Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company was originally incorporated on April 23, 2002 in Minnesota as BioDrain Medical,
Inc. Effective August 6, 2013, the Company changed its name to Skyline Medical Inc. Pursuant to an Agreement and Plan of Merger
effective December 16, 2013, the Company merged with and into a Delaware corporation with the same name that was its wholly-owned
subsidiary, with such Delaware Corporation as the surviving corporation of the merger. On August 31, 2015, the Company completed
a successful offering and concurrent uplisting to The NASDAQ Capital Market. On February 1, 2018, we filed with the Secretary of
State of Delaware a Certificate of Amendment to our Certificate of Incorporation to change our corporate name from Skyline Medical
Inc. to Precision Therapeutics Inc., effective February 1, 2018. Because of this change, our common stock trades under the new
ticker symbol “AIPT,” effective February 2, 2018.
We are a healthcare products and services company that is expanding its business to take
advantage of emerging areas of the dynamic healthcare market through sales of its products, through its partnership with Helomics
Holding Corporation (“Helomics”) a pioneering Contract Research Organization (“CRO”) Services company and
through pursuit of other strategic relationships to build value. In our STREAMWAY business we manufacture an environmentally conscious
system for the collection and disposal of infectious fluids that result from surgical procedures and post-operative care.
Since our inception in 2002, we have invested significant resources into product development. We believe that our success
depends upon converting the traditional process of collecting and disposing of infectious fluids from the operating rooms of medical
facilities to our wall-mounted Fluid Management System (“System”) and use of our proprietary cleaning solution and
bifurcated filter. We have acquired 25% of the capital stock of Helomics, and we have announced that we have a letter of intent
for a proposed merger transaction to acquire the remaining ownership of Helomics. In addition, we have formed a wholly-owned subsidiary,
TumorGenesis Inc., to develop the next generation, patient derived tumor models for precision cancer therapy and drug development.
We currently have a Vice President of Sales, one in house sales person, five regional
sales managers, and a Vice President of International Sales to sell the STREAMWAY System. We have hired a regional sales representative
in Q1 2018 to sell the STREAMWAY in Germany. We have also hired 3 independent contractors to further represent the Company in certain
regions of the United States. We have contracted with two General Purchasing Organizations in the United States, Vizient and
Intalere, providing customer exposure to more than 10,000 hospitals. The Company has contracted with Alliant Enterprises, LLC,
a Service Disabled Veterans Owned Small Business supplier to the federal government. We have executed contracts with three international
distributors. Quadromed, is a Canadian distributor who will represent us throughout the entire Canadian country over the next two
years, with annual automatic renewals. MediBridge Sarl, is a Swiss distributor representing us in Switzerland entirely over the
next two years, with annual automatic renewals. Device Technologies Australia PTY LTD, is an Australian distributor representing
us throughout Australia, New Zealand, Fiji and the Pacific Islands over the next five years with annual automatic renewals.
Since inception, we have been unprofitable. We incurred net losses of approximately $1.8
million and $1.3 million for the quarters ended March 31, 2018, and March 31, 2017, respectively. As of March 31, 2018, and March
31, 2017, we had an accumulated deficit of approximately $56.5 million and $48.3 million, respectively. We received approval from
the FDA in April 2009 to commence sales and marketing activities of the STREAMWAY System and shipped the first system in 2009.
However, there was no significant revenue prior to 2011, primarily due to lack of funds to build and ship the product.
In the first quarter of 2014, the Company commenced sales of an updated version of the
STREAMWAY System, which provide a number of enhancements to the existing product line including a more intuitive and easier to
navigate control screen, data storage capabilities, and additional inlet ports on the filters, among other improvements. This updated
version utilizes improved technology, including the capability for continuous flow and continuous suctioning, as covered by our
provisional patent application filed in 2013 and our non-provisional patent application filed in January 2014. We have sold one
hundred twenty-three STREAMWAY units through March 2018, and have since sold another two units for a total of one hundred twenty-five
units to date.
We expect the revenue for STREAMWAY System units to increase significantly at such time
as the hospitals approve the use of the units for their applications and place orders for billable units. We also expect an increase
in trial based units. Trial basis units are either installed in or hung on the hospital room wall. The unit is connected to the
hospital plumbing and sewer systems, as well as, the hospital vacuum system. The unit remains on the customer site for 2 –
4 weeks, as contracted, at no cost to the customer. However, the customer does purchase the disposable kits necessary to effectively
operate the units. Once the trial period has expired the unit is either returned to the Company or purchased by the customer. If
purchased, at that time, the Company invoices the customer based upon a contracted price negotiated prior to the trial.
We have never generated sufficient revenues to fund our capital requirements. We have
funded our operations through a variety of debt and equity instruments. See “Liquidity and Capital Resources – Liquidity,
Plan of Financing and Going Concern Qualification” and “Liquidity and Capital Resources – Financing Transactions”
below.
Our future cash requirements and the adequacy of available funds depend on our ability
to sell our products and the availability of future financing to fulfill our business plans. We have committed significant capital
and management resources to developing our CRO business and other new business areas, including approving $668,000 in financing
to Helomics and advancing $1,070,000 to CytoBioscience. It is likely that we will make further investments and advances in other
businesses as we develop our CRO business and other business models. See “Plan of Financing; Going Concern Qualification”
below.
As a company, our limited history of operations makes prediction of future operating
results difficult. We believe that period to period comparisons of our operating results should not be relied on as predictive
of our future results.
Results of Operations
Revenue.
The Company recognized $412,000 of revenue in the three months ended
March 31, 2018 compared to $175,000 in revenue in the three months ended March 31, 2017, an increase of 135%. There were 16 sales
of STREAMWAY units in the 2018 period. Our strategy in ramping up our sales efforts is to hire additional sales representatives
to have a greater revenue effect in the future quarters.
Cost of sales.
Cost of sales in the three months ended March 31, 2018 was $117,000
and $37,000 in the three months ended March 31, 2017. The gross profit margin was approximately 71% in the three months ended March
31, 2018, compared to 79% in the prior year. Our margins were reduced in 2018 due to higher costs. Eventually, increased sales
will allow us to achieve volume purchasing discounts on both equipment components and our cleaning solution.
General and Administrative expense.
General and administrative expense primarily
consists of management salaries, professional fees, consulting fees, travel expense, administrative fees and general office expenses.
General and Administrative (G&A) expenses increased by $84,000 from the three months
ended March 31, 2018 compared to March 31, 2017. The increase in the three-month period was primarily due to $418,000 in investor
relation expenses incurred from preferred stock conversions for cash from the private placement raise initiated in November 2017
and expenses related to the public offering completed in January 2018. Our legal fees increased by $136,000 predominantly related
to the public offering; stock based compensation increased by $43,000 because of employee stock options vesting in the first quarter;
recruiting fees increased by $9,000 through hiring our new Vice President of Sales and Marketing; corporate insurance was higher
by $9,000 and travel increased by $10,000. Offsets were predominantly from a $488,000 decrease in investors stock expense due to
warrant vesting in the 2017 period; additionally, our franchise taxes were reduced by $33,000, and our accounting fees decreased
by $11,000. There were other miscellaneous offsets aggregating $9,000.
Operations expense.
Operations expense primarily consists of expenses related
to product development and prototyping and testing in the company’s current stage.
Operations expense increased by $87,000 in the three months ended March 31, 2018 compared
to the three months ended March 31, 2017. Increases consisted of $50,000 toward stock based compensation for employee options vesting
in the first quarter; salary increasing by $23,000, research and development increasing by $10,000 and consulting increasing by
$6,000 for additional software technology on the STREAMWAY System.
Sales and Marketing expense.
Sales and marketing expense consists of expenses
required to sell products through independent reps, attendance at trades shows, product literature and other sales and marketing
activities
.
Sales and marketing expenses increased by $403,000 in the three months ended March 31,
2018 compared to the three months ended March 31, 2017. The increase in 2018 resulted from expanding our sales force leading to
a $92,000 increase in payroll, taxes and benefits; accordingly, travel expenses were increased as well by $33,000, and commissions
were higher by $66,000 due to increased sales in 2018. Additionally, stock based compensation increased by $34,000 due to employee
stock options vesting in the first quarter; we incurred $115,000 in increased expenses for developing our new website; public relations
increased by $36,000 in an expansive effort to inform our shareholders and the public about our company’s strategic direction;
marketing research increased by $20,000 as we hired a firm to provide further analysis to the shareholders and the public regarding
our strategic direction; and, consulting increased by $4,000.
Interest expense.
There was no interest expense in the first three months of either
2018 or 2017.
Liquidity and Capital Resources
Payment Obligations Under Separation Agreement With Former CEO
Effective May 5, 2016, Joshua Kornberg resigned as the Chief Executive Officer and President
and an employee of the Company. In connection with Mr. Kornberg’s resignation, the Company and Mr. Kornberg entered into
a separation agreement on June 13, 2016 (the “Separation Agreement”). Pursuant to the Separation Agreement, on July
15, 2016, the Company was required to pay Mr. Kornberg: (a) $15,433.20 less any required tax withholdings in a lump sum on July
15, 2016; and (b) $75,000 less any required tax withholdings on July 15, 2016. The Company is required to pay Mr. Kornberg an additional
$75,000 less any required tax withholdings payable in 6 monthly installments of $12,500, due on the first regular payday of each
month, starting on August 15, 2016; and an additional $450,000 less any required tax withholdings payable in 11 monthly installments
of $40,909, due on the first regular payday of each month, starting on February 15, 2017. The Company issued to Mr. Kornberg a
restricted stock award (the “Award”) under the Company’s stock incentive plan consisting of 20,000 shares. The
award vested on July 15, 2016. The value of the award for purposes of the Separation Agreement (the “Award Value”)
is $90,350.61, based on a ten-day volume-weighted average closing sale price per share of the Company’s common stock. Mr.
Kornberg agreed that the withholding taxes in connection with the Award will be offset against cash payments otherwise due to him
in four monthly installments. In addition, the Company agreed, at its option, to pay Mr. Kornberg $309,649 (the “Additional
Cash Amount”), equal to the difference between $400,000 and the Award Value, payable in equal monthly installments of $40,909,
due on the first regular payday of each month, starting on January 15, 2018, less any required tax withholding, and the Company’s
payment obligations will be completed in August 2018. Under the Separation Agreement, the Company made payments of $122,727 and
$122,727 in the three months ended 2018 and 2017, respectively. Under the Separation Agreement, all of Mr. Kornberg’s outstanding
stock options and outstanding restricted stock prior to the date of the Separation Agreement were canceled, consisting of options
to purchase 22,085 shares and 2,667 shares of restricted stock. The Separation Agreement included a waiver and release of claims
by Mr. Kornberg. He will also continue to be bound by the terms of any restrictive covenant agreements he had with the Company.
Cash Flows
Net cash used in operating activities was $1,694,318 for the three months ended March
31, 2018 compared with net cash used of $1,156,208 for the 2017 period. The $538,000 increase in cash used in operating activities
was primarily due to the increased net loss in 2018, and increases in receivables and decreases in vested options and warrants,
partially offset by an increase to payables and a decrease in prepaid accounts.
Cash flows provided by investing activities was $145,629 for the three months ended March
31, 2018 and used in investing activities was $2,336,412 for the three months ended March 31, 2017. The Company redeemed
certificates of deposit in 2018, which was offset by an increase in notes receivable, fixed assets and intangible asset purchases.
Net cash provided by financing activities was $3,015,303 for the three months ended
March 31, 2018 compared to net cash provided of $3,814,938 for the three months ended March 31, 2017. The cash provided came from
the net proceeds of the January 2018 public offering and the over-allotment option exercise by the underwriter.
Capital Resources
Our cash and cash equivalents were approximately $2,233,000 as of March 31, 2018. We
had a cash balance of $1,684,000 as of March 31, 2018, with the remainder of our cash equivalents in money market accounts. Since
our inception, we have incurred significant losses. As of March 31, 2018, we had an accumulated deficit of approximately $56,525,000.
From inception to March 31, 2018, our operations have been funded
through a bank loan and private convertible debt of approximately $5,435,000 and equity investments totaling approximately $35,840,000.
In the first quarter of 2018, we recognized $412,000 in revenues. Our product sales since
the end of the first quarter have resulted in approximately $68,000 in revenues.
Plan of Financing; Going Concern Qualification
Since our inception, we have incurred significant losses, and our accumulated deficit
was approximately $56.5 million as of March 31, 2018. Our operations from inception have been funded with private placements of
convertible debt securities and equity securities, in addition to a past bank loan (not currently outstanding) and various public
and private offerings. These included (1) a public offering raising net proceeds of $13,555,003 in 2015, (2) a registered direct
offering for net proceeds of $1,739,770 in November 2016,(3) an underwritten public offering that raised net proceeds of $3,439,125
in January 2017, with an additional over-allotment option that was exercised by the underwriter netting the Company $356,563,
(4) a private placement that raised $1,300,000 in gross proceeds in November 2017, and (5) a firm commitment underwritten public
offering that raised $2,755,087 in net proceeds in January 2018, with an additional over-allotment option that was exercised by
the underwriter netting the Company $204,422.
We have not achieved profitability and anticipate that we will continue to incur net losses at least for
the foreseeable future.
We had revenues of $412,000 in the first quarter of 2018, but we had negative operating
cash flows of $1.7 million. The negative cash flow is heavily impacted by our first quarter loss, which was largely made up of
$418,000 of expenses for the public offering completed in 2018 and a final cash payment of approximately $189,000 for conversion
of our convertible preferred stock issued in the private placement in November 2017; vesting expenses for employee options totaling
$226,000 and a one-time expense for $115,000 to develop our new website. Our cash balance was $1,683,552 as of March 31, 2018,
with $549,000 in cash equivalents, and our accounts payable and accrued expenses were an aggregate $745,000. We are currently
incurring negative operating cash flows of approximately $385,000 per month, though the first quarter operated at a higher rate
due to unusual expenses. Although we are attempting to curtail our expenses, there is no guarantee that we will be able to reduce
these expenses significantly, and expenses for some periods may be higher as we prepare our product for broader sales, increase
our sales efforts and maintain adequate inventories.
We will require additional funding to finance our CRO business and other new business areas, as well as ongoing
operating expenses of our STREAMWAY business and investment in our sales organization and new product development and pursuit of
sales in the international marketplace. We have committed significant capital and management resources to developing our CRO business
and other new business areas, and we intend to continue to devote significant management resources to new businesses. We will incur
approximately $70,000 per month in expenses relating to launching the TumorGenesis business. In addition, in 2017, we provided
$668,000 in financing to Helomics, of which $500,000 in principal amount has been converted into an equity interest in Helomics
and $168,000 in principal amount is subject to secured notes that remain outstanding. In addition, in August 2017, we entered into
a merger agreement with CytoBioscience, which was subsequently terminated in November 2017. From July 2017 through November 2017,
we advanced $1,070,000 to CytoBioscience in the form of secured notes, which are still outstanding. It is likely that we will make
further investments and advances in other businesses as we develop our CRO business and other business models. There can be no
assurance that any of the outstanding balances of our existing promissory notes or future advances will be repaid. Further, there
is no assurance that our equity investment in Helomics or other investments in new businesses will result in significant value
for the Company. Therefore, we could invest significant capital in other business enterprises with no certainty when or whether
we will realize a return on these investments. Investments in cash will deplete our capital resources, meaning that we will be
required to raise significant amounts of new capital. There is no assurance that we will be successful in raising sufficient capital,
and the terms of any such financing will be dilutive to our stockholders. We may also acquire technologies or companies by issuing
stock or other equity securities rather than or in addition to payment of cash, which may have the result of diluting the investment
of our stockholders. Further, the energy and resources of our officers and personnel are being substantially diverted to these
new lines of business, which are unproven. If these businesses are unsuccessful or require too great of a financial investment
to be profitable, our business may fail regardless of the level of success of our STREAMWAY business.
If necessary, we will attempt to raise these funds through equity or debt financing,
alternative offerings or other means. If we are successful in securing adequate funding we plan to make significant capital or
equipment investments, and we will also continue to make human resource additions over the next 12 months. Such additional financing
may be dilutive to existing stockholders, and there is no assurance that such financing will be available upon acceptable terms.
If such financing or adequate funds from operations are not available, we will be forced to limit our business activities, which
will have a material adverse effect on our results of operations and financial condition.
November 2017 Private Placement of Preferred Stock and Warrants
On November 30, 2017, the Company closed a private placement of a newly created series of preferred stock
designated as “Series C Convertible Preferred Stock” with a New York based Family Office. Pursuant to the Securities
Purchase Agreement, the investor purchased 1,213,819 shares of Series C stock at a purchase price of $1.071 per Series C Share,
together with a warrant to purchase up to 606,910 shares of common stock. The warrant has an exercise price of $1.26 per share,
subject to adjustment, has a five and one-half year term and is exercisable commencing six months following the date of issuance.
Total gross proceeds to the Company were $1,300,000 before deducting expenses and will be used for general working capital. In
connection with the Offering and pursuant to a registration rights agreement, the Company has agreed to file a “resale”
registration statement covering all of the shares of common stock issuable upon conversion of the warrant. Pursuant to the Securities
Purchase agreement, and as of this filing date, all the Preferred Series C shares were converted at a conversion rate of 1.167
to a maximum of 1,250,269 shares of common stock. The remaining 142,466 shares of Preferred Series C stock were cancelled with
a redemption payment to the holder for $189,285.
January 2018 Public Offering of Common Stock and Warrants
In January 2018, the Company completed a firm commitment underwritten public offering
of 2,900,000 Units at an offering price of $0.95 per Unit, with each Unit consisting of one share of the Company’s Common
Stock and 0.3 of a Series E Warrant, with each whole Series E Warrant purchasing one share of common stock at an exercise price
of $1.00 per whole share. The shares of Common Stock and Series E Warrants were immediately separable and were issued separately.
Gross proceeds were approximately $2,755,000, before deducting expenses. The Company granted the underwriter a 45-day option to
purchase an additional (i) up to 290,000 additional shares of Common Stock at the public offering price per Unit less the price
of the Series E Warrant included in the Units and less the underwriting discount and/or (ii) additional Series E Warrants to purchase
up to 87,000 additional shares of common stock at a purchase price of $0.001 per Series E Warrant to cover over-allotments, if
any. On February 21, 2018, the underwriter exercised on 215,247 shares of common stock, par value $0.01, at $0.9497 per share as
described in the Underwriting Agreement. The Company received net proceeds of $188,066 after deductions of $16,354 representing
the Underwriter’s discount of 8% of the purchase price of the shares.
Inflation
We do not believe that inflation has had a material impact on our business and operating
results during the periods presented.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4)
of Regulation S-K.
Critical Accounting Policies and Estimates and Recent Accounting Developments
The discussion and analysis of our financial condition and results of operations are
based upon our audited Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles
(“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of our financial statements, the reported amounts of
revenues and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates and assumptions, including, but not limited to, fair value of stock-based compensation,
fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes,
and contingencies and litigation.
We base our estimates and assumptions on our historical experience. We also used any
other pertinent information available to us at the time that these estimates and assumptions are made. We believe that
these estimates and assumptions are reasonable under the circumstances and form the basis for our making judgments about the carrying
values of our assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could
differ from our estimates.
Our significant accounting policies are described in “Note 1 – Summary of
Significant Accounting Policies,” in Notes to Financial Statements of this Quarterly Report on Form 10-Q. We believe that
the following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments,
and use of estimates and assumptions in the preparation of our Financial Statements.
Revenue Recognition.
Effective January 1, 2018, we adopted Accounting
Standards Update (“ASU”)
No.
2014
-
09,
Revenue from Contracts with Customers
(Topic 606),
which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services.
Our product sales consist of a single performance obligation that the Company satisfies
at a point in time. We recognize product revenue when the following events have occurred: (a) the Company has transferred physical
possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and
(d) the customer bears significant risks and rewards of ownership of the products. Based on the shipping terms specified in the
sales agreements and purchase orders, these criteria are generally met when the products are shipped from the Company’s facilities
(“FOB origin”, which is the Company’s standard shipping terms). As a result, we determined that the customer
is able to direct the use of, and obtain substantially all of the benefits from, the products at the time the products are shipped.
We may, at our discretion, negotiate different shipping terms with customers which may affect the timing of revenue recognition.
Standard payment terms for our customers are generally 30 to 60 days after the Company transfers control of the product to its
customer.
Customers may also purchase a maintenance plan from the Company, which requires that
we service the STREAMWAY System for a period of one year subsequent to the one year anniversary date of the original STREAMWAY
System invoice. The maintenance plan is considered a separate performance obligation from the product sale, is charged separately
from the product sale, and is recognized over time (ratably over the one-year period) as maintenance services are provided. A time-elapsed
output method is used to measure progress because we transfer control evenly by providing a stand-ready service. We have determined
that this method provides a faithful depiction of the transfer of services to our customers.
We record receivables when we have an unconditional right to receive consideration after
the performance obligations are satisfied. As of March 31, 2018, and December 31, 2017, accounts receivable totaled $241,764 and
$137,499, respectively. For the three months ended March 31, 2018, we did not incur material impairment losses with respect to
our receivables.
See “Note 2 – Revenue Recognition,” in Notes to Financial Statements
of this Quarterly Report on Form 10-Q for further discussion.
Stock-Based Compensation
. Effective January 1, 2006, we adopted ASC 718-
Compensation-Stock Compensation (“ASC 718”). Under ASC 718 stock-based employee compensation cost is recognized
using the fair value based method for all new awards granted after January 1, 2006 and unvested awards outstanding at January 1,
2006. Compensation costs for unvested stock options and non-vested awards that were outstanding at January 1, 2006, are being recognized
over the requisite service period based on the grant-date fair value of those options and awards, using a straight-line method.
We elected the modified-prospective method in adopting ASC 718 under which prior periods are not retroactively restated.
ASC 718 requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model. We use the Black-Scholes option-pricing model which requires the input of significant
assumptions including an estimate of the average period of time employees and directors will retain vested stock options before
exercising them, the estimated volatility of our common stock price over the expected term, the number of options that will ultimately
be forfeited before completing vesting requirements and the risk-free interest rate.
Because we do not have significant historical trading data on our common stock we relied
upon trading data from a composite of 10 medical companies traded on major exchanges and 15 medical companies quoted by the OTC
Bulletin Board to help us arrive at expectations as to volatility of our own stock when public trading commences. In 2013 the Company
experienced significant exercises of options and warrants. The options raised $6,500 in capital. Warrants exercised for cash produced
$1,330,000 of capital. In the case of options and warrants issued to consultants and investors we used the legal term of the option/warrant
as the estimated term unless there was a compelling reason to use a shorter term. The measurement date for employee and non-employee
options and warrants is the grant date of the option or warrant. The vesting period for options that contain service conditions
is based upon management’s best estimate as to when the applicable service conditions will be achieved. Changes in the assumptions
can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognized.
The assumptions we use in calculating the fair value of stock-based payment awards represent our best estimates, which involve
inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different
assumptions, our equity-based compensation expense could be materially different in the future. See “Note 2 – Stockholders’
Deficit, Stock Options and Warrants” in Notes to Financial Statements of this Quarterly Report on Form 10-Q for additional
information.
When an option or warrant is granted in place of cash compensation for services, we deem
the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or warrant is
granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing an option
pricing model. For that reason we also use the Black-Scholes option-pricing model to value options and warrants granted to
non-employees, which requires the input of significant assumptions including an estimate of the average period that investors
or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of our common stock
price over the expected term, the number of options and warrants that will ultimately be forfeited before completing vesting
requirements and the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair
value of stock-based compensation and, consequently, the related expense recognizes that. Since we have no trading history in our
common stock and no first-hand experience with how our investors and consultants have acted in similar circumstances, the assumptions
we use in calculating the fair value of stock-based payment awards represent our best estimates, which involve inherent uncertainties
and the application of management's judgment. As a result, if factors change and we use different assumptions, our equity-based
consulting and interest expense could be materially different in the future.
Since our common stock has no significant public trading history we were required to
take an alternative approach to estimating future volatility and the future results could vary significantly from our estimates.
We compiled historical volatilities over a period of 2 to 7 years of 10 small-cap medical companies traded on major exchanges and
15 medical companies in the middle of the market cap size range on the OTC Bulletin Board and combined the results using a weighted
average approach. In the case of standard options to employees we determined the expected life to be the midpoint between
the vesting term and the legal term. In the case of options or warrants granted to non-employees, we estimated the life to
be the legal term unless there was a compelling reason to make it shorter.
Valuation of Intangible Assets
We review identifiable intangible assets for impairment in accordance with ASC 350-
Intangibles
– Goodwill and Other,
whenever events or changes in circumstances indicate the carrying amount may not be recoverable.
Our intangible assets are currently solely the costs of obtaining trademarks and patents. Events or changes in circumstances
that indicate the carrying amount may not be recoverable include, but are not limited to, a significant change in the medical device
marketplace and a significant adverse change in the business climate in which we operate. If such events or changes in circumstances
are present, the undiscounted cash flows method is used to determine whether the intangible asset is impaired. Cash flows would
include the estimated terminal value of the asset and exclude any interest charges. If the carrying value of the asset exceeds
the undiscounted cash flows over the estimated remaining life of the asset, the asset is considered impaired, and the impairment
is measured by reducing the carrying value of the asset to its fair value using the discounted cash flows method. The discount
rate utilized is based on management's best estimate of the related risks and return at the time the impairment assessment is made.
The Company wrote off the entire original STREAMWAY product patent of $140,588 in June 2013. The balance represented intellectual
property in the form of patents for our original STREAMWAY product. The Company’s enhanced STREAMWAY product has a new patent
pending, see “Patents and Intellectual Property.”
Recent Accounting Developments
See Note 1 - “Summary of Significant Accounting Policies” to the Condensed Consolidated Financial
Statements of this Quarterly Report on Form 10-Q for a discussion of recent accounting developments.
Information Regarding Forward-Looking Statements
This Form 10-Q contains “forward-looking statements” that indicate certain
risks and uncertainties related to the Company, many of which are beyond the Company’s control. The Company’s actual
results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this report. Important factors that may cause actual results to differ
from projections include:
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Current negative operating cash flows, including significant investment in our new business areas, past advances to companies
with which we have strategic partnerships and the likelihood of additional such advances, as well as uncertain returns or
profitability of new businesses;
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The terms of any further financing, which may be highly dilutive and may include onerous terms;
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Risks relating to the proposed merger with Helomics, including uncertainty of completion of the merger, additional expenses
relating to the merger and devotion of management resources to the merger;
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Risk that we will be unable to protect our intellectual property or claims that we are infringing on others’ intellectual
property;
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The impact of competition, the obtaining and maintenance of any necessary regulatory clearances applicable to applications
of the Company’s technology;
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Inability to attract or retain qualified senior management personnel, including sales and marketing personnel;
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Risk that we never become profitable if our product is not accepted by potential customers;
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Possible impact of government regulation and scrutiny;
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Unexpected costs and operating deficits, and lower than expected sales and revenues, if any;
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Adverse results of any legal proceedings;
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The volatility of our operating results and financial condition, and,
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Other specific risks that may be alluded to in this report.
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All statements other than statements of historical facts, included in this report regarding the Company’s
growth strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and objectives
of management are forward-looking statements. When used in this report, the words “will”, “may”, “believe”,
“anticipate”, “intend”, “estimate”, “expect”, “project”, “plan”
and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements speak only as of the date of this report. The Company does not undertake
any obligation to update any forward-looking statements or other information contained herein. Potential investors should not place
undue reliance on these forward-looking statements. Although the Company believes that its plans, intentions and expectations reflected
in or suggested by the forward-looking statements in this report are reasonable the Company cannot assure potential investors that
these plans, intentions or expectations will be achieved. The Company discloses important factors that could cause the Company’s
actual results to differ materially from its expectations in the “Risk Factors” section and elsewhere our Annual Report
on Form 10-K for the year ended December 31, 2017 and in item 1A of Part II below. These cautionary statements qualify all forward-looking
statements attributable to the Company or persons acting on its behalf.
Information regarding market and industry statistics contained in this report is included
based on information available to the Company that it believes is accurate. It is generally based on academic and other publications
that are not produced for purposes of securities offerings or economic analysis. The Company has not reviewed or included data
from all sources, and the Company cannot assure potential investors of the accuracy or completeness of the data included in this
report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and
the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services.
The Company has no obligation to update forward-looking information to reflect actual results or changes in assumptions or other
factors that could affect those statements.