
dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
We
recognized stock-based compensation expense of $406,427 and $379,964 for the years ended December 31, 2017 and 2016, respectively.
The following table summarizes the effect of this stock-based compensation expense within each of the line items within our accompanying
consolidated statements of operations for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
Research
and development
|
|
$
|
92,055
|
|
|
$
|
65,500
|
|
Selling
and marketing
|
|
|
54,404
|
|
|
|
42,315
|
|
General
and administrative
|
|
|
259,968
|
|
|
|
272,149
|
|
Total
stock-based compensation expense
|
|
$
|
406,427
|
|
|
$
|
379,964
|
|
During
the years ended December 31, 2017 and 2016, the total fair value of stock options awarded was $487,964 and $0, respectively.
As
of December 31, 2017, total unrecognized compensation cost related to the unvested stock-based awards was $392,590, which is expected
to be recognized over weighted average period of 1.66 years.
xiv.
Advertising
Advertising
costs are expensed as incurred. We incurred $5,899 in 2017 and $19,125 in 2016 for advertising.
xv.
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. Short-term and long-term liabilities are primarily related to liabilities transferred under
contractual arrangements with carrying values that approximate fair value.
xvi.
Fair Value Measurements
The
Company follows the guidance of FASB ASC Topic 820, “
Fair Value Measurements and Disclosures
” (“
ASC
820
”) as it related to financial assets and financial liabilities that are recognized or disclosed at fair value in
the consolidated 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 an entity to develop its own assumptions.
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 currently classified within Level 1 and that its financial
liabilities are currently all classified within Level 3 in the fair value hierarchy.
The
Company changed its method of accounting for the Debentures and Warrants through the early adoption of ASU 2017-11 during the
year ended December 31, 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 $2.5 million.
Adoption
of ASU 2017-11
The
Company changed its method of accounting for the Debentures, Debenture Warrants and Series D Warrants through the early adoption
of ASU 2017-11 during the year ended December 31, 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 $2.4 million. This resulted to
an increase in stock warrants by $2.6 million and additional paid-in capital by $1.4 million. 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
|
|
|
$
|
(1,685,108
|
)
|
|
|
(951,059
|
)
|
|
|
2,636,236
|
|
|
|
1,446,011
|
|
|
|
(2,369,548
|
)
|
Balance,
January 1, 2017 (After adoption of ASU 2017-11)
|
|
$
|
4,775,018
|
|
|
$
|
683,894
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,961,338
|
|
|
$
|
28,990,276
|
|
|
$
|
(44,633,738
|
)
|
The
following tables set forth the Company’s financial assets and financial liabilities that were accounted for at fair value
on a recurring basis as of December 31, 2017 and December 31, 2016. The development of the unobservable inputs for Level 3 fair
value measurements and fair value calculations are the responsibility of the Company’s management.
|
|
|
|
|
Fair
value measurements at December 31, 2017 using:
|
|
|
|
December
31, 2017
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Available-For-Sale
Equity Securities
|
|
|
19,825
|
|
|
|
19,825
|
|
|
|
-
|
|
|
|
-
|
|
Total
Financial Assets
|
|
$
|
19,825
|
|
|
$
|
19,825
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
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
|
|
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:
|
|
January 1, 2016
|
|
|
Issuance
fair value
|
|
|
Change
in
fair value
|
|
|
December 31, 2016
|
|
Series
D Preferred Stock Purchase Warrants
|
|
$
|
173,526
|
|
|
$
|
-
|
|
|
$
|
(150,213
|
)
|
|
$
|
23,313
|
|
Warrants
Issued with Convertible Debt
|
|
|
3,122,450
|
|
|
|
1,094,432
|
|
|
|
(2,555,087
|
)
|
|
|
1,661,795
|
|
Conversion
Option Derivative Liabilities
|
|
|
3,940,791
|
|
|
|
1,547,127
|
|
|
|
(4,536,859
|
)
|
|
|
951,059
|
|
Total
Derivatives
|
|
$
|
7,236,767
|
|
|
$
|
2,641,559
|
|
|
$
|
(7,242,159
|
)
|
|
$
|
2,636,167
|
|
The
issuance fair values for 2016 include the “day 1” derivative losses on the conversion option derivative liabilities
of $1,337,510, which are included in “change in fair value of derivative liabilities” in the consolidated statements
of operations. There were no derivative liabilities as of December 31, 2017.
The
fair value of the derivative liabilities was determined using a binomial pricing model. The assumptions for the binomial pricing
model are represented in the table below for the warrants issued in the Series D private placement reflected on a per share common
stock equivalent basis.
Assumptions
|
|
November
10, 2011
|
|
|
Warrants
revalued at
December 31, 2016
|
|
Expected
life (in months)
|
|
|
60.0
|
|
|
|
5.0
|
|
Expected
volatility
|
|
|
104.5
|
%
|
|
|
83.5
|
%
|
Risk-free
interest rate
|
|
|
0.875
|
%
|
|
|
0.62
|
%
|
Exercise
price
|
|
$
|
24.30
|
|
|
$
|
7.50
|
|
Fair
value per warrant
|
|
$
|
16.20
|
|
|
$
|
0.60
|
|
The
assumptions for the binomial pricing model are represented in the table below for the warrants issued with the Convertible Debt
in 2016 reflected on a per share common stock equivalent basis.
Assumptions
|
|
At
Issuance
Fair value
|
|
|
Warrants
revalued at
December 31, 2016
|
|
Expected
life (in months)
|
|
|
60.0
|
|
|
|
43.0-51.0
|
|
Expected
volatility
|
|
|
118.3-120.1
|
%
|
|
|
110.0-116.0
|
%
|
Risk-free
interest rate
|
|
|
1.48-1.69
|
%
|
|
|
1.93
|
%
|
Exercise
price
|
|
$
|
12.00
|
|
|
$
|
12.00
|
|
Fair
value per warrant
|
|
$
|
5.70-$6.30
|
|
|
$
|
3.60-4.20
|
|
The
assumptions for the binomial pricing model are represented in the table below for the conversion options reflected on a per share
common stock equivalent basis.
Assumptions
|
|
At
Issuance fair value
|
|
|
At
Settlement fair value
|
|
|
Conversion
options revalued at
December 31, 2016
|
|
Expected
life (in months)
|
|
|
6.0-24.0
|
|
|
|
0-18.0
|
|
|
|
6.0-15.0
|
|
Expected
volatility
|
|
|
104.2-153.8
|
%
|
|
|
86.9%-142.2
|
%
|
|
|
84.4-94.8
|
%
|
Risk-free
interest rate
|
|
|
0.05-0.99
|
%
|
|
|
0.01-0.72
|
%
|
|
|
0.62-0.85
|
%
|
Exercise
price
|
|
$
|
3.00-$10.50
|
|
|
$
|
3.00-$7.50
|
|
|
$
|
8.40
|
|
Fair
value per conversion option
|
|
$
|
2.70-$8.40
|
|
|
$
|
2.10-$7.80
|
|
|
$
|
0.90-$1.80
|
|
xvi
i
.
Reclassifications
Certain
prior year amounts have been reclassified to conform to our current year presentation.
xviii
.
Recently Issued Accounting Standards
In
November 2016, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2016-18 (ASU 2016-18).
ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents,
and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for fiscal years beginning
after December 15, 2017. As early adoption of this amendment is permitted, the Company has adopted the update retrospectively
to each period presented. The adoption of this guidance did not have a material impact on the company’s consolidated Financial
Statements.
In
March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. ASU 2016-09 became effective for the Company on January 1, 2017. The adoption of this guidance did not have
a material impact on the Company’s consolidated Financial Statements.
In
February 2016, the FASB issued ASU 2016-02, which requires an entity to recognize assets and liabilities arising from a lease
for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating
the effect this standard will have on its consolidated Financial Statements.
In
August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.
(“ASU 2015-14”). Under the new standard, management must evaluate whether
there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to
continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially
does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented
as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates
whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to
continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it
is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued,
and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial
doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements
are issued. This standard was adopted by the Company at January 1, 2017. See Note 2.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amended the existing accounting
standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods
or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services.
In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim
reporting periods within those periods). The amendments may be applied retrospectively to each prior period (full retrospective)
or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). The Company
will adopt ASU 2014-09 in the first quarter of 2018 and apply the modified retrospective approach. The Company’s primary
source of revenues is from instrument sales which are considered distinct performance obligations and are recognized upon shipment,
the Company does not expect the impact on its consolidated financial statements to be material.
(4)
Property and Equipment, net
Property
and equipment as of December 31, 2017 and 2016 consisted of the following components:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Laboratory
and manufacturing equipment
|
|
$
|
240,670
|
|
|
$
|
226,326
|
|
Office
equipment
|
|
|
173,312
|
|
|
|
165,832
|
|
Leasehold
improvements
|
|
|
8,117
|
|
|
|
8,117
|
|
PCT
collaboration, demonstration and leased systems
|
|
|
461,858
|
|
|
|
461,858
|
|
Total
property and equipment
|
|
|
883,957
|
|
|
|
862,133
|
|
Less
accumulated depreciation
|
|
|
(861,295
|
)
|
|
|
(852,720
|
)
|
Net
book value
|
|
$
|
22,662
|
|
|
$
|
9,413
|
|
Depreciation
expense for the years ended December 31, 2017 and 2016 was $8,576 and $17,939, respectively.
(5)
Intangible Assets
Intangible
assets as of December 31, 2017 reflect the purchase price attributable to patents received in connection with the acquisition
of assets of BaroFold Corp. Acquired BaroFold patents are being amortized to expense on a straight line basis at the rate of $80,000
per year over their estimated remaining useful lives of approximately 9 years. The estimated aggregate amortization expense
for each of the five succeeding fiscal years is $80,000 annually. We performed a review of our intangible assets for impairment.
When impairment is indicated, any excess of carrying value over fair value is recorded as a loss. An impairment analysis of intangible
assets was performed as of December 31, 2017. We have concluded that there is no impairment of intangible assets. Intangible assets
at December 31, 2017 and 2016 consisted of the following:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
BaroFold
Patents
|
|
$
|
750,000
|
|
|
$
|
-
|
|
Less
accumulated amortization
|
|
|
-
|
|
|
|
-
|
|
Net
book value
|
|
$
|
750,000
|
|
|
$
|
-
|
|
Amortization
expense for each of the years ended December 31, 2017 and 2016 was $0.
(6)
Retirement Plan
We
provide all of our employees with the opportunity to participate in our retirement savings plan. Our retirement savings plan has
been qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to the plan through
payroll deductions within statutory limitations and subject to any limitations included in the plan. During 2017 and 2016 we contributed
$13,587 and $22,627, respectively, in the form of discretionary Company-matching contributions.
(7)
Income Taxes
Tax
positions must meet a “more likely than not” recognition threshold at the effective date to be recognized. At December
31, 2017 and 2016, the Company did not have any uncertain tax positions. No interest and penalties related to uncertain tax positions
were accrued at December 31, 2017 and 2016. Our tax returns for fiscal years 2014, 2015 and 2016 are open to examination.
We
did not record an income tax benefit or provision for the years ended December 31, 2017 and 2016.
Significant
items making up the deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Long term deferred taxes:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
49,067
|
|
|
$
|
7,856
|
|
Accounts receivable allowance
|
|
|
-
|
|
|
|
17,253
|
|
Other accruals
|
|
|
75,992
|
|
|
|
33,399
|
|
Accelerated tax depreciation
|
|
|
6,945
|
|
|
|
14,582
|
|
Non-cash, stock-based compensation,
nonqualified
|
|
|
606,020
|
|
|
|
711,676
|
|
Impairment loss on investment
|
|
|
103,748
|
|
|
|
146,782
|
|
Goodwill and intangibles
|
|
|
-
|
|
|
|
-
|
|
Operating loss carry forwards and tax
credits
|
|
|
12,196,765
|
|
|
|
13,561,012
|
|
Less: valuation allowance
|
|
|
(13,038,537
|
)
|
|
|
(14,492,560
|
)
|
Total net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
A
valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.
Accordingly, a valuation allowance was established in 2017 and 2016 for the full amount of our deferred tax assets due to the
uncertainty of realization. We believe based on our projection of future taxable operating income for the foreseeable future,
it is more likely than not that we will not be able to realize the benefit of the deferred tax asset at December 31, 2017.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act (the "Tax Reform Act") was signed into law by President Trump. The
Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate
tax rate from 35% to 21% effective January 1, 2018. Under ASC 740, the tax effects of changes in tax laws must be recognized in
the period in which the law was enacted. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted
tax rate expected to apply when temporary differences are to be realized or settled. The Company re-measured its deferred tax
assets and liabilities at the 21% federal corporate tax rate. The remeasurement resulted in no change in the Company’s recorded
tax provision, as the remeasurement of the company's deferred tax assets and liabilities resulted in a reduction of approximately
$5,843,000 which was fully offset by a change in the Company's valuation allowance.
We
have net operating loss carry-forwards for federal income tax purposes of $38,690,000 as of December 31, 2017. Included
in these numbers are loss carry-forwards that were obtained through the acquisition of BioSeq, Inc. and are subject to Section
382 NOL limitations. These net operating loss carry-forwards expire at various dates from 2018 through 2038.
We
have net operating loss carry-forwards for state income tax purposes of approximately $31,735,000 at December 31,
2017. These net operating loss carry-forwards expire at various dates from 2030 through 2038.
We
have research and development tax credit carry-forwards for federal income tax purposes of approximately $1,089,000 as
of December 31, 2017 and research and development tax credit carry-forwards for state income tax purposes of approximately $232,000
as of December 31, 2017. The federal credit carry-forwards expire at various dates from 2018 through 2038. The state
credit carry-forwards expire at various dates from 2023 through 2033.
In
addition, we have federal alternative minimum tax credit carry-forwards for federal income tax purposes of approximately $217,000
as of December 31, 2017. These credits do not expire.
Our
effective income tax (benefit) provision rate was different than the statutory federal income tax (benefit) provision rate as
follows for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
Federal
tax provision rate
|
|
|
35
|
%
|
|
|
34
|
%
|
Permanent
differences
|
|
|
(0
|
)
%
|
|
|
24
|
%
|
State
tax expense
|
|
|
0
|
%
|
|
|
0
|
%
|
Refundable
AMT and R&D tax credit
|
|
|
0
|
%
|
|
|
0
|
%
|
Net
operating loss carry back
|
|
|
0
|
%
|
|
|
0
|
%
|
Valuation
allowance
|
|
|
(35
|
)%
|
|
|
(58
|
)%
|
Effective
income tax provision
|
|
|
0
|
%
|
|
|
0
|
%
|
(8)
Commitments and Contingencies
Operating
Leases
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 29, 2017, that expires December 31, 2018, 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 $6,912.75 subject
to annual cost of living increases. The lease shall be automatically extended for additional three years unless either party terminates
at least six months prior to the expiration of the current lease term.
Following
is a schedule by years of future minimum rental payments required under operating leases with initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2017:
2018
|
|
$
|
166,353
|
|
2019
|
|
|
82,953
|
|
2020
|
|
|
82,953
|
|
Thereafter
|
|
|
-
|
|
Total
minimum payments required
|
|
$
|
332,259
|
|
Royalty
Commitments
BioMolecular
Assays, Inc.
In
1996, we acquired our initial equity interest in BioSeq, Inc., which at the time was developing our original pressure cycling
technology. BioSeq, Inc. acquired its pressure cycling technology from BioMolecular Assays, Inc. under a technology transfer and
patent assignment agreement. In 1998, we purchased all of the remaining outstanding capital stock of BioSeq, Inc., and at such
time, the technology transfer and patent assignment agreement was amended to require us to pay BioMolecular Assays, Inc., a 5%
royalty on our sales of products or services that incorporate or utilize the original pressure cycling technology that BioSeq,
Inc. acquired from BioMolecular Assays, Inc. We are also required to pay BioMolecular Assays, Inc. 5% of the proceeds from any
sale, transfer or license of all or any portion of the original pressure cycling technology. These payment obligations terminated
on March 7, 2016. During the year ended December 31, 2016, we incurred approximately $6,963 in royalty expense associated with
our obligation to BioMolecular Assays, Inc.
In
connection with our acquisition of BioSeq, Inc., we licensed certain limited rights to the original pressure cycling technology
back to BioMolecular Assays, Inc. This license is non-exclusive and limits the use of the original pressure cycling technology
by BioMolecular Assays, Inc. solely for molecular applications in scientific research and development and in scientific plant
research and development. BioMolecular Assays, Inc. is required to pay us a royalty equal to 20% of any license or other fees
and royalties, but not including research support and similar payments, it receives in connection with any sale, assignment, license
or other transfer of any rights granted to BioMolecular Assays, Inc. under the license. BioMolecular Assays, Inc. was required
to pay us these royalties until the expiration in March 2016 of the patents held by BioSeq, Inc. since 1998. We have not received
any royalty payments from BioMolecular Assays, Inc. under this license.
Battelle
Memorial Institute
In
December 2008, we entered into an exclusive patent license agreement with the Battelle Memorial Institute (“
Battelle
”).
The licensed technology is the subject of a patent application filed by Battelle in 2008 and relates to a method and a system
for improving the analysis of protein samples, including through an automated system utilizing pressure and a pre-selected agent
to obtain a digested sample in a significantly shorter period of time than current methods, while maintaining the integrity of
the sample throughout the preparatory process. In addition to royalty payments on net sales on “licensed products,”
we are obligated to make minimum royalty payments for each year that we retain the rights outlined in the patent license agreement
and we are required to have our first commercial sale of the licensed products within one year following the issuance of the patent
covered by the licensed technology. After re-negotiating the terms of the contract in 2013, the minimum annual royalty was $1,200
in 2014 and $2,000 in 2015; the minimum royalties are $3,000 in 2016, $4,000 in 2017 and $5,000 in 2018 and each calendar year
thereafter during the term of the agreement.
Target
Discovery Inc
.
In
March 2010, we signed a strategic product licensing, manufacturing, co-marketing, and collaborative research and development agreement
with Target Discovery Inc. (“
TDI
”), a related party. Under the terms of the agreement, we have been
licensed by TDI to manufacture and sell a highly innovative line of chemicals used in the preparation of tissues for scientific
analysis (“
TDI reagents
”). The TDI reagents were designed for use in combination with our pressure cycling
technology. The companies believe that the combination of PCT and the TDI reagents can fill an existing need in life science research
for an automated method for rapid extraction and recovery of intact, functional proteins associated with cell membranes in tissue
samples. We did not incur any royalty obligation under this agreement in 2017 or 2016.
In
April 2012, we signed a non-exclusive license agreement with TDI to grant the non-exclusive use of our pressure cycling technology.
We recorded $30,000 and $20,000 of minimum royalty income in 2017 and 2016, respectively. We executed an amendment to this
agreement on October 1, 2016 wherein we agreed to pay a monthly fee of $1,400 for the use of a lab bench, shared space and other
utilities, and $2,000 per day for technical support services as needed.
Severance
and Change of Control Agreements
Each
of Mr. Schumacher, and Drs. Ting, Lazarev, and Lawrence, executive officers of the Company, are entitled to receive a severance
payment if terminated by us without cause. The severance benefits would include a payment in an amount equal to one year of such
executive officer’s annualized base salary compensation plus accrued paid time off. Additionally, the officer will be entitled
to receive medical and dental insurance coverage for one year following the date of termination.
Each
of these executive officers, other than Mr. Schumacher, is entitled to receive a change of control payment in an amount equal
to one year of such executive officer’s annualized base salary compensation, accrued paid time off, and medical and dental
coverage, in the event of a change of control of the Company. In the case of Mr. Schumacher, this payment would be equal to two
years of annualized base salary compensation, accrued paid time off, and two years of medical and dental coverage. The severance
payment is meant to induce the aforementioned executives to remain in the employ of the Company, in general; and particularly
in the occurrence of a change in control, as a disincentive to the control change.
(9)
Convertible Debt and Other Debt
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
various dates for the year ended December 31, 2017, the Company issued 61,307 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 June 30, 2017 for an aggregate amount of $483,054. We recognized a $218,452 gain on extinguishment of debt by calculating
the difference of the shares valued on the issuance date and the amount of accrued interest through June 30, 2017.
At
any time after the Issuance 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.
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 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.
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.
The
Company determined that the conversion feature of the Debentures met the definition of a liability in accordance with ASC 815-40
and therefore bifurcated the conversion feature on each debt agreement and accounted for it as a derivative liability. The fair
value of the conversion feature was accounted for as a note discount and is amortized to interest expense over the life of the
loan. The fair value of the conversion feature was reflected in the conversion option liability line in the consolidated balance
sheet as of December 31, 2016.
The
proceeds from these convertible debts were allocated between the host debt instrument and the convertible option based on the
residual method. The estimated fair value of the convertible option was determined using a binomial formula, resulting in allocations
to the convertible option and accounted for as a liability in the Company’s consolidated balance sheet. In accordance with
the provisions of ASC 815-40, the gross proceeds are offset by debt discounts, which are amortized to interest expense over the
expected life of the debt.
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 $3,740,746 of the debt discount to interest expense in 2016. 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
early adopted ASU 2017-11 and applied the guidance to derivative accounting. We reclassified the fair value of the warrant derivative
liabilities to stockholders’ equity when we adopted ASU 2017-11.
Other
convertible notes
On
May 13, 2016, one lender converted an outstanding note issued on April 28, 2015 and the related accrued interest totaling $117,837
to 14,028 common shares. As of December 31, 2017, the outstanding balance on the note was zero.
On
May 24, 2016, we sold an additional convertible note for $107,000 with warrants to purchase 1,667 shares of common stock at an
exercise price of $16.50 per share. The purchaser has the right to convert the notes into shares of the Company’s common
stock at a fixed conversion price equal to $13.50 per share, subject to applicable adjustments. The estimated fair value of the
warrants was determined using the binomial model, resulting in an allocation of $12,406 to the total warrants and the recognition
of a beneficial conversion feature of $7,962, both of which were recorded as a discount to the note. We evaluated the convertible
note and warrants for derivative liability treatment and determined that these instruments do not include certain rights such
as price protection like our previous debt financings. Accordingly, we concluded that this financing arrangement did not qualify
for derivative accounting treatment. The loan was paid in full in fiscal year 2016.
On
June 14, 2016, we sold an additional convertible note for $115,000 and issued 1,023 common shares to compensate the lender. On
July 1, 2016, the note was modified to increase the principal amount to $200,000 and we received the remaining proceeds of $85,000
on the same date and issued 1,144 common shares as compensation to the lender. The lender has the right to convert the note into
shares of the Company’s common stock at fixed conversion price equal to $13.50 per share, subject to applicable adjustments.
We valued the total 2,167 common shares using the stock prices at the respective dates the note proceeds were received and recorded
the relative fair value of the shares amounting to $26,000 as a debt discount to be amortized over the term of the loan. We then
computed the effective conversion price of the note, noting that no beneficial conversion feature exists. We also evaluated the
convertible note for derivative liability treatment and determined that the instrument does not include certain rights such as
price protection like our previous debt financing. Accordingly, we concluded that this financing arrangement did not qualify for
derivative accounting treatment. The loan was paid in full in fiscal year 2017.
On
July 29, 2016, we sold an additional convertible note for $100,000 and issued 1,084 common shares to compensate the lender. The
lender has the right to convert the notes into shares of the Company’s common stock at a fixed conversion price equal to
$13.50 per share, subject to applicable adjustments. The proceeds were allocated between the convertible note and shares of common
stock based on their relative fair values. The relative fair values of the convertible note and the common shares was $87,241
and $12,759, respectively. We then computed the effective conversion price of the note, noting that the convertible debt gave
rise to a beneficial conversion feature (BCF) of $12,759. The sum of the relative fair value of the common shares and the BCF
of $25,518 was recorded as a debt discount to be amortized over the term of the loan. We also evaluated the convertible note for
derivative liability treatment and determined that the instruments does not include certain rights such as price protection like
our previous debt financings. Accordingly, we concluded that this financing arrangements did not qualify for derivative accounting
treatment. The loan was paid in full in fiscal year 2017.
On
September 15, 2016, we sold an additional convertible note for $500,000 and issued 6,666 common shares to compensate the lender.
The lender has the right to convert the notes into shares of the Company’s common stock at a fixed conversion price equal
to $13.50 per share, subject to applicable adjustments. The convertible note includes an original issue discount of $40,541 and
is subject to a one-time interest of 9% or $45,000 which was recorded as a debt discount and amortized over the term of the loan.
The proceeds were allocated between the convertible note and shares of common stock based on their relative fair values. The relative
fair value of the convertible note was $434,028. The allocation of the gross proceeds to the shares of common stock was $65,972
and recorded as a debt discount to be amortized over the term of the loan. We then computed the effective conversion price of
the note, noting that no beneficial conversion feature exists. We also evaluated the convertible note for derivative liability
treatment and determined that the instrument does not include certain rights such as price protection like our previous debt financings.
Accordingly, we concluded that this financing arrangement did not qualify for derivative accounting treatment. The loan was
paid in full in fiscal year 2017.
On
various dates during the quarter ended December 31, 2017, the Company issued convertible notes for net proceeds of $1,755,850
with the following terms: a) maturity ranging from 3 to 12 months; b) annual interest rates ranging from 5% to 12%; 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 or warrants which were fair
valued at issuance dates. The relative fair values of the shares or warrants issued with the notes were 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 December 31, 2017.
The
specific terms of the convertible notes and outstanding balances as of December 31, 2017 are listed in the tables below.
Convertible
Notes
Inception
Date
|
|
Term
|
|
Loan
Amount
|
|
|
Outstanding
Balance
|
|
|
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
|
|
July 22, 2015
|
|
30
months
1
|
|
$
|
2,180,000
|
|
|
$
|
2,180,000
|
|
|
$
|
218,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
$
|
388,532
|
|
|
$
|
2,163,074
|
|
September 25, 2015
|
|
30
months
1
|
|
|
1,100,000
|
|
|
|
1,100,000
|
|
|
|
110,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
185,956
|
|
|
|
1,022,052
|
|
October 2, 2015
|
|
30
months
1
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
15,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
26,345
|
|
|
|
140,832
|
|
October 6, 2015
|
|
30
months
1
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
3,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
5,168
|
|
|
|
26,721
|
|
October 14, 2015
|
|
30
months
1
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
8,954
|
|
|
|
49,377
|
|
November 2, 2015
|
|
30
months
1
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
25,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
43,079
|
|
|
|
222,723
|
|
November 10, 2015
|
|
30
months
1
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
8,790
|
|
|
|
46,984
|
|
November 12, 2015
|
|
30
months
1
|
|
|
215,000
|
|
|
|
215,000
|
|
|
|
21,500
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
38,518
|
|
|
|
212,399
|
|
November 20, 2015
|
|
30
months
1
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
20,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
37,185
|
|
|
|
200,000
|
|
December 4, 2015
|
|
30
months
1
|
|
|
170,000
|
|
|
|
170,000
|
|
|
|
17,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
37,352
|
|
|
|
170,000
|
|
December 11, 2015
|
|
30
months
1
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
36,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
75,449
|
|
|
|
360,000
|
|
December 18, 2015
|
|
30
months
1
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
5,500
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
11,714
|
|
|
|
55,000
|
|
December 31, 2015
|
|
30
months
1
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
10,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
20,634
|
|
|
|
100,000
|
|
January 11, 2016
|
|
30
months
1
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
10,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
24,966
|
|
|
|
80,034
|
|
January 20, 2016
|
|
30
months
1
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
9,812
|
|
|
|
40,188
|
|
January 29, 2016
|
|
30
months
1
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
30,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
60,887
|
|
|
|
239,113
|
|
February 26, 2016
|
|
30
months
1
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
20,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
43,952
|
|
|
|
156,048
|
|
March 10, 2016
|
|
30
months
1
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
12,500
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
18,260
|
|
|
|
106,740
|
|
March 18, 2016
|
|
30
months
1
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
36,000
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
94,992
|
|
|
|
265,008
|
|
March 24, 2016
|
|
30
months
1
|
|
|
106,667
|
|
|
|
106,667
|
|
|
|
10,667
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
15,427
|
|
|
|
91,240
|
|
March 31, 2016
|
|
30
months
1
|
|
|
177,882
|
|
|
|
177,882
|
|
|
|
17,788
|
2
|
|
|
10
|
%
3
|
|
|
$
|
8.40
|
|
|
|
2,436
|
|
|
|
175,446
|
|
June 15, 2016
|
|
6 months
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
$
|
13.50
|
|
|
|
-
|
|
|
|
3,680
|
|
June 17, 2016
|
|
6 months
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
$
|
13.50
|
|
|
|
-
|
|
|
|
3,899
|
|
June 22, 2016
|
|
6 months
|
|
|
35,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
$
|
13.50
|
|
|
|
-
|
|
|
|
3,373
|
|
July 6, 2016
|
|
6 months
|
|
|
85,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
$
|
13.50
|
|
|
|
-
|
|
|
|
15,048
|
|
July 29, 2016
|
|
6 months
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
$
|
13.50
|
|
|
|
-
|
|
|
|
25,518
|
|
September 15, 2016
|
|
8 months
|
|
|
500,000
|
|
|
|
-
|
|
|
|
85,541
|
|
|
|
9
|
%
|
|
|
$
|
13.50
|
|
|
|
-
|
|
|
|
65,972
|
|
October 11, 2017
|
|
12 months
|
|
|
85,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
%
|
|
|
|
-
|
|
|
|
4,250
|
|
|
|
-
|
|
October 20, 2017(4)
|
|
12 months
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
-
|
|
|
|
5
|
%
|
|
|
$
|
7.50
|
|
|
|
7,500
|
|
|
|
-
|
|
October 25, 2017
|
|
6 months
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
|
-
|
|
|
|
3,000
|
|
|
|
|
|
October 27, 2017
|
|
12 months
|
|
|
170,000
|
|
|
|
170,000
|
|
|
|
-
|
|
|
|
5
|
%
|
|
|
|
-
|
|
|
|
4,250
|
|
|
|
10,000
|
|
November 13, 2017
|
|
9
months
|
|
|
380,000
|
|
|
|
380,000
|
|
|
|
15,200
|
|
|
|
8
|
%
|
|
|
$
|
7.50
|
|
|
|
15,200
|
|
|
|
46,274
|
|
November 22, 2017
|
|
12 months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
10,000
|
|
|
|
5
|
%
|
|
|
|
-
|
|
|
|
2,000
|
|
|
|
-
|
|
November 28, 2017
|
|
10 months
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
3,000
|
|
|
|
12
|
%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
November 29, 2017
|
|
6 months
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
-
|
|
|
|
15
|
%
|
|
|
$
|
7.50
|
|
|
|
-
|
|
|
|
15,200
|
|
November 30, 2017
|
|
3 months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
8
|
%
|
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
December 5, 2017
|
|
3 months
|
|
|
52,500
|
|
|
|
52,500
|
|
|
|
-
|
|
|
|
10
|
%
|
|
|
$
|
7.50
|
|
|
|
2,500
|
|
|
|
-
|
|
December 6, 2017
|
|
4 months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
10
|
%
|
|
|
$
|
7.50
|
|
|
|
-
|
|
|
|
-
|
|
December 11, 2017
|
|
6 months
|
|
|
130,000
|
|
|
|
130,000
|
|
|
|
1,500
|
|
|
|
5
|
%
|
|
|
|
-
|
|
|
|
6,500
|
|
|
|
6,460
|
|
December 19, 2017
|
|
6 months
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
1,500
|
|
|
|
5
|
%
|
|
|
|
-
|
|
|
|
5,500
|
|
|
|
5,775
|
|
December 28, 2017
|
|
6 months
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
-
|
|
|
|
15
|
%
|
|
|
$
|
7.50
|
|
|
|
5,000
|
|
|
|
-
|
|
December 29, 2017
|
|
12
months
|
|
|
105,000
|
|
|
|
105,000
|
|
|
|
-
|
|
|
|
5
|
%
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
|
|
$
|
8,973,049
|
|
|
$
|
8,088,049
|
|
|
$
|
749,696
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,219,108
|
|
|
$
|
6,124,178
|
|
1)
The loan term was extended by 180 days and further extended on January 15, 2018 by 60 days to repay in common stock. The July
22, 2015 Debentures of $2,180,000 is currently past due as of March 19, 2018.
2.
The original issue discount is reflected in the first year.
3.
The annual interest started accruing in the second year.
4.
On October 20, 2017, Company issued to EMA Financial, LLC a 5% one year convertible note in the amount of $150,000, less $7,500
from OID and fees. The note is convertible at $7.50 per share, provided however, if the Company fails to comply with Section 1.9
of the note then the conversion price shall be 65% of the lowest sale price for the Common Stock on the Principal Market during
the twenty (20) consecutive Trading Days immediately preceding the Conversion Date or the closing bid price, whichever is lower.
As
of December 31, 2017, a total of approximately $291,000 convertible debentures were purchased by related parties who were members
of the Company’s Board of Directors and management and their family members.
Deferred
finance fees included cash commissions amounting to $621,500 and the fair value of the 2,101,786 warrants issued to the placement
agent amounting to $536,908. For the year ended December 31, 2017, the Company recognized amortization expense related to the
debt discounts indicated above of $1,955,193. The unamortized debt discounts as of December 31, 2017 related to the convertible
debentures and other convertible notes amounted to $433,228.
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). Although the Revolving Note is dated October 26, 2016, the transaction did not close until October 28,
2016, when we received its initial $250,000 advance pursuant to the Revolving Note. As a result, on the same day and pursuant
to the Revolving Note, we issued to the Investor a Common Stock Purchase Warrant to purchase 20,834 shares of our common stock
at an exercise price per share equal to $12.00 per share. The Investor is obligated to provide us with advances of $250,000 under
the Revolving Note, but the Investor shall not be required to advance more than $250,000 in any individual fifteen (15) day period
and no more than $500,000 in the thirty (30) day period immediately following the date of the initial advance. We received $3,500,000
pursuant to the Revolving Note as amended of which $2,070,000 net proceeds was received in 2017 and we issued to the Investor
warrants to purchase 291,667 shares of our Common Stock at an exercise price per share equal to $12.00 per share. The terms
of the Warrants are identical except for the exercise date, issue date, and termination date which are based on the advance date.
The
Revolving Note was amended on May 2, 2017 to increase the aggregate principal amount to $3,000,000, to issue 16,667 shares of
our Common Stock to the Investor, to decrease the exercise price per share of the warrants to the lower of (i) $12.00 or (ii)
the per share purchase price of the shares of our Common Stock sold in the Qualified Offering, and to change the references in
the Revolving Note from “the six (6) month anniversary of October 28, 2016” to “July 25, 2017.” The fair
value of the 16,667 shares issued of $149,018 was accounted for as a note discount and are amortized to interest expense
over the life of the loan. We evaluated the accounting impact of the Revolving Note amendment and deemed that the amendment did
not have a material impact on our consolidated financial statements.
The
Revolving Note was 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 relative fair value of the 291,667 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 related to the Revolving Note were fully amortized as of December 31, 2017.
The
Revolving Note was still outstanding as of December 31, 2017 and is currently past due. 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 discounts,
during 2017:
|
|
2017
|
|
Balance
at January 1,
|
|
$
|
5,273,937
|
|
Adjustment
due to ASU 2017-11
|
|
|
923,468
|
|
Issuance
of convertible debt, face value
|
|
|
4,093,500
|
|
Deferred
financing cost
|
|
|
(267,650
|
)
|
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
|
|
|
(750,705
|
)
|
Payments
|
|
|
(925,541
|
)
|
Accretion
of interest and amortization of debt discount to interest expense through December 31,
|
|
|
3,815,767
|
|
Balance
at December 31,
|
|
|
11,787,776
|
|
Less:
current portion
|
|
|
11,787,776
|
|
Convertible
debt, long-term portion
|
|
$
|
-
|
|
Other
Notes
On
January 20, 2016 we borrowed $50,000 from an individual with no interest or fees. We paid back the loan in March 2016.
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 December 31, 2017, the outstanding balance on this note was zero.
On
May 9, 2016 we signed a promissory note with a lender. Under the agreement we received $200,000 net of a $6,000 original issue
discount and we repaid $206,000 on August 25, 2016. In connection with this promissory note, we issued warrants exercisable into
3,333 shares of our common stock. The warrants issued in this transaction are immediately exercisable at an exercise price of
$16.50 per share. The warrants have an expiration period of three years from the original issue date. The warrants are subject
to adjustment for stock splits, stock dividends or recapitalizations. The warrants were recorded as a component of our Stockholders’
Equity. The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $27,349
to the total warrants and recorded as a discount to the note to be amortized over the term of the loan. We evaluated the warrants
for derivative liability treatment and determined that these instruments do not include certain rights such as price protection
like our previous debt financings. Accordingly, we concluded that these instruments did not qualify for derivative accounting
treatment. In August 2016, the lender extended the maturity date of the note from August 11, 2016 to August 25, 2016. Consequently,
a penalty interest of $41,200 was added to the principal amount and settled through the issuance of 3,335 common shares. As of
December 31, 2016, the outstanding balance on this note was zero.
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
discount 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
to extend the loans were recorded as losses on extinguishment of debt in the consolidated financial statements. Both loans
were paid off entirely by October 31, 2017. We amortized the entire $63,616 of debt discounts in the year ended December 31,
2017.
On
March 14, 2017, we received an eight-month, non-convertible loan of $250,000 from a privately-held investment firm. The loan earned
an annual interest rate of 10% and included 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. We amortized the entire $76,748 of the debt discount in the year ended December
31, 2017. In the event of default and at the option of the holder, the loan was convertible into common stock at a 35% discount
to the lowest closing stock price for the 15 trading days prior to conversion. We paid the loan entirely by the maturity date
so derivative accounting was triggered from the conversion option.
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 December 31, 2017 with a balance of $170,000. The
lender extended the term to December 31, 2017 and further to March 31, 2018 in exchange for a total of 9,500 shares
of common stock. We amortized $44,841 of debt discounts in the year ended December 31, 2017. The unamortized debt discount as
of December 31, 2017 was $7,238.
On
April 19, 2017, we received a 7-month non-convertible loan of $250,000 from a privately-held investment firm. The loan earned
an annual interest rate of 10% and included 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. We recorded the fair value of the 8,333 shares amounting to $43,687 as a debt
discount that was amortized to interest expense during the term of the loan. We amortized $68,687
of
debt discounts in the year ended December 31, 2017. The unamortized debt discount as of December 31, 2017 was zero. In the event
of default and at the option of the holder, the loan was convertible into common stock at a 35% discount to the lowest closing
stock price for the 15 trading days prior to conversion. We paid the loan entirely by the maturity date so derivative accounting
was triggered from the conversion option.
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 December 31, 2017 was zero. We used these proceeds to pay off in full our September 2016 loan of $589,189. The
loan remains outstanding and is currently past due. We continue to accrue interest at a 20% annual rate from the maturity
date.
On
August 1, 2017, we signed a non-convertible installment loan with a lender. Under the agreement we received a loan of $75,000
with a weekly repayment of $3,500 until payment in full. 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 December 31, 2017 with a balance of approximately
$16,750.
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 $15,311 of debt discounts in the year ended December
31, 2017. The unamortized debt discount as of December 31, 2017 was $22,689. 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.
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. The following table shows our Merchant Agreements as of December 31, 2017.
Inception
Date
|
|
Purchase
Price
|
|
|
Purchased
Amount
|
|
|
Outstanding
Balance
|
|
|
Daily
Payment
|
|
|
Interest
Rate
|
|
|
Deferred
Finance Fees
|
|
|
Note
|
|
January
6, 2016
|
|
|
250,000
|
|
|
|
322,500
|
|
|
$
|
-
|
|
|
|
1,279.76
|
|
|
|
14
|
%
|
|
|
2,500
|
|
|
|
1
|
|
February
8, 2016
|
|
|
100,000
|
|
|
|
129,900
|
|
|
|
-
|
|
|
|
927.00
|
|
|
|
15
|
%
|
|
|
2,000
|
|
|
|
|
|
August
16, 2016
|
|
|
70,000
|
|
|
|
90,930
|
|
|
|
-
|
|
|
|
650.00
|
|
|
|
15
|
%
|
|
|
1,590
|
|
|
|
|
|
August
26, 2016
|
|
|
125,000
|
|
|
|
166,250
|
|
|
|
-
|
|
|
|
1,386.00
|
|
|
|
6
|
%
|
|
|
2,535
|
|
|
|
|
|
February
6, 2017
|
|
|
125,000
|
|
|
|
161,250
|
|
|
|
-
|
|
|
|
1,343.75
|
|
|
|
15
|
%
|
|
|
1,250
|
|
|
|
|
|
March
2, 2017
|
|
|
75,750
|
|
|
|
97,718
|
|
|
|
-
|
|
|
|
775.74
|
|
|
|
7
|
%
|
|
|
750
|
|
|
|
|
|
June
6, 2017
|
|
|
250,000
|
|
|
|
330,000
|
|
|
|
-
|
|
|
|
1,833.00
|
|
|
|
5
|
%
|
|
|
6,250
|
|
|
|
|
|
June
21, 2017
|
|
|
150,000
|
|
|
|
190,500
|
|
|
|
-
|
|
|
|
1,361.00
|
|
|
|
15
|
%
|
|
|
1,498
|
|
|
|
|
|
July
17, 2017
|
|
|
125,000
|
|
|
|
160,000
|
|
|
|
-
|
|
|
|
1,250.00
|
|
|
|
7
|
%
|
|
|
1,250
|
|
|
|
|
|
September
29, 2017
|
|
|
75,000
|
|
|
|
102,000
|
|
|
|
(1,200
|
)
|
|
|
1,200.00
|
|
|
|
15
|
%
|
|
|
1,500
|
|
|
|
|
|
October
25, 2017
|
|
|
110,000
|
|
|
|
153,890
|
|
|
|
71,233
|
|
|
|
1,539.00
|
|
|
|
15
|
%
|
|
|
8,800
|
|
|
|
|
|
December
7, 2017
|
|
|
160,000
|
|
|
|
212,800
|
|
|
|
157,088
|
|
|
|
1,251.76
|
|
|
|
25
|
%
|
|
|
5,799
|
|
|
|
|
|
December
12, 2017
|
|
|
160,000
|
|
|
|
212,800
|
|
|
|
159,186
|
|
|
|
1,251.76
|
|
|
|
15
|
%
|
|
|
5,258
|
|
|
|
|
|
|
|
$
|
1,775,750
|
|
|
$
|
2,330,538
|
|
|
$
|
386,307
|
|
|
|
|
|
|
|
|
|
|
$
|
40,980
|
|
|
|
|
|
1)
The Company recognized a gain in fiscal year 2016 on the settlement of the previous loan of $5,044 which was credited to
interest expense.
We
amortized $312,870 and $40,802 of debt discounts during the years ended December 31, 2017 and 2016, respectively for all non-convertible
notes. The total unamortized discount for all non-convertible notes as of December 31, 2017 was $48,194.
Related
Party Notes
During
the year ended December 31, 2016, the Company received advances from certain officers of the Company amounting to $20,000. These
advances were non-interest bearing and payable on demand. As of December 31, 2016 there are no outstanding notes to related parties.
(10)
Stockholders’ (Deficit)
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 December 31, 2017 and 2016, there were no shares of Junior A, and Series A, B, C, and E issued and outstanding.
Series
D Convertible Preferred Stock
On
November 11, 2011, we completed a registered direct offering, pursuant to which we sold an aggregate of 843 units for a purchase
price of $1,000 per unit, resulting in gross proceeds to us of $843,000 (the “
Series D Placement
”). Each unit
(“
Series D Unit
”) consisted of (i) one share of Series D Convertible Preferred Stock, $0.01 par value per share
(the “
Series D Convertible Preferred Stock
”) convertible into 84 shares of our common stock, (subject to adjustment
for stock splits, stock dividends, recapitalization, etc.) and (ii) one five-year warrant to purchase approximately 21 shares
of our common stock at a per share exercise price of $24.30, subject to adjustment as provided in the Warrants (“
Series
D Warrant
”). The Series D Warrants will be exercisable beginning on May 11, 2012 and until the close of business on
the fifth anniversary of the initial exercise date.
The
proceeds from the sale of each Series D Unit were allocated between the Series D Convertible Preferred Stock and the Series D
Warrants based on the residual method. The estimated fair value of the Series D Warrants was determined using a binomial formula,
resulting in an allocation of the gross proceeds of $283,725 to the total warrants issued. The allocation of the gross proceeds
to the Series D Convertible Preferred Stock was $559,275. In accordance with the provisions of ASC 470-20, an additional adjustment
between Additional Paid in Capital and Accumulated Deficit of $530,140 was recorded to reflect an implicit non-cash dividend related
to the allocation of proceeds between the stock and warrants issued. The $530,140 represents the value of the adjustment to additional
paid in capital related to the beneficial conversion feature of the Series D Convertible Preferred Stock. The value adjustment
was calculated by subtracting the fair market value of the underlying common stock on November 10, 2011 issuable upon conversion
of the Series D Convertible Preferred Stock from the fair market value of the Series D Convertible Preferred Stock as determined
when the Company performed a fair market value allocation of the proceeds to the Series D Convertible Preferred Stock and warrants.
The warrants are recorded as a liability. See “Warrant Derivative Liability” below.
The
Series D Convertible Preferred Stock will rank senior to the Company’s common stock and Series C Convertible Preferred Stock
with respect to payments made upon liquidation, winding up or dissolution. Upon any liquidation, dissolution or winding up of
the Company, after payment of the Company’s debts and liabilities, and before any payment is made to the holders of any
junior securities, the holders of Series D Convertible Preferred Stock will first be entitled to be paid $1,000 per share subject
to adjustment for accrued but unpaid dividends.
We
may not pay any dividends on shares of common stock unless we also pay dividends on the Series D Convertible Preferred Stock in
the same form and amount, on an as-if-converted basis, as dividends actually paid on shares of our common stock. Except for such
dividends, no other dividends may be paid on the Series D Convertible Preferred Stock.
Each
share of Series D Convertible Preferred Stock is convertible into 84 shares of common stock (based upon an initial conversion
price of $19.50 per share) at any time at the option of the holder, subject to adjustment for stock splits, stock dividends, combinations,
and similar recapitalization transactions (the “
Series D Conversion Ratio
”). Subject to certain exceptions,
if the Company issues any shares of common stock or common stock equivalents at a per share price that is lower than the conversion
price of the Series D Convertible Preferred Stock, the conversion price will be reduced to the per share price at which such shares
of common stock or common stock equivalents are issued. Each share of Series D Convertible Preferred Stock will automatically
be converted into shares of common stock at the Series D Conversion Ratio then in effect if, after six months from the closing
of the Series D Placement, the common stock trades on the OTCQB (or other primary trading market or exchange on which the common
stock is then traded) at a price equal to at least 300% of the then effective Series D Convertible Preferred Stock conversion
price for 20 out of 30 consecutive trading days with each trading day having a volume of at least $50,000. Unless waived under
certain circumstances by the holder of the Series D Convertible Preferred Stock, such holder’s Series D Convertible Preferred
Stock may not be converted if upon such conversion the holder’s beneficial ownership would exceed certain thresholds.
In
addition, in the event we consummate a merger or consolidation with or into another person or other reorganization event in which
our shares of common stock are converted or exchanged for securities, cash or other property, or we sell, lease, license or otherwise
dispose of all or substantially all of our assets or we or another person acquire 50% or more of our outstanding shares of common
stock, then following such event, the holders of the Series D Convertible Preferred Stock will be entitled to receive upon conversion
of the Series D Convertible Preferred Stock the same kind and amount of securities, cash or property which the holders of the
Series D Convertible Preferred Stock would have received had they converted the Series D Convertible Preferred Stock immediately
prior to such fundamental transaction.
The
holders of Series D Convertible Preferred Stock are not entitled to vote on any matters presented to the stockholders of the Company
for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu
of meeting), except that the holders of Series D Convertible Preferred Stock may vote separately as a class on any matters that
would (i) amend, our Restated Articles of Organization, as amended, in a manner that adversely affects the rights of the Series
D Convertible Preferred Stock, (ii) alter or change adversely the powers, preferences or rights of the Series D Convertible Preferred
Stock or alter or amend the certificate of designation, (iii) authorize or create any class of shares ranking as to dividends,
redemption or distribution of assets upon liquidation senior to, or otherwise pari passu with, the Series D Convertible Preferred
Stock, or (iv) increase the number of authorized shares of Series D Convertible Preferred Stock.
If,
within 12 months of the initial issuance of the Series D Convertible Preferred Stock, we issue any common stock, common stock
equivalents, indebtedness or any combination thereof (a “
Subsequent Financing
”), the holders of Series D Convertible
Preferred Stock will have the right to participate on a pro-rata basis in up to 50% of such Subsequent Financing.
Series
D Warrants
The
Series D Warrants originally had an exercise price equal to $24.30 per share of common stock. In April 2012, the number of Series
D Warrants increased by 17,681 to a total of 34,930 and each Series D Warrant had an exercise price reset to $12.00 per share
of common stock. In December of 2013 the number of Series D Warrants increased by 20,958 to a total of 55,887 and each Series
D Warrant had an exercise price reset to $7.50 per share of common stock. The Series D Warrants will be exercisable beginning
on the six-month anniversary of the date of issuance and expire five years from the initial exercise date. The Series D Warrants
permit the holder to conduct a “cashless exercise” at any time a registration statement registering, or the prospectus
contained therein, is not available for the issuance of the shares of common stock issuable upon exercise of the Series D Warrant,
and under certain circumstances at the expiration of the Series D Warrants. The exercise price and/or number of shares of common
stock issuable upon exercise of the Series D Warrants are subject to adjustment for certain stock dividends, stock splits or similar
capital reorganizations, as set forth in the Warrants. The exercise price is also subject to adjustment in the event that we issue
any shares of common stock or common stock equivalents at a per share price that is lower than the exercise price for the Series
D Warrants then in effect. Upon any such issuance, subject to certain exceptions, the exercise price will be reduced to the per
share price at which such shares of common stock or common stock equivalents are issued and number of Series D Warrant shares
issuable thereunder shall be increased such that the aggregate exercise price payable thereunder, after taking into account the
decrease in the exercise price, shall be equal to the aggregate exercise price prior to such adjustment. Unless waived under certain
circumstance by the holder of a Series D Warrant, such holder may not exercise the Series D Warrant if upon such exercise the
holder’s beneficial ownership of the Company’s common stock would exceed certain thresholds.
In
the event we consummate a merger or consolidation with or into another person or other reorganization event in which our shares
of common stock are converted or exchanged for securities, cash or other property, or we sell, lease, license or otherwise dispose
of all or substantially all of our assets or we or another person acquire 50% or more of our outstanding shares of common stock,
then following such event, the holders of the Series D Warrants will be entitled to receive upon exercise of the Series D Warrants
the same kind and amount of securities, cash or property which the holders would have received had they exercised the Series D
Warrants immediately prior to such fundamental transaction.
On
May 10, 2017, we received net proceeds of $140,214 from the exercise of 19,889 stock purchase warrants from the Series
D registered direct offering on November 10, 2011. 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.
Series
G Convertible Preferred Stock
On
July 6 and November 15, 2012, we completed a private placement, pursuant to which we sold an aggregate of 4,844 units for a purchase
price of $150.00 per unit (the “Series G Purchase Price”), resulting in gross proceeds to us of $726,600 (the “
Series
G Private Placement
”). Each unit (“
Series G Unit
”) consists of (i) one share of Series G Convertible
Preferred Stock, $0.01 par value per share (the “Series G Preferred Stock”) convertible into 1 share of our common
stock, (subject to adjustment for stock splits, stock dividends, recapitalization, etc.) and (ii) a three-year warrant to purchase
1 share of our common stock at a per share exercise price of $15.00 (the “
Series G Warrant
”). The Series G
Warrants will be exercisable until the close of business on the third anniversary of the applicable closing date of the Series
G Private Placement.
Each
share of Series G Preferred Stock will receive a cumulative dividend at the annual rate of (i) four percent (4%) on those shares
of Series G Preferred Stock purchased from the Company by an individual purchaser with an aggregate investment of less than $100,000,
(ii) six percent (6%) on those shares of Series G Preferred Stock purchased from the Company by an individual purchaser with an
aggregate investment of at least $100,000 but less than $250,000, and (iii) twelve percent (12%) on those shares of Series G Preferred
Stock purchased from the Company by an individual purchaser with an aggregate investment of at least $250,000. Dividends accruing
on the Series G Preferred Stock shall accrue from day to day until, and shall be paid within fifteen (15) days of, the first anniversary
of, the original issue date of the Series G Preferred Stock; provided, however, if any shares of the Company’s Series E
Preferred Stock are outstanding at such time, payment of the accrued dividends on the Series G Preferred Stock shall be deferred
until no such shares of Series E Convertible Preferred Stock remain outstanding. The Company may pay accrued dividends on the
Series G Preferred Stock in cash or in shares of its common stock equal to the volume weighted average price of the common stock
as reported by the OTCQB for the ten (10) trading days immediately preceding the Series G’s first anniversary.
At
the election of the Company and upon required advanced notice, each share of Series G Preferred Stock will automatically be converted
into shares of common stock at the Conversion Ratio then in effect: (i) if, after 6 months from the original issuance date of
the Series G Preferred Stock, the common stock trades on the OTCQB (or other primary trading market or exchange on which the common
stock is then traded) at a price equal to at least $22.50, for 7 out of 10 consecutive trading days with average daily trading
volume of at least 334 shares, (ii) on or after the first anniversary of the original issuance date of the Series G Preferred
Stock or (iii) upon completion of a firm-commitment underwritten registered public offering by the Company at a per share price
equal to at least $22.50, with aggregate gross proceeds to the Company of not less than $2.5 million. Unless waived under certain
circumstances by the holder of the Series G Preferred Stock, such holder’s Series G Preferred Stock may not be converted
if upon such conversion the holder’s beneficial ownership would exceed certain thresholds.
The
holders of Series G Preferred Stock are not entitled to vote on any matters presented to the stockholders of the Company for their
action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting),
except as required by law.
Series
G Warrants
The
Series G Warrants issued in the Series G Private Placement had an exercise price equal to $15.00 per share and expired on July
6, 2015.
Series
H Convertible Preferred Stock
On
December 28, 2012 the Company amended the Articles of Incorporation to authorize 10,000 shares of Series H Convertible Preferred
Stock. On January 4, 2013, the Company reported that it had entered into a securities purchase and exchange agreement with an
investor, pursuant to which the Company agreed to exchange 33,334 shares of the Company’s common stock, par value $0.01
per share of common stock held by the investor for an aggregate of 10,000 shares of a newly created series of preferred stock,
designated Series H Convertible Preferred Stock, par value $0.01 per share (the “
Series H Preferred Stock
”)
in a non-cash transaction. The investor originally purchased the common stock from the Company for $24.08 per share. The exchange
ratio was 4 shares of common stock per share of Series H Preferred Stock at a stated conversion price of $24.08 per share.
Series
H2 Convertible Preferred Stock
On
December 23, 2014 the Company amended the Articles of Incorporation to authorize 21 shares of Series H2 Convertible Preferred
Stock. On December 23, 2014, the Company reported that it had entered into a securities purchase and exchange agreement with an
investor, pursuant to which the Company agreed to exchange 70,000 shares of the Company’s common stock, par value $0.01
per share of common stock held by the investor for an aggregate of 21 shares of a newly created series of preferred stock, designated
Series H2 Convertible Preferred Stock, par value $0.01 per share (the “
Series H2 Preferred Stock
”) in a non-cash
transaction. The investor originally acquired the common stock from the Company for $7.50 per share in the warrant reset transaction
on December 23, 2014. The exchange ratio was 3,334 shares of common stock per share of Series H2 Preferred Stock at a stated conversion
price of $7.50 per share.
Series
J Convertible Preferred Stock
On
February 6, March 28 and May 20, 2013, the Company entered into a Securities Purchase with various individuals pursuant to which
the Company sold an aggregate of 5,087.5 units for a purchase price of $400.00 per unit (the “Purchase Price”), or
an aggregate Purchase Price of $2,034,700. Each unit purchased in the initial tranche consists of (i) one share of a newly created
series of preferred stock, designated Series J Convertible Preferred Stock, par value $0.01 per share (the “Series J Convertible
Preferred Stock”), convertible into 34 shares of the Company’s common stock, par value $0.01 per share and (ii) a
warrant to purchase 34 shares of common stock at an exercise price equal to $12.00 per share. The warrants expire three years
from the issuance date.
From
the date of issuance of any shares of Series J Convertible Preferred Stock and until the earlier of the first anniversary of such
date, the voluntary conversion of any shares of Series J Convertible Preferred Stock, or the date of any mandatory conversion
(solely under the Company’s control based upon certain triggering events) of the Series J Convertible Preferred Stock, dividends
will accrue on each share of Series J Convertible Preferred Stock at an annual rate of (i) four percent (4%) of the Purchase Price
on those shares of Series J Convertible Preferred Stock purchased from the Company pursuant to the Securities Purchase Agreement
by an individual purchaser who purchased from the Company shares of Series J Convertible Preferred Stock with an aggregate Purchase
Price of less than $250,000, and (ii) six percent (6%) of the Purchase Price on those shares of Series J Convertible Preferred
Stock purchased from the Company pursuant to the Securities Purchase Agreement by an individual purchaser who purchased shares
of Series J Convertible Preferred Stock with an aggregate purchase price of at least $250,000. Dividends accruing on the Series
J Convertible Preferred Stock shall accrue from day to day until the earlier of the first anniversary of the date of issuance
of such shares of Series J Convertible Stock, the voluntary conversion of any shares of Series J Convertible Preferred Stock,
or the date of any mandatory conversion of the Series J Convertible Preferred Stock, and shall be paid, as applicable, within
fifteen (15) days of the first anniversary of the original issue date of the Series J Convertible Preferred Stock, within five
(5) days of the voluntary conversion of shares of the Series J Convertible Preferred Stock, or within five (5) days of the mandatory
conversion of shares of the Series J Convertible Preferred Stock. The Company may pay accrued dividends on the Series J Convertible
Preferred Stock in cash or, in the sole discretion of the Board of Directors of the Company, in shares of its common stock in
accordance with a specified formula.
Each
share of Series J Convertible Preferred Stock is convertible into 34 shares of common stock at the option of the holder on or
after the six-month anniversary of the issuance of such share, subject to adjustment for stock splits, stock dividends, recapitalizations
and similar transactions (the “Conversion Ratio”). Unless waived under certain circumstances by the holder of Series
J Convertible Preferred Stock, such holder’s shares of Series J Convertible Preferred Stock may not be converted if upon
such conversion the holder’s beneficial ownership would exceed certain thresholds.
At
the election of the Company and upon required advance notice, each share of Series J Convertible Preferred Stock will automatically
be converted into shares of common stock at the Conversion Ratio then in effect: (i) on or after the six-month anniversary of
the original issuance date of the Series J Convertible Preferred Stock, the common stock trades on the OTCQB (or other primary
trading market or exchange on which the common stock is then traded) at a price per share equal to at least $24.00 for 7 out of
10 consecutive trading days with average daily trading volume of at least 1,667 shares, (ii) on the first anniversary of the original
issuance date of the Series J Convertible Preferred Stock or (iii) within three days of the completion of a firm-commitment underwritten
registered public offering by the Company at a per share price equal to at least $24.00, with aggregate gross proceeds to the
Company of not less than $2.5 million. Unless waived under certain circumstances by the holder of the Series J Convertible Preferred
Stock, such holder’s Series J Convertible Preferred Stock may not be converted if upon such conversion the holder’s
beneficial ownership would exceed certain thresholds.
The
holders of Series J Convertible Preferred Stock are not entitled to vote on any matters presented to the stockholders of the Company
for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu
of meeting), except as required by law.
Series
J Warrants
The
Series J Warrants issued in the Series J Private Placement had an exercise price equal to $12.00 per share and expired on February
6, March 28 and May 20, 2016.
Registration
Rights Agreement
In
connection with the Private Placement, the Company has agreed that, if, at any time after February 1, 2014, the Company files
a Registration Statement relating to an offering of equity securities of the Company (the “Registration Statement”),
subject to certain exceptions, including a Registration Statement relating solely to an offering or sale of securities having
an aggregate public offering price of less than $5,000,000, the Company shall include in the Registration Statement the resale
of the shares of common stock underlying the Warrants. Shares of common stock issued upon conversion of Series J Convertible Preferred
Stock or in payment of the dividend on the Series J Convertible Preferred Stock will not be registered and will not be subject
to registration rights. This right is subject to customary conditions and procedures.
Series
K Convertible Preferred Stock
On
December 12, 2013, the Company entered into a Securities Purchase with various individuals pursuant to which the Company sold
an aggregate of 4,000 units for a purchase price of $250.00 per unit (the “Purchase Price”), for an aggregate Purchase
Price of $1,000,000. Each unit purchased in the initial tranche consists of (i) one share of a newly created series of preferred
stock, designated Series K Convertible Preferred Stock, par value $0.01 per share (the “Series K Convertible Preferred Stock”),
convertible into 34 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 17 shares
of common stock at an exercise price equal to $9.38 per share. The warrants expired three years from the issuance date.
Of the $1,000,000 invested in the Private Placement, $572,044 was received in cash and $427,956 was from the conversion of outstanding
indebtedness and interest. The Company incurred $43,334 of fees in conjunction with this private placement. The purchasers in
the initial tranche of the private placement consisted of certain existing and new investors in the Company as well as all of
the members of the Company’s Board of Directors.
From
the date of issuance of any shares of Series K Convertible Preferred Stock and until the earlier of the first anniversary of such
date, the voluntary conversion of any shares of Series K Convertible Preferred Stock, or the date of any mandatory conversion
(solely under the Company’s control based upon certain triggering events) of the Series K Convertible Preferred Stock, dividends
will accrue on each share of Series K Convertible Preferred Stock at an annual rate of (i) four percent (4%) of the Purchase Price
on those shares of Series K Convertible Preferred Stock purchased from the Company pursuant to the Securities Purchase Agreement
by an individual purchaser who purchased from the Company shares of Series K Convertible Preferred Stock with an aggregate Purchase
Price of less than $100,000, and (ii) six percent (6%) of the Purchase Price on those shares of Series K Convertible Preferred
Stock purchased from the Company pursuant to the Securities Purchase Agreement by an individual purchaser who purchased shares
of Series K Convertible Preferred Stock with an aggregate purchase price of at least $100,000. Dividends accruing on the Series
K Convertible Preferred Stock shall accrue from day to day until the earlier of the first anniversary of the date of issuance
of such shares of Series K Convertible Stock, the voluntary conversion of any shares of Series K Convertible Preferred Stock,
or the date of any mandatory conversion of the Series K Convertible Preferred Stock, and shall be paid, as applicable, within
fifteen (15) days of the first anniversary of the original issue date of the Series K Convertible Preferred Stock, within five
(5) days of the voluntary conversion of shares of the Series K Convertible Preferred Stock, or within five (5) days of the mandatory
conversion of shares of the Series K Convertible Preferred Stock. The Company may pay accrued dividends on the Series K Convertible
Preferred Stock in cash or, in the sole discretion of the Board of Directors of the Company, in shares of its common stock in
accordance with a specified formula.
Each
share of Series K Convertible Preferred Stock is convertible into 34 shares of common stock at the option of the holder on or
after the six-month anniversary of the issuance of such share, subject to adjustment for stock splits, stock dividends, recapitalizations
and similar transactions (the “Conversion Ratio”). Unless waived under certain circumstances by the holder of Series
K Convertible Preferred Stock, such holder’s shares of Series K Convertible Preferred Stock may not be converted if upon
such conversion the holder’s beneficial ownership would exceed certain thresholds.
At
the election of the Company and upon required advance notice, each share of Series K Convertible Preferred Stock will automatically
be converted into shares of common stock at the Conversion Ratio then in effect: (i) on or after the six-month anniversary of
the original issuance date of the Series K Convertible Preferred Stock, the common stock trades on the OTCQB (or other primary
trading market or exchange on which the common stock is then traded) at a price per share equal to at least $24.00 for 7 out of
10 consecutive trading days with average daily trading volume of at least 1,667 shares, (ii) on the first anniversary of the original
issuance date of the Series K Convertible Preferred Stock or (iii) within three days of the completion of a firm-commitment underwritten
registered public offering by the Company at a per share price equal to at least $24.00, with aggregate gross proceeds to the
Company of not less than $2.5 million. Unless waived under certain circumstances by the holder of the Series K Convertible Preferred
Stock, such holder’s Series K Convertible Preferred Stock may not be converted if upon such conversion the holder’s
beneficial ownership would exceed certain thresholds.
The
proceeds from the sale of each Series K Unit were allocated between the Series K Convertible Preferred Stock and the Series K
Warrants based on the relative fair value method. The estimated fair value of the Series K Warrants was determined using a Black-Scholes
formula, resulting in an allocation of the gross proceeds of $271,422 to the total warrants issued. The allocation of the gross
proceeds to the Series K Convertible Preferred Stock was $685,245, net of $43,334 in fees. In accordance with the provisions of
ASC 470-20, an additional adjustment in the aggregate between Additional Paid in Capital and Accumulated Deficit of $1,495,415
was recorded for all tranches of Series K to reflect an implicit, deemed non-cash dividend related to the allocation of proceeds
between the stock and warrants issued. The $1,495,415 represents the aggregate value of the adjustment to additional paid in capital
related to the beneficial conversion feature of the Series K Convertible Preferred Stock. The value adjustment was calculated
by subtracting the fair market value of the underlying common stock on the closing dates issuable upon conversion of the Series
K Convertible Preferred Stock from the fair market value of the Series K Convertible Preferred Stock as determined when the Company
performed a fair market value allocation of the proceeds to the Series K Convertible Preferred Stock and warrants.
On
January 29, 2014, the Company entered into a Securities Purchase Agreement with various accredited investors, pursuant to which
the Company sold an aggregate of 4,875 units for a purchase price of $250.00 per unit or an aggregate Purchase Price of $1,218,750.
This was the second tranche of a $1.5 million private placement previously disclosed by the Company in its Current Report on Form
8-K filed with the Securities and Exchange Commission on December 12, 2013, which is incorporated by reference herein. The Purchasers
in the second tranche of the Private Placement consisted of certain existing and new investors in the Company, as well as all
of the members of the Company’s board of directors.
Each
unit purchased in the second tranche consists of (i) one share of Series K Convertible Preferred Stock, par value $0.01 per share,
convertible into 34 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 17 shares
of common stock at an exercise price equal to $9.38 per share, with a term that expired on January 29, 2017.
On
February 28, 2014, the Company entered into a Securities Purchase Agreement with various accredited investors, pursuant to which
the Company sold an aggregate of 1,854 units for a purchase price of $340.00 per unit or an aggregate Purchase Price of $630,360.
This was the third tranche of a $1.5 million private placement previously disclosed by the Company in its Current Report on Form
8-K filed with the Securities and Exchange Commission on December 12, 2013, which is incorporated by reference herein. The Purchasers
in the third tranche of the Private Placement consisted of certain existing and new investors in the Company.
Each
unit purchased in the third tranche consists of (i) one share of Series K Convertible Preferred Stock, par value $0.01 per share
convertible into 34 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 17 shares
of common stock at an exercise price equal to $12.75 per share, with a term that expired on February 28, 2017.
On
June 30, 2014, the Company entered into a Securities Purchase Agreement with various accredited investors, pursuant to which the
Company sold an aggregate of 734 units for a purchase price of $300.00 per unit or an aggregate Purchase Price of $220,000. This
was the fourth tranche of a $1.5 million private placement previously disclosed by the Company in its Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 12, 2013, which is incorporated by reference herein. The Purchasers
in the fourth tranche of the Private Placement consisted of certain existing and new investors in the Company.
Each
unit purchased in the fourth tranche consists of (i) one share of Series K Convertible Preferred Stock, par value $0.01 per share
convertible into 34 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 17 shares
of common stock at an exercise price equal to $11.25 per share, with a term that expired on June 30, 2017.
On
November 12, 2014, the Company entered into a Securities Purchase Agreement with various accredited investors, pursuant to which
the Company sold an aggregate of 1,052 units for a purchase price of $250.00 per unit or an aggregate Purchase Price of $263,000.
This was the fifth tranche of a $1.5 million private placement previously disclosed by the Company in its Current Report on Form
8-K filed with the Securities and Exchange Commission on December 12, 2013, which is incorporated by reference herein. The Purchasers
in the fourth tranche of the Private Placement consisted of certain existing and new investors in the Company.
Each
unit purchased in the fifth tranche consists of (i) one share of Series K Convertible Preferred Stock, par value $0.01 per share
convertible into 34 shares of the Company’s common stock, par value $0.01 per share and (ii) a warrant to purchase 17 shares
of common stock at an exercise price equal to $9.38 per share, with a term that expired on November 12, 2017.
The
Private Placement was originally expected to raise $1.5 million and close on or before January 31, 2014. On January 29, 2014,
the Company’s Board of Directors voted to increase the subscription amount of the Private Placement by $718,750. The Board
of Directors also voted to extend the Private Placement until February 28, 2014. On February 28, 2014 the Company’s Board
of Directors voted to increase the subscription amount once again to a total of $3.5 million and extended the closing to April
4, 2014. On April 13, 2014 the Company’s Board of Directors voted to increase the subscription amount by $1 million, to
a total of $4.5 million, and extended the closing to May 31, 2014. On July 7, 2014 the Company’s Board of Directors voted
to extend the closing to August 15, 2014. Together with the initial tranche of $1,000,000 that closed on December 12, 2013, the
second tranche of $1,218,750 that closed January 29, 2014, the third tranche of $630,360 that closed February 28, 2014, the fourth
tranche of $220,000 that closed June 30, 2014, and the fifth tranche of $263,000 that closed November 12, 2014,the total consideration
received by the Company in the Private Placement is $3,332,110, which is comprised of $2,511,404 in cash and $820,706 from the
conversion of outstanding indebtedness and Board of Director fees. The placement was closed after the November 12, 2014 round.
On
September 22, 2014 the Company issued 2,134 shares of common stock for the conversion of 64 shares of Series K Preferred Convertible
Stock. In 2017, the Company returned 64 shares of Series K Preferred Convertible Stock as issued and outstanding. The conversion
was done erroneously. The Company agreed to allow the recipient to keep the 2,134 shares of common stock, with a fair value
of $15,992, as issued for services to be rendered in 2018 for the Company.
In
connection with the Series K Warrants, we calculated the fair value of the warrants received as described above using the Black-
Scholes formula with the below assumptions:
Assumptions
|
|
Series
K
Warrants
December 12, 2013
|
|
|
Series
K
Warrants
January 29, 2014
|
|
|
Series
K
Warrants
February 28, 2014
|
|
|
Series
K
Warrants
June 30, 2014
|
|
|
Series
K
Warrants
November 12, 2014
|
|
Contractual
life (in months)
|
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
Expected
volatility
|
|
|
136.1
|
|
|
|
152.4
|
|
|
|
152.7
|
|
|
|
153.9
|
|
|
|
153.9
|
|
Risk-free
interest rate
|
|
|
0.39
|
%
|
|
|
0.39
|
%
|
|
|
0.39
|
%
|
|
|
0.90
|
%
|
|
|
0.90
|
%
|
Exercise
price
|
|
$
|
9.38
|
|
|
$
|
9.38
|
|
|
$
|
12.75
|
|
|
$
|
11.25
|
|
|
$
|
9.38
|
|
Fair
value per warrant
|
|
$
|
6.00
|
|
|
$
|
9.00
|
|
|
$
|
11.10
|
|
|
$
|
8.70
|
|
|
$
|
6.90
|
|
The
holders of Series K Convertible Preferred Stock are not entitled to vote on any matters presented to the stockholders of the Company
for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu
of meeting), except as required by law.
Series
K Warrants
The
warrants issued in the Private Placement have an exercise price equal to $9.38 per share, for the December 12, 2013 and January
29, 2014 warrants, $12.75 per share for the February 28, 2014 warrants, $11.25 per share for the June 30, 2014 warrants and $9.38
per share for the November 12, 2014 warrants, with a term expiring three years from the issuance date. The warrants also permit
the holder to conduct a “cashless exercise” at any time the holder of the warrant is an affiliate of the Company.
The exercise price and/or number of shares issuable upon exercise of the warrants will be subject to adjustment for stock dividends,
stock splits or similar capital reorganizations, as set forth in the warrant agreement.
Subject
to the terms and conditions of the warrants, at any time commencing six months from the closing date of the sale of Units under
the Securities Purchase Agreement 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 either (i) 10 consecutive trading days or (ii)
15 out of 25 consecutive trading days. All Series K warrants have expired.
Registration
Rights Agreement
In
connection with the Private Placement, the Company has agreed that, if, at any time after February 1, 2014, the Company files
a Registration Statement relating to an offering of equity securities of the Company (the “Registration Statement”),
subject to certain exceptions, including a Registration Statement relating solely to an offering or sale of securities having
an aggregate public offering price of less than $5,000,000, the Company shall include in the Registration Statement the resale
of the shares of common stock underlying the warrants. Shares of common stock issued upon conversion of Series K Convertible Preferred
Stock or in payment of the dividend on the Series K Convertible Preferred Stock will not be registered and will not be subject
to registration rights. This right is subject to customary conditions and procedures.
Common
Stock
Stock
Options and Warrants
Our
stockholders approved our amended 2005 Equity Incentive Plan (the “
2005 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 2005 Plan. Under the 2005 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 December 31, 2017, options to acquire 35,274 shares were outstanding under the 2005 Plan.
On
December 12, 2013 at the Company’s 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. 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 December 31, 2017, options to acquire 82,481 shares were outstanding under the Plan with 2,917,519 shares
available for future grant under the 2013 Plan.
On
November 29, 2015 the Company’s Board of Directors adopted the 2015 Nonqualified Stock Option Plan (the “
2015 Plan
”)
pursuant to which 5,000,000 shares of our common stock were reserved for issuance upon exercise of non-qualified stock options
under the 2015 Plan. Under the 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 December 31, 2017, non-qualified
options to acquire 129,937 shares were outstanding under the Plan with 4,870,063 shares available for future grants under the
2015 Plan.
All
of the outstanding non-qualified options had an exercise price that was at or above the Company’s common stock share price
on December 31, 2017.
The
following tables summarize information concerning options and warrants outstanding and exercisable:
|
|
Stock
Options
|
|
|
Warrants
|
|
|
Total
|
|
|
|
Shares
|
|
|
Weighted
Average
price per
share
|
|
|
Shares
|
|
|
Weighted
Average
price per
share
|
|
|
Shares
|
|
|
Exercisable
|
|
Balance
outstanding, January 1, 2016
|
|
|
185,708
|
|
|
$
|
13.20
|
|
|
|
974,256
|
|
|
$
|
13.20
|
|
|
|
1,159,964
|
|
|
|
1,055,483
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
272,652
|
|
|
|
12.60
|
|
|
|
272,652
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,334
|
)
|
|
|
9.30
|
|
|
|
(2,334
|
)
|
|
|
|
|
Expired
|
|
|
(6,200
|
)
|
|
|
30.00
|
|
|
|
(362,585
|
)
|
|
|
16.50
|
|
|
|
(368,785
|
)
|
|
|
|
|
Forfeited
|
|
|
(3,866
|
)
|
|
|
15.30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,866
|
)
|
|
|
|
|
Balance
outstanding, December 31, 2016
|
|
|
175,642
|
|
|
$
|
12.60
|
|
|
|
881,989
|
|
|
$
|
12.00
|
|
|
|
1,057,631
|
|
|
|
991,032
|
|
Granted
|
|
|
87,198
|
|
|
|
8.40
|
|
|
|
245,661
|
|
|
|
11.14
|
|
|
|
332,859
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,889
|
)
|
|
|
7.50
|
|
|
|
(19,889
|
)
|
|
|
|
|
Expired
|
|
|
(3,202
|
)
|
|
|
30.00
|
|
|
|
(208,219
|
)
|
|
|
11.46
|
|
|
|
(211,421
|
)
|
|
|
|
|
Forfeited
|
|
|
(11,946
|
)
|
|
|
9.82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,946
|
)
|
|
|
|
|
Balance
outstanding, December 31, 2017
|
|
|
247,692
|
|
|
$
|
10.95
|
|
|
|
899,542
|
|
|
$
|
12.03
|
|
|
|
1,147,234
|
|
|
|
1,073,850
|
|
|
|
|
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
|
|
|
|
133,580
|
|
|
|
8.3
|
|
|
$
|
8.63
|
|
|
|
80,997
|
|
|
|
7.7
|
|
|
$
|
8.78
|
|
|
12.00
– 14.99
|
|
|
|
88,705
|
|
|
|
7.7
|
|
|
|
12.00
|
|
|
|
67,904
|
|
|
|
7.6
|
|
|
|
12.00
|
|
|
15.00
– 17.99
|
|
|
|
7,547
|
|
|
|
4.6
|
|
|
|
15.00
|
|
|
|
7,547
|
|
|
|
4.6
|
|
|
|
15.00
|
|
|
18.00
– 20.99
|
|
|
|
12,854
|
|
|
|
2.1
|
|
|
|
18.00
|
|
|
|
12,854
|
|
|
|
2.1
|
|
|
|
18.00
|
|
|
21.00
– 30.00
|
|
|
|
5,006
|
|
|
|
2.7
|
|
|
|
30.00
|
|
|
|
5,006
|
|
|
|
2.7
|
|
|
|
30.00
|
|
$
|
7.50
- $30.00
|
|
|
|
247,692
|
|
|
|
7.5
|
|
|
$
|
10.95
|
|
|
|
174,308
|
|
|
|
7.0
|
|
|
$
|
11.59
|
|
There
was $392,590 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock options granted
as of December 31, 2017. This cost is expected to be recognized over a period of 1.66 years, and will be adjusted for any future
changes in estimated forfeitures.
The
Series D Warrants issued in connection with the registered direct offering of Series D Convertible Preferred were measured
at fair value and liability-classified because the Series D 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 the gross
proceeds $171,733 to the warrants issued in the Series D registered direct offering. The fair value was 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 early adopted ASU 2017-11 and applied the guidance to derivative accounting. Therefore, we reclassified the
warrant and conversion option liabilities to equity and stopped fair valuing the instruments in 2017.
In
connection with the senior secured convertible debentures issued in our private placement with closings in 2015 and 2016, we issued
warrants to the lenders to purchase an aggregate 292,262 and 83,902 shares of the Common Stock, respectively, at an exercise price
of $12.00 per share, expiring five years after the issuance date. We also issued, in 2015 and 2016, warrants to the placement
agent to purchase an aggregate 56,310 and 13,750 shares of the Common Stock, respectively, at an exercise price of $12.00 per
share, expiring five years after the issuance date.
In
November 2016 we issued warrants to purchase 11,000 shares of restricted common stock to an investor relations firm for services
rendered with a total fair value of $84,735.
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 63 shares of Series J Convertible Preferred Stock into 2,100 shares of common stock.
On
various dates for the year ended December 31, 2017, the Company issued 61,307 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 June 30, 2017 for an aggregate amount of $483,054. We recognized a $218,452 gain on extinguishment of debt by calculating
the difference of the shares valued on the issuance date and the amount of accrued interest through June 30, 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 year ended December 31, 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. As of December 31, 2017, the outstanding balance on this note was zero. We have
issued 8,333 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 $8,950 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 year ended December 31, 2017.
On
December 11, 2017 the Company issued 2,500 shares with a fair value of $9,500 to a noteholder for an extension on a loan of
$170,000 until February 15, 2018.
On
December 12, 2017, we issued 150,000 shares of restricted common stock in connection with the acquisition of assets of BaroFold
Corp. We recorded the common stock’s fair value of $600,000 as part of Intangibles cost in the consolidated balance sheets.
On
December 31, 2017, the Company awarded 2,134 shares of common stock for services to be rendered in 2018 for the Company.
During
the quarter ended December 31, 2017, the Company issued 9,700 shares of common stock on its convertible notes. The relative fair
value of these notes totaling $37,435 was recognized as a debt discount to the notes (see Note 9).
(11)
Subsequent Events
During
the three months ended March 31, 2018, we issued to Debenture holders 12,494 shares of common stock for quarterly interest of
$52,371 issued in stock in lieu of cash. Of the 12,494 shares issued, 1,092 shares were issued to members of the Company’s
Board of Directors, who are also Debenture holders.
On
various dates in March 2018, we received six-month, convertible loans of $150,000 from three accredited investors. The loans include
a 10% original issue discount and are convertible into a qualified offering at the deal price.
On
March 14, 2018, we received a three month, non-convertible loan of $50,000 from a related party who was a member of the Company’s
Board of Directors.
On
March 12, 2018, we received a six-month, convertible loan of $253,000 from an accredited investor. The loan has an original issue
discount of $53,000. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue
the investor 6,750 shares of restricted common stock.
On
March 12, 2018, we received a six-month convertible loan of $85,000 from a privately-held investment firm. The Company paid total
fees of $5,400 related to this loan.
The Revolving Note
was further amended on January 30, 2018 to increase the aggregate principal amount to $4,000,000 with all other terms unchanged.
We received the additional $500,000 advances in January and March 2018.
On
February 22, 2018 we signed a Merchant Agreement with a lender. Under the agreement we received $110,000 in exchange for rights
to all customer receipts until the lender is paid $147,400, which is collected at the rate of $921.25 per business day. The payments
were secured by second position rights to all customer receipts until the loan has been paid in full.
On
February 12, 2018, we received a six-month, convertible loan of $100,000 from an accredited investor. The loan earns a one-time
interest of 10%. $50,000 of the proceeds were used to pay off the outstanding balance of a previous loan from this lender. The
loan can be converted at any time into common stock at a conversion price of $7.50. We issued the investor 5,000 shares of
restricted common stock.
On
February 12, 2018, we issued 3,500 shares of restricted common stock to an accredited investor to extend the maturity date of
our eight-month, non-convertible loan of $170,000 originated on March 21, 2017 to February 15, 2018. The accredited investor agreed
to a further extension to March 31, 2018 in exchange for 3,500 shares of restricted common stock yet to be issued.
On
January 19, 2018, we received a six-month, convertible loan of $150,000 from an accredited investor. The loan earns a one-time
interest of 10% and includes a 10% original issue discount. We also issued the investor 4,000 shares of restricted common
stock. The loan can be converted at any time into common stock at a conversion price of $7.50.
On
January 16, 2018, we received a one year, convertible loan of $131,250 from an accredited investor. The loan earns interest of
4% per year. The loan can be converted into common stock after 180 calendar days at a discount of 40% to market price as defined
in the loan.
On
January 3, 2018, we received a one year, convertible loan of $95,000 from an accredited investor. The loan includes a 5% original
issue discount. The loan can be converted into common stock after 180 calendar days at a discount of 40% to market price as defined
in the loan.