UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

   

 

 

 

[X] 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended September 30, 2016

   

 

 

 

[  ] 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 For the transition period from ______________ to _____________

 

Commission file number:   333-199619

 

VIATAR CTC SOLUTIONS INC.

(Exact name of Company as specified in its charter)

 

Delaware

 

26-1581305

(State or other jurisdiction of incorporation or

 

(I.R.S. Employer Identification No.)

organization)

 

 

 

116 John Street, Suite 10, Lowell, Massachusetts

 

01852

(Address of principal executive offices)

 

(Zip Code)

 

 

(617) 299-6590

 

 

(Registrant’s telephone number, including area code)

 


 (Former name, former address and former fiscal year, if changed since last report)

 

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

Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]   No [  ]

 

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

 

 Large accelerated filer

[  ]

Accelerated filer

[  ]

 

 

 

 

Non-accelerated filer

[  ]

Smaller reporting company

[X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]   No [X]   


As of November 14, 2016, there were 19,495,426 shares of $0.001 par value common stock issued and outstanding.





VIATAR CTC SOLUTIONS INC.

FORM 10-Q

INDEX

 

 

 

 

 

 

 

 

 

Page

 

 

 

PART I.

Financial Information

 

 

 

 

 

Item 1.  Financial Statements (Unaudited).

F-1

 

 

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

4

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

14

 

 

 

 

Item 4.  Controls and Procedures.

15

 

 

 

PART II.

Other Information

 

 

 

 

 

Item 1.  Legal Proceedings.

16

 

 

 

 

Item 1A. Risk Factors.

16

 

 

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

16

 

 

 

 

Item 3.  Defaults Upon Senior Securities.

16

 

 

 

 

Item 4.  Mine Safety Disclosures.

16

 

 

 

 

Item 5.  Other Information.

16

 

 

 

 

Item 6.  Exhibits.

17

 

 

 

 

Signatures

18

 










2







PART I –FINANCIAL INFORMATION

 

Item 1. Financial Statements


INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Page

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31 2015

F-1

Condensed Consolidated Statements of Operations for the nine and three months ended September 30, 2016 and 2015 (unaudited)

F-2

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the period ended September 30, 2016 (unaudited)

F-3

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited)

F-4

Notes to Condensed Consolidated Financial Statements (unaudited)

F-5







3





Viatar CTC Solutions Inc. and Subsidiary

Condensed Consolidated Balance Sheets


 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

 

(Unaudited)

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash

 

$

630,260 

 

$

508,445 

 

Prepaid expenses

19,679 

 

247,659 

 

 

Total current assets

649,939 

 

756,104 

 

 

 

 

 

 

 

 

Property and equipment, net

685,264 

 

172,793 

 

 

 

 

 

 

 

 

Investment in non-publicly traded company

 

480,000 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

1,335,203 

 

$

1,408,897 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts payable and accrued expenses

$

385,548 

 

$

368,116 

 

Accrued income tax liability

626,887 

 

626,887 

 

Convertible notes payable - net of long term

100,000 

 

 

 

Total current liabilities

1,112,435 

 

995,003 

 

 

 

 

 

 

 

 

Convertible notes payable, net

2,070,481 

 

2,126,218 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

3,182,916 

 

3,121,221 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

 

Series A preferred stock, $.001 par value, 4,000,000 shares

 

 

 

 

 

authorized, 4,000,000 shares issued and outstanding at

 

 

 

 

 

September 30, 2016 and December 31, 2015, respectively

4,000 

 

4,000 

 

Series B preferred stock, $.001 par value, 5,000,000 shares

 

 

 

 

 

authorized, 1,733,801 and 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

1,734 

 

 

Preferred stock, $.001 par value, 11,000,000 shares

 

 

 

 

 

authorized, 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

Common stock, $.001 par value, 100,000,000 shares authorized,

 

 

 

 

 

19,495,426 and 18,605,426 shares issued and outstanding at

 

 

 

 

 

September 30, 2016 and December 31, 2015, respectively

19,496 

 

18,606 

 

Additional paid-in capital

26,959,694 

 

20,492,974 

 

Accumulated deficit

(28,822,215)

 

(22,217,527)

 

 

 

Total stockholders' equity (deficit)

(1,837,291)

 

(1,701,947)

 

 

 

 

 

 

 

 

Noncontrolling interest

(10,422)

 

(10,377)

 

 

 

 

 

 

 

 

 

 

TOTAL STOCKHOLDERS' EQUITY (DEFICIT)

(1,847,713)

 

(1,712,324)

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

$

1,335,203 

 

$

1,408,897 


See notes to condensed consolidated financial statements.



F-1





Viatar CTC Solutions Inc. and Subsidiary

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 


 

 

 

For the Nine Months Ended September 30,

 

For the Three Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

REVENUE

 

 

 

 

 

 

 

 

Sales

$

 

$

37,940 

 

$

 

$

13,985 

 

 

 

 

 

 

 

 

 

 

COST OF REVENUE

 

 

 

 

 

 

 

 

Cost of sales

 

7,660 

 

 

3,830 

 

 

 

 

 

 

 

 

 

 

GROSS MARGIN

 

30,280 

 

 

10,155 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

Research and development

3,556,577 

 

1,889,156 

 

921,577 

 

677,878 

 

General and administrative

2,636,588 

 

941,534 

 

419,932 

 

244,066 

 

 

 

 

 

 

 

 

 

 

TOTAL EXPENSES

6,193,165 

 

2,830,690 

 

1,341,509 

 

921,944 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

(6,193,165)

 

(2,830,690)

 

(1,341,509)

 

(921,944)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Dividend income

3,227 

 

 

 

 

Interest expense

(168,994)

 

(73,132)

 

(52,261)

 

(16,413)

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER INCOME (EXPENSE)

(165,767)

 

(73,132)

 

(52,261)

 

(16,413)

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAX EXPENSE

(6,358,932)

 

(2,873,542)

 

(1,393,770)

 

(928,202)

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

      (6,750)

 

                      (6,582)

 

                       (5,799)

 

                    (6,582)

 

 

 

 

 

 

 

 

 

 

NET LOSS

(6,365,682)

 

(2,880,124)

 

(1,399,569)

 

(934,784)

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling

 

 

 

 

 

 

 

 

interest in consolidated subsidiary

(45)

 

(393)

 

(11)

 

(120)

 

 

 

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO

 

 

 

 

 

 

 

 

STOCKHOLDERS BEFORE PREFERRED DIVIDENDS

$

(6,365,637)

 

$

(2,879,731)

 

$

(1,399,558)

 

$

(934,664)

 

 

 

 

 

 

 

 

 

 

LESS: PREFERRED DIVIDENDS

(239,051)

 

 

(103,790)

 

 

 

 

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO

 

 

 

 

 

 

 

 

STOCKHOLDERS

$

(6,604,688)

 

$

(2,879,731)

 

$

(1,503,348)

 

$

(934,664)

 

 

 

 

 

 

 

 

 

 

LOSS PER COMMON SHARE - BASIC AND DILUTED:

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Common

 

 

 

 

 

 

 

 

 

Stockholders

$

(0.34)

 

$

(0.16)

 

$

(0.08)

 

$

(0.05)

 

 

Weighted Average Shares

19,196,594 

 

17,604,366 

 

19,495,426 

 

17,981,054 


See notes to condensed consolidated financial statements.



F-2





Viatar CTC Solutions Inc. and Subsidiary

 

 

 

Consolidated Statement of Stockholders' Equity (Deficit)

For the Period Ended September 30, 2016

(Unaudited)


 

Series A Preferred Stock

 

Series B Preferred Stock

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Additional Paid-in Capital

 

Accumulated Deficit

 

Total Stockholders' Equity (Deficit)

 

Noncontrolling Interest

 

Total Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

4,000,000

 

4,000

 

-

 

-

 

18,605,426

 

18,606

 

20,492,974

 

(22,217,527)

 

(1,701,947)

 

(10,377)

 

(1,712,324)

Issuance of Series B Preferred stock, net of offering costs

-

 

-

 

1,679,696

 

1,680

 

-

 

-

 

4,197,560

 

-

 

4,199,240

 

-

 

4,199,240

Issuance of stock and warrants for services

-

 

-

 

-

 

-

 

890,000

 

890

 

2,133,953

 

-

 

2,134,843

 

-

 

2,134,843

Series B Preferred dividend shares

-

 

-

 

54,105

 

54

 

-

 

-

 

135,207

 

-

 

135,261

 

-

 

135,261

Series B Preferred dividend

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(239,051)

 

(239,051)

 

-

 

(239,051)

Net loss

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(6,365,637)

 

(6,365,637)

 

(45)

 

(6,365,682)

Balance, September 30, 2016

4,000,000

 

4,000

 

1,733,801

 

1,734

 

19,495,426

 

19,496

 

26,959,694

 

(28,822,215)

 

(1,837,291)

 

(10,422)

 

(1,847,713)




See notes to condensed consolidated financial statements.






F-3





Viatar CTC Solutions Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

(Unaudited)


 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

2016

 

2015

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(6,365,682)

 

$

(2,880,124)

 

Adjustments to reconcile net loss to net cash used in

 

 

 

 

 

  operating activities:

 

 

 

 

 

 

Stock based compensation

 

2,362,823 

 

1,117,015 

 

 

Amortization of discount on debt

 

44,263 

 

37,654 

 

 

Depreciation expense

 

87,368 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accrued expenses

 

(86,358)

 

(69,528)

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

(3,957,586)

 

(1,794,983)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from sale of investment in non-publicly traded company

 

480,000 

 

 

Purchase of equipment

 

(599,839)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(119,839)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from demand note

 

 

50,000 

 

Repayment of demand notes

 

 

(100,000)

 

Proceeds from convertible note payable

 

 

300,000 

 

Proceeds from promissory note for common stock subscription

 

 

611,939 

 

Proceeds from issuance of stock and warrants

 

 

1,009,125 

 

Proceeds from issuance of Preferred B shares, net of offering costs

 

4,199,240 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

4,199,240 

 

1,871,064 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

121,815 

 

76,081 

 

 

 

 

 

 

 

 

Cash - beginning of the period

 

508,445 

 

31,351 

 

 

 

 

 

 

 

 

Cash - end of the period

 

$

630,260 

 

$

107,432 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

54,734 

 

$

4,291 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

Discount on debt issued with warrants

 

$

 

$

31,149 

 

Dividends paid with Series B Preferred shares

 

$

135,261 

 

$

 

Dividends accrued on Series B Preferred

 

$

103,790 

 

$



See notes to condensed consolidated financial statements.



F-4




Viatar CTC Solutions Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

September 30, 2016

(Unaudited)


1.

NATURE OF OPERATIONS


Viatar CTC Solutions Inc., formerly known as Vizio Medical Devices LLC (“Vizio”), and Subsidiary (as defined below) is a pre-clinical stage company focused on medical devices for oncology applications which remove circulating tumor cells for diagnostic and therapeutic purposes.

 

Vizio was a Delaware limited liability company with perpetual duration that was formed on December 18, 2007. On February 25, 2014, Vizio converted to a Delaware C corporation and changed its name to Viatar CTC Solutions Inc. (“Viatar CTC Solutions”).

 

Viatar CTC Solutions conducts all of its operations through its subsidiary, Viatar LLC (the “Subsidiary”). The Subsidiary was formed on September 23, 2010 as a Delaware limited liability company with perpetual duration.

 

Viatar CTC Solutions and Vizio are together referred to as the “Company”.

 

Since inception, the Company has not generated significant revenues. As a result, we have incurred significant net losses and significant negative cash flows from operations.


As reflected in the accompanying condensed consolidated financial statements, the Company incurred a net loss and net cash used in operations of $6,365,682 and $3,957,586, respectively, for the nine months ended September 30, 2016. As of September 30, 2016 the Company had a working capital deficit of $462,496 and an accumulated deficit of $28,822,215.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon several factors, including (a) obtaining funding, whether in the form of equity, or debt investments, licensing revenues, strategic collaboration payments or grants from government or other sources, (b) success in achieving its research and development goals, (c) obtaining regulatory approvals, and (d) gaining market acceptance and/or distribution or strategic partners for its products. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


The Company has raised approximately $21.7 million of capital since its inception, including $20.3 million from the sale of common and Series B Preferred stock, $1.4 million from convertible notes and $100,000 of demand notes. Management is continually pursuing additional funding sources.


2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Accounting


The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”).





F-5





The financial statements contained herein have been prepared by the Company in accordance with GAAP for interim financial information. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. The balance sheet at December 31, 2015 was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management, the interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results of the periods presented. The results of operations for the nine and three months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2015.


Principles of Consolidation


The accompanying condensed consolidated financial statements include the accounts of Viatar CTC Solutions Inc., the Subsidiary and amounts related to a noncontrolling interest in the Subsidiary. The noncontrolling interest represents a 0.001% ownership interest in the Subsidiary at September 30, 2016 and December 31, 2015. All significant intercompany accounts and transactions have been eliminated in consolidation.


Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make 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 income and expenses during the reporting period. Significant estimates subject to such estimates and assumptions include the valuation of debt and equity instruments issued for services and in connection with agreements and contracts entered in to by the Company. Actual results could differ from those estimates.


Cash

 

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company held no cash equivalents at September 30, 2016 or December 31, 2015.

 

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.


Fair Value of Financial Instruments


The Company’s financial instruments consist of cash, accounts payable and accrued expenses. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. As of September 30, 2016 and December 31, 2015, the carrying amount of cash, accounts payable and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments.


Property and Equipment

 

Property and equipment are recorded at cost. Depreciation expense is computed using straight-line methods over the estimated useful lives.

 




F-6





Asset lives for financial statement reporting of depreciation are:

 

Machinery and equipment

 

5 years


Cost- Method Investment


The Company’s cost-method investment in a non-publicly traded company is included in the condensed consolidated balance sheets and is carried at cost, adjusted for any impairment, because the Company does not have a controlling interest and does not have the ability to exercise significant influence over this company. The Company monitors any such investment for impairment on a quarterly basis, and adjusts carrying value for any impairment charges recognized. Realized gains and losses on this investment are reported in other income (expense), net in the condensed consolidated statements of operations.


As of September 30, 2016 the Company does not have any investment in any non-publicly traded company. See Note 4.


Revenue Recognition

 

The Company records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is delivered, (3) the sales price to the customer is fixed or determinable, and (4) collectability of the related customer receivable is reasonably assured. There is no stated right of return for products. The Company generally meets these criteria upon shipment.


Cost of Sales

 

Cost of sales represents costs directly related to the production and manufacturing of the Company’s products for commercial sale to customers. Costs include product cost, freight, packaging, and labor costs.


Research and Development

 

Research and development costs consist of ongoing testing (including pre-clinical and clinical), research and development, and are expensed as incurred.

 

Derivatives

 

The Company evaluated its options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “ Derivatives and Hedging .” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassed to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liability at the fair value of the instrument on the reclassification date.




F-7





Income Taxes


In the ordinary course of business, there is inherent uncertainty in quantifying income tax positions. The Company assesses its income tax positions and records tax assets or liabilities for all years subject to examination based upon management’s evaluation of the facts and circumstances and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense or benefit.


The Company files income tax returns with the U.S. federal government and various state and local jurisdictions. The Company is no longer subject to tax examinations by tax authorities for years prior to 2012.


The Company is currently under audit by New York City tax authorities for the 2011, 2012, and 2013 tax years. The Company applied for New York City biotechnology tax credits and received certificates of eligibility from the NYC Department of Finance in the amounts of $147,997, $242,016, and $236,874 for tax years 2013, 2012, and 2011, respectively. The Company received refunds for these amounts in previous years. The City of New York subsequently ruled that the Company does not qualify for the tax credits. As of September 30, 2016, the Company accrued $626,887 on the condensed consolidated balance sheets, as well as $194,955 of interest at the statutory rate, which is included in accounts payable and accrued expenses on the condensed consolidated balance sheets. The Company appealed the decision made by the City of New York. While settlement discussions have been held, as of the date of this report no decision has been made regarding the appeal or settlement.


Commitments and Contingencies

 

The Company follows subtopic 450-20 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) to report accounting for contingencies. Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. 


If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.


Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.




F-8





Stock-Based Compensation

 

In December 2004, the FASB issued ASC 718, Compensation – Stock Compensation , or ASC 718. Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include options, restricted stock, restricted stock units, performance-based awards, share appreciation rights, and employee share purchase plans. As such, compensation cost is measured on the date of grant at fair value. The Company amortizes such compensation amounts, if any, over the respective vesting periods of the award. The Company uses the Black-Scholes-Merton option pricing model, or the Black-Scholes Model, an acceptable model in accordance with ASC 718, that requires the input of highly complex and subjective variables, including the expected life of the award and the expected stock price volatility over a period equal to or greater than the expected life of the award.


Equity instruments (“Instruments”) issued to anyone other than employees are recorded on the basis of the fair value of the Instruments, as required by ASC 718. ASC 505, Equity Based Payments to Non-Employees , or ASC 505, defines the measurement date and recognition period for such Instruments. In general, the measurement date is when either (a) a performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the Instruments are vested. The measured value related to the Instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in ASC 505.


The Company recognizes the compensation expense for all share-based compensation granted based on the grant date fair value estimated in accordance with ASC 718. The Company generally recognizes the compensation expense on a straight-line basis over the employee’s requisite service period.


Earnings (Loss) Per Share

 

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss), adjusted for changes in income or loss that resulted from the assumed conversion of convertible shares, by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

 

The Company had the following potential common stock equivalents as of September 30, 2016 and 2015:


 

As of

  

 

September 30, 2016

  

  

September 30, 2015

  

Common stock warrants, exercise price range of $1.00-$2.00

 

 

777,981

 

 

-

 

Conversion feature on convertible notes, exercise price of $2.50

  

  

920,000

  

  

120,000

  

Conversion feature on Series B preferred stock, exercise price of $2.50

  

  

1,733,801

  

  

535,000

  

 Total common stock equivalents

  

  

3,431,782

  

  

655,000

  


Since the Company reflected a net loss during the nine and three months ended September 30, 2016 and 2015, the effect of considering any common stock equivalents would have been anti-dilutive. Therefore, a separate computation of diluted earnings (loss) per share is not presented.


Reclassification

 

Certain prior period amounts have been reclassified to conform to current period presentation. The reclassifications did not have an impact on net loss as previously reported .




F-9





Recent Accounting Pronouncements


In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle (issued as ASU 2014-09 by the FASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 by one year, and would allow entities the option to early adopt the new revenue standard as of the original effective date. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating its adoption method and the impact of the standard on its condensed consolidated financial statements.


In March 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” . The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company adopted ASU 2015-03 during the period ended September 30, 2016.


In July 2015, the FASB issued ASU No.  2015- 11,  “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under current inventory standards, the market value requires consideration of replacement cost, net realizable value and net realizable value less an approximately normal profit margin. The new guidance replaces market with net realizable value defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within that annual period. The amendment is to be applied prospectively with early adoption permitted. The Company is in the process of evaluating the effect of the new guidance on its condensed consolidated financial statements and disclosures.


In February 2016, the FASB issued ASU 2016-02, “ Leases (Topic 842).”  Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its condensed consolidated financial statements and disclosures.




F-10





In April 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.


In April 2016, the FASB issued ASU No. 2016-10, “ Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing ” (topic 606). In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net)” (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity's promise to grant a license provides a customer with either a right to use an entity's intellectual property or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new standard.


In May 2016, the FASB issued ASU No. 2016-12, “ Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” , which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating the impact of the new standard.


In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU  2016- 15”). ASU  2016- 15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU  2016- 15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of ASU  2016- 15 on its consolidated financial statements.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.


3.

PROPERTY AND EQUIPMENT


Property and equipment on September 30, 2016 and December 31, 2015 are as follows:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Machinery and Equipment

 

$

775,422

 

 

$

175,583

 

 

 

 

 

 

 

 

 

 

Less: Accumulated Depreciation

 

 

90,158

 

 

 

2,790

 

 

 

$

685,264

 

 

$

172,793

 

 




F-11





Depreciation expense charged to income for the nine months ended September 30, 2016 and 2015 amounted to $87,368 and $0, respectively. Depreciation expense charged to income for the three months ended September 30, 2016 and 2015 amounted to $38,383 and $0, respectively.


4.

INVESTMENT IN NON-PUBLICLY TRADED COMPANY


During the fourth quarter of 2015, the Company issued convertible promissory notes to an accredited investor for an aggregate total of 60,000 shares of stock in a non-publicly traded company which it valued at $720,000 based on the subsequent sale of a portion of those shares during the period for $12 per share. The Company sold 20,000 and 40,000 shares in November 2015 and February 2016, respectively, for approximately $240,000 and $480,000, respectively, resulting in a reduction of the investment. As of September 30, 2016, the balance of the investment was $0.


The following table summarizes the activity for the investment in non-publicly traded company:


  

  

September 30, 2016

Balance at January 1, 2016

  

$

480,000

Additions – stock of non-publicly traded company

  

  

-

Disposal – sale of stock of non-publicly traded company

  

  

(480,000)

Balance at September 30, 2016

  

$

-


5.

CONVERTIBLE NOTES PAYABLE


In April 2013, the Company borrowed $100,000 in exchange for a 4% convertible promissory note due April 30, 2015 and a five-year warrant to purchase 50,000 shares of common stock at $2 each. The note is convertible at any time prior to maturity at the option of the holder at $2 per share of common stock (50,000 shares). The relative fair value of the warrant issued was $32,525 based on the Black-Scholes option pricing model. The relative fair value of the warrant was recorded as a discount and is being amortized over two years based on the effective interest method. The unamortized discount at September 30, 2016 and December 31, 2015 was $0 and $0, respectively. The note requires interest payments semi-annually. In April 2015, the note and the related warrants were extended for an additional two year period maturing in April 2017. The debt modification was evaluated under ASC 470-50, “ Debt Modification and Extinguishments” . The Company determined that it was appropriate to account for the term extension on a prospective basis and the carrying amount of the debt remained unchanged. All costs incurred with third parties directly related to the maturity extension were expensed as incurred.


During the third and fourth quarters of 2015, the Company borrowed an aggregate of $1.3 million in exchange for 4% convertible notes (the “4% Convertible Notes”) with the following terms: (i) maturing on October 1, 2018 ($300,000) and November 1, 2018 ($1,000,000) ; (ii) quarterly cash interest due of 4% ; (iii) convertible into common stock at any time at the holder s option at $2.50 per share ; and (iv) automatically convertible into common stock after May 5, 2017 at $2.50 per share if after that date the common stock trades above that price for 20 trading days with an average daily volume of 25,000 shares. As discussed in Note 8, $1.0 million was borrowed from a related party.


During the fourth quarter of 2015, the Company issued 4% Convertible Notes in the aggregate principal amount of $900,000 in exchange for 60,000 shares of stock in a non-publicly traded company valued at $15 per share (discussed in Note 4). Upon issuance of the notes, a debt discount of $180,000 was recorded for the value of the common shares of the non-publicly traded company and is being amortized using the effective interest method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statements of operations. There was an aggregate unamortized debt discount of $129,519 and $173,782 as of September 30, 2016 and December 31, 2015, respectively.




F-12





6.

FAIR VALUE OF FINANCIAL INSTRUMENTS


The Company follows the provisions of ASC 820 for fair value measurements of its financial assets and liabilities. The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The accounting standard established a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. This hierarchy prioritizes the inputs into three broad levels, as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's own assumptions used to measure assets and liabilities at fair value. An asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.


7.

COMMITMENTS AND CONTINGENCIES


Operating Lease


In June 2012, the Company entered into an operating lease for its office space for $3,103 per month through June 2015, with a three year renewal option extending to June 2018. The future minimum rental payments to be paid under the non-cancelable operating lease in effect at March 31, 2015 was $9,309. In April 2015, the Company and the landlord agreed to extend and expand that lease agreement by increasing the size of the space rented. The annual rent according to the amended lease is $91,050 per year payable in equal monthly installments of $7,587, plus the Company’s share of common area maintenance charges and electricity. The amended lease is subject to a five-year extension at the election of the Company.


Employment Agreement


Mr. Ilan Reich is employed pursuant to an agreement as President, CEO and Chairman of the Company. Additionally, he will serve as Chief Financial Officer until the Board appoints a replacement. The term of his employment is to December 31, 2022 with automatic renewal for 2 year terms unless either party provides written notice. For now, Mr. Reich will not receive a base salary but will receive up to a US$5,000,000 bonus upon the achievement of the Milestone Goals. “Milestone Goals” shall mean (i) positive Earnings Before Interest Taxes Depreciation and Amortization, or EBITDA, for the Company’s last fiscal year, as reflected in the Company’s Annual Report on Form 10-K, and (ii) gross revenues of more than $20,000,000 for the Company’s last fiscal year, as reflected in the Company’s Annual Report on Form 10-K. The bonus will be paid in stock, to Mr. Reich, or in his sole discretion, fully or partially to employees and/or officers of the Company, in such amounts (up to the total amount of the bonus) and to such employees and/or officers as designated by Mr. Reich in writing to the Company. Mr. Reich is reimbursed by the Company up to $105,000 in calendar year 2016 which amount shall be increased by 5% (compounding) in each subsequent calendar year during the term of the Agreement for office, travel, entertainment, insurance (health, automobile or otherwise), automobile and other expenses arising during the term of the agreement. Additionally, Mr. Reich shall be eligible to participate in incentive, stock purchase, savings, retirement (401K) and welfare benefit plans including, without limitation, health, medical, dental, vision, life (including accidental death and dismemberment) and disability insurance plans. The Company cannot terminate Mr. Reich’s employment without cause. Mr. Reich may resign on 30 days’ notice to the Company. Mr. Reich is entitled to payment of the balance of his contract on resignation for death or disability, good reason or following a Change in Control (defined in the agreement as the accumulation by any individual of 10% or more of the shares of the Company whether by merger, consolidation, sale or other transfer). Additionally, the employment agreement provides a non-compete/non-solicitation provision for a 12 month period following the termination of Mr. Reich’s employment with the Company.




F-13





8.

RELATED PARTY TRANSACTIONS


In December 2014, the Company borrowed an aggregate of $50,000 in exchange for an interest free demand note from a former member of the board of managers. The loan was repaid in January 2015.


In January 2015, the Company borrowed an aggregate of $50,000 in exchange for an interest free demand note from a former member of the board of managers. In addition, the Company issued warrants to purchase 50,000 shares of common stock at $1.00 per share to the lender. The warrants expire in 2020. The relative fair value of the warrant issued was $31,149 based on the Black-Scholes option pricing model. As a result of this transaction, the Company recorded a debt discount and corresponding amortization expense of $31,149. The loan was repaid in January 2015.


In October 2015, the Company sold a 4% Convertible Note in the principal amount of $1,000,000 to a related party. See Note 5.


9.

STOCKHOLDERS’ EQUITY (DEFICIT)


The Company’s capital structure consists of the authorization to issue 100,000,000 shares of common stock and 20,000,000 shares of Preferred Stock, which may be issued in series as designated by the Board of Directors. Each series of Preferred Stock shall have such voting and other rights as designated at the time of establishment by the Board of Directors.


Each issued share of common stock and Series A Preferred Stock has one vote and the approval of a majority of the Series A Preferred Stock, voting as a separate class, is required to approve any corporate action requiring shareholder approval. The Series A Preferred Stock is entitled to participate in dividends, rights issuances and property distributions on the same terms that the Class B member units had since the formation of the Company; namely, 20% of the dividends, rights and property distributed to common stockholders. Upon liquidation of the Company, the Series A Preferred Stock is entitled to 20% of the liquidation value, subject to a priority $13,470,000 allocation to the common shares. This formulation preserves the right of the former Class B member units to participate in profits once the holders of Class A member units recouped their aggregate capital contributions.


During January 2015, the Company received $611,939 for the payoff of notes originally issued to purchase common stock and all accrued interest.


In January 2015, the Company entered into an equity financing agreement with a third party who committed to raise an aggregate of $1.5 million by February 28, 2016.  This commitment was satisfied through (a) the sale of an aggregate of 697,000 shares of common stock to accredited investors for proceeds of $1,009,125 (for an average price of $1.45 per share) net of offering costs of $134,750, and (b) the exchange of 4% Convertible Notes for stock of a non-publicly traded company (See Note 4).


During February 2016, the Company raised approximately $4.2 million of cash through the sale of approximately 1.7 million shares of a new class of Preferred Stock designated as “Series B Preferred Stock”.  The shares of Series B Preferred Stock:




F-14





·

have a stated value of $2.50 and a conversion price of $2.50, subject to certain adjustments;


·

are convertible into such number of shares of common stock as determined by dividing the number of shares of Series B Preferred Stock being converted, multiplied by the stated value, divided by the conversion price then in effect;


·

are entitled to one vote for each share of Series B Preferred Stock on any matter submitted to holders of common stock;


·

are entitled to dividends at the annual rate of 9.5% (which will increase to 12% in the event that by June 30, 2018, the Company does not obtain CE Mark approval of its Therapeutic Oncopheresis System and generate at least $600,000 of gross profit in two fiscal quarters, subject to certain conditions), payable quarterly in shares of Series B Preferred Stock;


·

upon any liquidation, will be entitled to receive, prior to any payments in respect of the Company’s common stock, an amount equal to the stated value plus any accrued but unpaid dividends; and


·

beginning in 2022, will automatically convert into common stock in the event that the closing price of the common stock is at least $4.00 for 20 consecutive trading days with a minimum average trading volume of at least 25,000 shares for such period.


In conjunction with that financing the terms of the Series A Preferred Stock were amended to provide that it will not participate in dividends payable in shares of Series B Preferred Stock to the holders of the Series B Preferred Stock, and to provide that the liquidation amount payable to the holders of Series A Preferred Stock will be paid following payment of the liquidation amount due to holders of Series B Preferred Stock.


On April 1, 2016, the Company issued 75,000 shares of common stock to an employee for services rendered. The Company expensed an aggregate $125,625 as stock-based compensation relating to these shares.


During the nine months ended September 30, 2016 and 2015, the Company expensed an aggregate of $2,362,823 and $1,117,015, respectively, included in the condensed consolidated statement of operations for stock based compensation.  This includes the previously mentioned $125,625, the below mentioned $1,888,287 for restricted stock, and the below mentioned $348,911 for warrants.


During the three months ended September 30, 2016 and 2015, the Company expensed an aggregate of $149,528 and $160,266, respectively, included in the condensed consolidated statement of operations for stock based compensation for services provided.


As of September 30, 2016, 4,000,000 shares of Series A Preferred Stock, 1,733,801 shares of Series B Preferred Stock and 19,495,426 shares of common stock were issued and outstanding.


See Note 2 for a description of potential common stock equivalents.  




F-15





Restricted Stock


The Company periodically grants restricted stock awards to certain employees and consultants pursuant to the Company’s 2014 Incentive Plan that typically vest one to two years from their grant date. The Company recognized an aggregate of $1,888,287 in compensation expense during the nine months ended September 30, 2016, related to restricted stock awards. Stock compensation expense is recognized over the vesting period of the restricted stock. At September 30, 2016 the Company had approximately $186,898 of total unrecognized compensation cost related to non-vested restricted stock, all of which will be recognized through September 2017.


 

Restricted Stock

 

 

 

Weighted

Average

Exercise Price

 

 

 

 

 

 

Non-vested – December 31, 2015

 

470,167

 

 

 

$

1.72

Granted

 

960,000

 

 

 

$

1.68

Vested

 

(1,064,333)

 

 

 

$

1.69

Forfeited/Cancelled

 

-

 

 

 

$

-

Non-vested – September 30, 2016

 

365,834

 

 

 

$

1.70


The following is a summary of the Company’s warrant activity:


  

Warrants

 

 

Weighted

Average

Exercise Price

 

 

 

 

 

Outstanding – January 1, 2016

 

535,000

 

 

$

1.42

Exercisable –January 1, 2016

 

535,000

 

 

$

1.42

Granted

 

417,981

 

 

$

1.50

Exercised

 

-

 

 

$

-

Forfeited/Cancelled

 

(175,000)

 

 

$

-

Outstanding – September 30, 2016

 

777,981

 

 

$

1.42

Exercisable – September 30, 2016

 

777,981

 

 

$

1.42





F-16





Warrants Outstanding

 

Warrants Exercisable

Range of
Exercise Price

 

Number
Outstanding

 

 

Weighted
Average
Remaining
Contractual Life
(in years)

 

Weighted
Average
Exercise Price

 

 

Number
Exercisable

 

Weighted
Average
Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.00-$2.00

 

 

777,981

 

 

3.67 years

 

$

1.42

 

 

777,981

 

$

1.42

 


The following table summarizes the assumptions the Company utilized to estimate the fair value of the convertible note and warrants, and derivative liability issued during the nine months ended September 30, 2016:


Assumptions

 

September 30, 2016

 

 

 

Expected term (years)

 

5.00

Expected volatility

 

86.6%

Risk-free interest rate

 

1.24%

Dividend yield

 

0.00%


The expected warrant term is based on the remaining contractual term. The expected volatility is based on historical-volatility of peer entities whose stock prices were publicly available. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected term of the related warrant at the valuation date. Dividend yield is based on historical trends.


During the nine months ended September 30, 2016, the Company issued warrants for advisory services and expensed an aggregate of $348,911 as stock based compensation.


10. SUBSEQUENT EVENTS


In October 2016, the Company borrowed $300,000 from the President and CEO of the Company pursuant to an interest-free demand note.





F-17





Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Forward Looking Statements

 

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management and should be read in conjunction with the accompanying financial statements and their related notes included in this Quarterly Report. References in this section to “we,” “us,” “our,” or the “Company” are to the consolidated business of Viatar CTC Solutions Inc. and its wholly owned subsidiary, Viatar LLC.

 

This Quarterly Report contains forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expects,” “intends,” “estimates,” “continues,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements except as may be required under applicable securities laws.

 

Overview

 

We are a biotechnology company focused on developing and marketing cancer molecular diagnostics and cancer therapy products, both of which are based on the principle of removing blood-borne circulating tumor cells (CTCs). We are seeking to commercialize two products which utilize our proprietary CTC removal technology:


· The Viatar TM Collection System for Molecular Analysis is designed to collect and purify a statistically significant quantity of CTCs from up to 50 mL of blood as the front end for DNA sequencing and other genetic analysis technologies used primarily for research.


· The Viatar TM Therapeutic Oncopheresis System is designed to remove CTCs from a patient s blood as a new cancer therapy for metastatic disease.

  

We anticipate launching the Viatar M Collection System for Molecular Analysis during 2017 once we receive the following regulatory clearances: first, a CE Mark in Europe and Canada and, second, a 510K designation in the United States. We are currently engaged in research collaborations with several prominent researchers with the goal of marketing and selling the Viatar TM Collection System for Molecular Analysis through private label and distribution arrangements.

 

We anticipate launching the Viatar TM Therapeutic Oncopheresis System during 2017 with a CE Mark in Europe and Canada. Introduction in the United States will take several years, based on the premarket approval application (“PMA”) classification by the FDA. We anticipate marketing and selling the Viatar TM   Therapeutic Oncopheresis System  on a direct basis through our own dedicated sales force in key large markets (such as the United States, Germany, France, Italy, UK and Japan), and through distributors in other markets.




4





Key Factors Affecting our Results of Operations and Financial Condition

 

Our overall long-term growth plan depends on our ability to develop and commercialize our two oncology products. We are working with several prominent researchers to optimize our  Viatar TM  Collection System for Molecular Analysis to their process flow, and we intend to enter into additional such collaborations in the coming year. These activities will help facilitate market adoption of that product, and we anticipate having to complete various studies with clinical samples to demonstrate its efficacy. We will also seek to publish the results of those studies in peer-reviewed scientific journals. Our ability to complete such clinical studies, as well as to perform clinical studies for the Viatar TM Therapeutic Oncopheresis System is dependent on our ability to foster strong collaborative relationships with cancer researchers, CTC technology platform companies, and companies which make DNA sequencing equipment or perform such services; to conduct the appropriate clinical studies; and to obtain favorable clinical data.


For the years ended December 31, 2015 and 2014, we generated $65,910 and $9,000 from commercial sales, respectively. Assuming we are successful in completing development activities for the Viatar TM   Collection System for Molecular Analysis, we expect to generate revenues during 2017 from sales of that product. However, significant revenues and growth will depend on market adoption of that product. Similarly, assuming we are successful in completing development activities for the Viatar TM Therapeutic Oncopheresis System , we expect to generate revenues from sales of that system in 2017; however, significant revenues and growth will depend on clinical studies showing its efficacy in mitigating the spread and growth of metastatic tumors, and regulatory and reimbursement approval in the US and major European countries.


Our operating expenses consist of general and administrative; research and development; clinical and regulatory; and business development. These expenses principally consist of personnel costs, outside services (such as contract engineering firms, as well as the cost of supporting clinical studies and regulatory consultants), laboratory equipment and consumables, rent and overhead, and legal and accounting fees. We have also begun to incur significant capital costs for customized manufacturing and inspection equipment. All of these expense and capital equipment categories will increase in the near-term, principally as a result of hiring additional personnel and contracting with outside engineering firms to complete the development of our two products; expanding the range and scope of clinical trials (both with cancer researchers as well as companies we collaborate with); hiring additional personnel to handle business development, sales and marketing activities; and hiring additional personnel or outside services to handle administrative functions such as accounting, information technology and logistics.

 

We expect there to be an element of seasonality to our business, as research activities and patient treatment or monitoring with CTC-based tests is likely to decline during vacation and holiday seasons. We expect this trend of seasonality to continue for the foreseeable future.


Recent Developments


On October 21, 2016, the Company entered into Amendment No. 1 to the Company’s Executive Employment Agreement with Ilan Reich, the Company’s Chief Executive Officer and President. The amendment establishes certain milestones, of (i) positive Earnings Before Interest Taxes Depreciation and Amortization, or EBITDA, for the Company’s last fiscal year, as reflected in the Company’s Annual Report on Form 10-K, and (ii) gross revenues of more than $20,000,000 for the Company’s last fiscal year,  for the payment of Mr. Reich’s bonus, provides that the bonus will be paid in stock, and provides that the bonus may be allocated to members of the Company’s management as designated by Mr. Reich.

 




5





Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The notes to our financial statements, which are included elsewhere in this report, contain a summary of our significant accounting policies. We consider the accounting policies discussed below as being critical to the understanding of our current and future results of our operations.


Revenue Recognition

 

We recognize revenue in accordance with ASC 605, Revenue Recognition , and ASC 954-605, Health Care Entities , Revenue Recognition - which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. For contract partners, revenue is recorded based upon the contractually agreed upon fee schedule. When assessing collectability, we consider whether we have sufficient payment history to reliably estimate a payor’s individual payment patterns.

 

Accounts Receivable and Bad Debts

 

We carry accounts receivable at original invoice amounts, less an estimate for doubtful receivables, based on a review of all outstanding amounts on a periodic basis. The estimate for doubtful receivables will be determined from an analysis of the accounts receivable on a quarterly basis, and be recorded as bad debt expense. Since we will only recognize revenue to the extent we expect to collect such amounts, bad debt expense related to receivables from product revenue will be recorded in general and administrative expense in the statements of operations. Accounts receivable will be written off when deemed uncollectible. Recoveries of accounts receivable previously written off will be recorded when received.


Stock-Based Compensation Expense

 

In December 2004, the Financial Accounting Standards Board (the “FASB”) issued ASC 718, Compensation – Stock Compensation , or ASC 718. Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include options, restricted stock, restricted stock units, performance-based awards, share appreciation rights, and employee share purchase plans. As such, compensation cost is measured on the date of grant at fair value. The Company amortizes such compensation amounts, if any, over the respective vesting periods of the award. The Company uses the Black-Scholes-Merton option pricing model, or the Black-Scholes Model, an acceptable model in accordance with ASC 718, that requires the input of highly complex and subjective variables, including the expected life of the award and the expected stock price volatility over a period equal to or greater than the expected life of the award.

 




6





Equity instruments (“Instruments”) issued to anyone other than employees are recorded on the basis of the fair value of the Instruments, as required by ASC 718. ASC 505, Equity Based Payments to Non-Employees , or ASC 505, defines the measurement date and recognition period for such Instruments. In general, the measurement date is when either (a) a performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the Instruments are vested. The measured value related to the Instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in ASC 505.

 

The Company recognizes the compensation expense for all share-based compensation granted based on the grant date fair value estimated in accordance with ASC 718. The Company generally recognizes the compensation expense on a straight-line basis over the employee’s requisite service period.


Recent Accounting Pronouncements


In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle (issued as ASU 2014-09 by the FASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 by one year, and would allow entities the option to early adopt the new revenue standard as of the original effective date. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating its adoption method and the impact of the standard on its condensed consolidated financial statements.


In March 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” . The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company adopted ASU 2015-03 the period ended September 30, 2016.


In July 2015, the FASB issued ASU No. 2015-11,  “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under current inventory standards, the market value requires consideration of replacement cost, net realizable value and net realizable value less an approximately normal profit margin. The new guidance replaces market with net realizable value defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within that annual period. The amendment is to be applied prospectively with early adoption permitted. The Company is in the process of evaluating the effect of the new guidance on its condensed consolidated financial statements and disclosures.




7





In February 2016, the FASB issued ASU 2016-02, “ Leases (Topic 842).”  Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its condensed consolidated financial statements and disclosures.


In April 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.


In April 2016, the FASB issued ASU No. 2016-10, “ Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing ” (topic 606). In March 2016, the FASB issued ASU No. 2016-08, “ Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net)” (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, “ Revenue from Contracts with Customers ”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity's promise to grant a license provides a customer with either a right to use an entity's intellectual property or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new standard.


In May 2016, the FASB issued ASU No. 2016-12, “ Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” , which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating the impact of the new standard.


Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.




8





Results of Operations


Three Months Ended September 30, 2016 and 2015

 

The following table sets forth certain information concerning our results of operations for the periods shown:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Change

 

 

(unaudited)

 

 

 

 

 

2016

 

 

2015

 

 

Dollars

 

 

Percent

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

-

 

 

 

13,985

 

 

 

(13,985)

 

 

 

(100)

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Sales

 

 

-

 

 

 

3,830

 

 

 

(3,380)

 

 

 

(100)

Gross Profit

 

 

-

 

 

 

10,155

 

 

 

(10,155)

 

 

 

(100)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and Development

 

 

840,954

 

 

 

523,824

 

 

 

317,130

 

 

 

61

Clinical & Regulatory

 

 

80,623

 

 

 

154,054

 

 

 

(73,431)

 

 

 

(48)

Total R&D

 

 

921,577

 

 

 

677,878

 

 

 

243,699

 

 

 

36

General and Administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

 

304,070

 

 

 

198,557

 

 

 

105,513

 

 

 

53

Business Development

 

 

115,862

 

 

 

45,509

 

 

 

70,353

 

 

 

155

Total G&A

 

 

419,932

 

 

 

244,066

 

 

 

175,866

 

 

 

72

Total Expenses

 

 

1,341,509

 

 

 

921,944

 

 

 

419,565

 

 

 

46

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(52,261)

 

 

 

(16,413)

 

 

 

(35,848)

 

 

 

218

Total Other Income (Expense)

 

 

(52,261)

 

 

 

(16,413)

 

 

 

(35,848)

 

 

 

218

Loss Before Income Tax Expense

 

 

(1,393,770)

 

 

 

(928,202)

 

 

 

465,568

 

 

 

50

        Income tax expense

 

 

(5,799)

 

 

 

(6,582)

 

 

 

783

 

 

 

(12)

Net Loss

 

$

(1,399,569)

 

 

$

(934,784)

 

 

$

464,785

 

 

 

50

 

Revenue

 

Sales of $0 and $13,985 for the three months ended September 30, 2016 and 2015, respectively, arose in connection with commercial sales. The decrease is attributable to no sales during the period ended September 30, 2016. We do not expect to achieve significant sales until there is a full scale commercial rollout and we successfully obtain widespread adoption by the research and medical communities.  


Gross Profit


Gross profit for the three months ended September 30, 2016 was $0 or 0% of revenue, compared to $10,155 or 73% of revenue for the three months ended September 30, 2015.


Expenses

 

Research and Development Expenses

 

Research and development expenses consist of two categories of expenses: (i) research and development (“R&D”); and (ii) clinical trial and regulatory expenses.




9





R&D Expenses


R&D was $840,954 for the three months ended September 30, 2016, an increase of $317,130 or 61%, compared with $523,824 for the three months ended September 30, 2015. Of that $840,954 of R&D expenses for the three months ended September 30, 2016, $107,424 was attributable to the non-cash expensing of restricted and unrestricted stock awards to employees and consultants issued pursuant to the Company’s 2014 Equity Incentive Plan (“2014 Equity Incentive Plan”), compared to $160,266 for the three months ended September 30, 2015. The balance of R&D expenses for the three months ended September 30, 2016 and 2015 was $760,023 and $363,558, respectively. The increase was due to higher staffing levels, use of third party engineering resources, and the purchase of supplies and equipment to support the oncology program.


Clinical Trial and Regulatory Expenses


Clinical trial and regulatory expenses were $80,623 for the three months ended September 30, 2016, a decrease of $73,431, or 48%, compared with $154,054 for the three months ended September 30, 2015.  Of that $80,623 of clinical trial and regulatory expenses for the three months ended September 30, 2016, $54,129 was attributable to the non-cash expensing of restricted and unrestricted stock awards to employees and consultants issued pursuant to the 2014 Equity Incentive Plan, compared to $0 for the three months ended September 30, 2015. The balance of $54,129 was due to expenses in preparation for upcoming clinical trials for the Company’s Therapeutic Oncopheresis System .

 

General and Administrative Expenses

 

General and administrative expenses consist of general and administrative (“G&A”) and business development expenses.


G&A Expenses


G&A expenses were $304,070 for the three months ended September 30, 2016, an increase of $105,513 or 53%, compared to $198,557 for the three months ended September 30, 2015. The increase was due primarily to the non-cash stock based compensation totaling $42,104 during the current period compared to $0 in the prior period.


Business Development Expenses

 

Business development expenses were $115,862 for the three months ended September 30, 2016, an increase of $70,353 or 155%, compared with $45,509 for the three months ended September 30, 2015.  The increase was due to higher costs to obtain new capital, including certain investor relation activities and meetings.   


Interest Expense

 

Interest expense was $52,261 for the three months ended September 30, 2016, compared to $16,413 for the three months ended September 30, 2015. Interest expense for the period ended September 30, 2016 is comprised of $15,219 of accrued interest in the outstanding NYC R&D tax credit appeal, $14,862 for non-cash amortization of debt discount related to warrants issued with convertible notes, and $22,181 of accrued interest on debt. Interest expense for the period ended September 30, 2015 was comprised of $14,123 of accrued interest in the outstanding NYC R&D tax credit appeal and $2,290 of accrued interest on debt.


Net Loss

 

Net loss was $1,399,569 for the three months ended September 30, 2016, an increase of $464,785 or 50%, compared to $934,784 for the three months ended September 30, 2015. The increase was primarily due to higher expenses as discussed above.




10





Nine Months Ended September 30, 2016 and 2015

 

The following table sets forth certain information concerning our results of operations for the periods shown:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Change

 

 

(unaudited)

 

 

 

 

 

2016

 

 

2015

 

 

Dollars

 

 

Percent

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

-

 

 

 

37,940

 

 

 

(37,940)

 

 

 

(100)

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Sales

 

 

-

 

 

 

7,660

 

 

 

(7,660)

 

 

 

(100)

Gross Profit

 

 

-

 

 

 

30,280

 

 

 

(30,280)

 

 

 

(100)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and Development

 

 

3,315,874

 

 

 

1,732,079

 

 

 

1,583,795

 

 

 

91

Clinical & Regulatory

 

 

240,703

 

 

 

157,077

 

 

 

83,626

 

 

 

53

Total R&D

 

 

3,556,577

 

 

 

1,889,156

 

 

 

1,667,421

 

 

 

88

General and Administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

 

2,270,767

 

 

 

748,781

 

 

 

1,521,986

 

 

 

203

Business Development

 

 

365,821

 

 

 

192,753

 

 

 

173,068

 

 

 

90

Total G&A

 

 

2,636,588

 

 

 

941,534

 

 

 

1,695,054

 

 

 

180

Total Expenses

 

 

6,193,165

 

 

 

2,830,690

 

 

 

3,362,475

 

 

 

119

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend Income

 

 

3,227

 

 

 

-

 

 

 

3,227

 

 

 

100

Interest Expense

 

 

(168,994)

 

 

 

(73,132)

 

 

 

(95,862)

 

 

 

131

Total Other Income (Expense)

 

 

(165,767)

 

 

 

(73,132)

 

 

 

(92,635)

 

 

 

127

Loss Before Income Tax Expense

 

 

(6,358,932)

 

 

 

(2,873,542)

 

 

 

(3,485,390)

 

 

 

121

        Income tax expense

 

 

(6,750)

 

 

 

(6,582)

 

 

 

(168)

 

 

 

3

Net Loss

 

$

(6,365,682)

 

 

 

(2,880,124)

 

 

 

(3,485,558)

 

 

 

121

 

Revenue

 

Sales of $0 and $37,940 for the nine months ended September 30, 2016 and 2015, respectively, arose in connection with commercial sales. The decrease is attributable to no sales during the period ended September 30, 2016. We do not expect to achieve significant sales until there is a full scale commercial rollout and we successfully obtain widespread adoption by the research and medical communities.  


Gross Profit


Gross profit for the nine months ended September 30, 2016 was $0 or 0% of revenue compared to $30,280 or 80% of revenue for the nine months ended September 30, 2015.


Expenses

 

Research and Development Expenses

 

Research and development expenses consist of two categories of expenses: (i) research and development (“R&D”); and (ii) clinical trial and regulatory expenses.




11





R&D Expenses


R&D was $3,315,874 for the nine months ended September 30, 2016, an increase of $1,583,795 or 91%, compared with $1,732,079 for the nine months ended September 30, 2015. Of that $3,315,874 of R&D expenses for the nine months ended September 30, 2016, $923,642 was attributable to the non-cash expensing of restricted and unrestricted stock awards to employees and consultants issued pursuant to the Company’s 2014 Equity Incentive Plan (“2014 Equity Incentive Plan”), compared to $857,515 for the nine months ended September 30, 2015. The balance for the nine months ended September 30, 2016 and 2015 was $2,392,232 and $874,564 respectively. The increase was due to higher staffing levels, use of third party engineering resources, and the purchase of supplies and equipment to support the oncology program.


Clinical Trial and Regulatory Expenses


Clinical trial and regulatory expenses were $240,703 for the nine months ended September 30, 2016, an increase of $83,626 or 53%, compared with $157,077 for the nine months ended September 30, 2015.  Of that $240,703 of clinical trial and regulatory expenses for the nine months ended September 30, 2016, $91,790 was attributable to the non-cash expensing of restricted and unrestricted stock awards to employees and consultants issued pursuant to the 2014 Equity Incentive Plan compared to $0 for the nine months ended September 30, 2015. The balance of $148,912 was due to expenses in preparation for upcoming clinical trials for the Company’s Therapeutic Oncopheresis System .

 

General and Administrative Expenses

 

General and administrative expenses consist of general and administrative (“G&A”) and business development expenses.


G&A Expenses


G&A expenses were $2,270,767 for the nine months ended September 30, 2016, an increase of $1,521,986 or 203%, compared to $748,781 for the nine months ended September 30, 2015. The increase was due primarily to the non-cash stock based compensation totaling $1,347,391 during the current period, compared to $225,000 in the prior period.


Business Development Expenses

 

Business development expenses were $365,821 for the nine months ended September 30, 2016, an increase of $173,068 or 90%, compared with $192,753 for the nine months ended September 30, 2015.  The increase was due to higher costs to obtain new capital, including certain investor relation activities and meetings.


Interest Expense

 

Interest expense was $168,994 for the nine months ended September 30, 2016, compared to $73,132 for the nine months ended September 30, 2015. Interest expense for the period ended September 30, 2016 is comprised of $44,816 of accrued interest in the outstanding NYC R&D tax credit appeal, $44,262 for non-cash amortization of debt discount related to warrants issued with convertible notes, and $79,916 of accrued interest on debt. Interest expense for the period ended September 30, 2016 was offset by dividend income of $3,227 from the Company’s investment in a non-publicly traded company. Interest expense for the period ended September 30, 2015 was primarily comprised of $30,088 of accrued interest in the outstanding NYC R&D tax credit appeal, $37,654 for non-cash amortization of debt discount related to warrants issued with a demand note, and $5,390 of accrued interest on debt.


Net Loss

 

Net loss was $6,365,682 for the nine months ended September 30, 2016, an increase of $3,485,558 or 121%, compared to $2,880,124 for the nine months ended September 30, 2015. The increase was primarily due to the higher expenses as discussed above.




12





  Liquidity and Capital Resources

 

Since inception, the Company has not generated significant revenues. As a result, we have incurred significant net losses and significant negative cash flows from operations.


As reflected in the accompanying condensed consolidated financial statements, the Company incurred a net loss and net cash used in operations of $6,365,682 and $3,957,586, respectively, for the nine months ended September 30, 2016. As of September 30, 2016 the Company had a working capital deficit of $462,496 and an accumulated deficit of $28,822,215.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon several factors, including (a) obtaining funding, whether in the form of equity, or debt investments, licensing revenues, strategic collaboration payments or grants from government or other sources, (b) success in achieving its research and development goals, (c) obtaining regulatory approvals, and (d) gaining market acceptance and/or distribution or strategic partners for its products.


We are actively working to improve our financial position and enable the growth of our business by raising new capital. During the nine months ended September 30, 2016 and 2015 we raised $4,199,240 and $1,009,125, respectively, through equity financing and $0 and $350,000, respectively, through debt financing. In addition, we received $0 and $611,939 from the promissory note used for common stock subscription during the nine months ended September 30, 2016 and 2015, respectively. We repaid $0 and $100,000, respectively, on two outstanding demand notes during the nine months ended September 30, 2016 and 2015, respectively.


We have a limited operating history and our business is subject to all of the usual risks inherent in establishing and growing a new business enterprise. If we continue to incur operating losses and fail to become a profitable company, we may be unable to continue our operations. We expect to continue to operate at a net loss until we can obtain regulatory approval to commercialize our Therapeutic Oncopheresis System and secure widespread market acceptance and favorable reimbursement rates.  While we currently have sufficient cash on hand to fund operating and capital expenses for the remainder of this year, we anticipate that we will need substantial additional capital of approximately $8-15 million in order to achieve commercialization and subsequent profitability.


In January 2015, we received a commitment from an existing shareholder to provide $1.5 million of financing by February 28, 2016. This commitment was satisfied through (a) the sale of an aggregate of 697,000 shares of common stock to accredited investors for proceeds of $1,009,125 (for an average price of $1.45 per share) net of offering costs of $134,750, and (b) the exchange of 4% Convertible Notes for stock of a non-publicly traded company.   


In October 2015, the Company borrowed $1,000,000 from a related party in exchange for a 4% convertible promissory note due November 2018. In October 2015, the Company issued a 4% convertible promissory note of $900,000 due December 2018 in exchange for 60,000 shares of stock in a non-publicly company valued at $15 per share, which was monetized in February 2016.


During the nine month ended September 30, 2016, the Company raised approximately $4.2 million of cash through the sale of approximately 1.7 million shares of Series B Preferred Stock. The investors are existing, accredited shareholders of the Company.  


The Company anticipates raising substantial additional capital in the fourth quarter of 2016 and first quarter of 2017, either in the form of equity, debt or convertible instruments, as well as the issuance of warrants to purchase common stock with a cashless exercise feature (that will not provide new capital upon exercise).  




13





Cash Flows

 

Cash Used in Operating Activities

 

Net cash used in operating activities was $3,957,586 for the nine months ended September 30, 2016, compared to net cash used in operating activities of $1,794,983 for the nine months ended September 30, 2015. The change in cash used in operating activities was a result of the overall increase in expenses described above.  

 

In all periods, the primary use of cash in operating activities was to fund operations.  The Company’s monthly cash burn rate during most of 2016 has been approximately $500,000, which is the appropriate level needed to complete the manufacturing scale-up and regulatory compliance activities necessary to commence the first human clinical trial in 2017.  Since September 2016, the Company has reduced its monthly cash burn rate to approximately $250,000 in order to conserve cash pending the completion of various new financing endeavors.  This reduction in the spending rate may cause a delay in completion of the Company’s research and development program.


Cash Provided by Investing Activities

 

During the nine months ended September 30, 2016, the Company received net proceeds of $480,000 from the sale of the investment in a non-publicly traded company. The increase in cash was offset by $599,839 utilized for the purchase of equipment and machinery for full-scale production of components for our Therapeutic Oncopheresis Syste m. There was no cash provided by or used in investing activities in 2015. 


Cash Provided by Financing Activities

   

Net cash provided by financing activities was $4,199,240 for the nine months ended September 30, 2016, compared to net cash provided by financing activities of $1,871,064 for the nine months ended September 30, 2015. Our primary source of financing in all periods consisted of equity capital contributed by current and new investors, as well as debt financing from various lenders.

 

Contingencies

 

The Company is currently under audit by New York City tax authorities for the 2011, 2012, and 2013 tax years. The Company applied for New York City biotechnology tax credits and received certificates of eligibility from the NYC Department of Finance in the amounts of $147,997, $242,016, and $236,874 for tax years 2013, 2012, and 2011, respectively. These credits have been recognized as income tax benefits on the consolidated statements of operations in the year of application. The Company received refunds for these amounts in previous years. The City of New York subsequently ruled that the Company does not qualify for the tax credits. As of September 30, 2016, the Company accrued $821,842 on the condensed consolidated balance sheet which includes $194,955 of interest at the statutory rate. The Company appealed the decision made by the City of New York. While settlement discussions have been held, as of the date of this report no decision has been made regarding the appeal or settlement.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Not required for a smaller reporting company. 

 




14





Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company's management, including the Company's chief executive officer and chief financial officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Ilan Reich, the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of September 30, 2016. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were not effective due to the deficiencies in the Company’s internal control over financial reporting identified below.  


A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.  Based on management's assessment over financial reporting, management believes as of September 30, 2016, the Company's internal control over financial reporting was not effective due to the following deficiencies:

(i)

there are limited controls over information processing due to limited resources,


(ii)

a lack of sufficient internal accounting expertise to provide reasonable assurance that our financial statements and notes thereto are prepared in accordance with GAAP, and


(iii)

a lack of segregation of duties to ensure adequate review of financial statement preparation. 


 Accordingly, as the result of identifying the above material weaknesses, we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company's internal controls.

  

Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management believes these weaknesses did not have a material effect on our financial results and intends to take remedial actions upon receiving substantial additional funding for the Company's business operations.


Changes in Internal Controls over Financial Reporting

 

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

 

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 




15





PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

We are not party to, and our property is not the subject to, any material legal proceedings.


Item 1A. Risk Factors

 

Not required for a smaller reporting company.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.


In July 2016, the Company issued an aggregate of 40,114.8 shares of Series B Preferred Stock to holders of the Company’s shares of Series B Preferred Stock as dividends.


In connection with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactions not involving a public offering.


Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.




16





Item 6. Exhibits.

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit

No.

 

Description

 

 

 

 10.1

 

Amendment No. 1 to Executive Employment Agreement between the Company and Ilan Reich.*



31.1

 



Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

32.1

 

Certification of the Principal Executive Officer and Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

 

 

 

101.INS

 

XBRL Instance Document*

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document*

 

 

 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document*

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document*

 

 

 

101.LAB

 

XBRL Taxonomy Label Linkbase Document*

 

 

 

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document*

  

 

 

*Filed herewith.









17







SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

VIATAR CTC SOLUTIONS INC.

 

 

 

Date:  November 14, 2016

By:

/s/ Ilan Reich

 

 

Ilan Reich

 

 

President, Chief Executive Officer and Chief Financial Officer

 

 

(Principal Executive Officer and Principal Accounting and Financial Officer)

 

 

 

 

 




18



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