Item
1. Financial Statements
PRESSURE
BIOSCIENCES, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
41,939
|
|
|
$
|
116,783
|
|
Accounts receivable
|
|
|
589,682
|
|
|
|
113,256
|
|
Inventories, net of $50,000 reserve at September
30, 2016 and December 31, 2015
|
|
|
1,008,138
|
|
|
|
1,038,371
|
|
Prepaid income taxes
|
|
|
7,405
|
|
|
|
7,381
|
|
Prepaid
expenses and other current assets
|
|
|
179,954
|
|
|
|
213,926
|
|
Total
current assets
|
|
|
1,827,118
|
|
|
|
1,489,717
|
|
Investment in available-for-sale
equity securities
|
|
|
59,550
|
|
|
|
294,522
|
|
Property
and equipment, net
|
|
|
7,933
|
|
|
|
20,149
|
|
TOTAL
ASSETS
|
|
$
|
1,894,601
|
|
|
$
|
1,804,388
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
532,214
|
|
|
$
|
941,389
|
|
Accrued employee compensation
|
|
|
185,909
|
|
|
|
176,009
|
|
Accrued professional
fees and other
|
|
|
690,230
|
|
|
|
821,088
|
|
Deferred revenue
|
|
|
270,102
|
|
|
|
140,878
|
|
Convertible
debt, net of unamortized debt discounts of $1,891,206 at September 30, 2016 and $0 at December
31, 2015
|
|
|
2,664,334
|
|
|
|
100,000
|
|
Other
debt, net of unamortized discounts of $5,183 and $3,041, respectively
|
|
|
242,963
|
|
|
|
151,628
|
|
Warrant derivative
liability
|
|
|
4,325,864
|
|
|
|
3,295,976
|
|
Conversion
option derivative liability
|
|
|
4,627,452
|
|
|
|
3,940,791
|
|
Total
current liabilities
|
|
|
13,539,068
|
|
|
|
9,567,759
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Related party convertible
debt, net of unamortized debt discounts of $199,436 and $0, respectively
|
|
|
91,568
|
|
|
|
—
|
|
Convertible debt, net
of unamortized debt discounts of $2,076,658 and $5,223,658, respectively
|
|
|
986,843
|
|
|
|
177,342
|
|
Deferred
revenue
|
|
|
36,935
|
|
|
|
36,935
|
|
TOTAL
LIABILITIES
|
|
|
14,654,414
|
|
|
|
9,782,036
|
|
COMMITMENTS AND CONTINGENCIES
(Note 5)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
Series D Convertible
Preferred Stock, $.01 par value; 850 shares authorized; 300 shares issued and outstanding on September 30, 2016 and December
31, 2015, respectively (Liquidation value of $300,000)
|
|
|
3
|
|
|
|
3
|
|
Series G Convertible
Preferred Stock, $.01 par value; 240,000 shares authorized; 86,570 shares issued and outstanding on September 30, 2016 and
December 31, 2015, respectively
|
|
|
866
|
|
|
|
866
|
|
Series H Convertible
Preferred Stock, $.01 par value; 10,000 shares authorized; 10,000 shares issued and outstanding on September 30, 2016 and
December 31, 2015, respectively
|
|
|
100
|
|
|
|
100
|
|
Series H2 Convertible
Preferred Stock, $.01 par value; 21 shares authorized; 21 shares issued and outstanding on September 30, 2016 and December
31, 2015, respectively
|
|
|
—
|
|
|
|
—
|
|
Series J Convertible
Preferred Stock, $.01 par value; 6,250 shares authorized; 3,521 and 3,546 shares issued and outstanding on September 30, 2016
and December 31, 2015, respectively
|
|
|
35
|
|
|
|
36
|
|
Series K Convertible
Preferred Stock, $.01 par value; 15,000 shares authorized; 6,816 and 11,416 shares issued and outstanding on September 30,
2016 and December 31, 2015, respectively
|
|
|
68
|
|
|
|
114
|
|
Common stock, $.01
par value; 100,000,000 shares authorized; 30,599,839 and 23,004,898 shares issued and outstanding on September 30, 2016 and
December 31, 2015, respectively
|
|
|
305,998
|
|
|
|
230,050
|
|
Warrants to acquire
common stock
|
|
|
5,683,897
|
|
|
|
5,416,681
|
|
Additional paid-in
capital
|
|
|
27,080,191
|
|
|
|
26,036,733
|
|
Accumulated other comprehensive
income
|
|
|
(339,997
|
)
|
|
|
(105,025
|
)
|
Accumulated
deficit
|
|
|
(45,490,974
|
)
|
|
|
(39,557,206
|
)
|
Total
stockholders’ deficit
|
|
|
(12,759,813
|
)
|
|
|
(7,977,648
|
)
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
1,894,601
|
|
|
$
|
1,804,388
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
PRESSURE
BIOSCIENCES, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For
the Three Months Ended
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products, services, other
|
|
$
|
500,949
|
|
|
$
|
481,452
|
|
|
$
|
1,429,487
|
|
|
$
|
1,174,391
|
|
Grant revenue
|
|
|
34,385
|
|
|
|
98,882
|
|
|
|
127,289
|
|
|
|
259,181
|
|
Total
revenue
|
|
|
535,334
|
|
|
|
580,334
|
|
|
|
1,556,776
|
|
|
|
1,433,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and services
|
|
|
262,894
|
|
|
|
209,804
|
|
|
|
727,698
|
|
|
|
575,780
|
|
Research and development
|
|
|
268,317
|
|
|
|
355,574
|
|
|
|
925,015
|
|
|
|
878,899
|
|
Selling and marketing
|
|
|
224,380
|
|
|
|
207,888
|
|
|
|
609,501
|
|
|
|
574,289
|
|
General and administrative
|
|
|
231,550
|
|
|
|
497,796
|
|
|
|
1,853,010
|
|
|
|
2,034,040
|
|
Total
operating costs and expenses
|
|
|
987,141
|
|
|
|
1,271,062
|
|
|
|
4,115,224
|
|
|
|
4,063,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(451,807
|
)
|
|
|
(690,728
|
)
|
|
|
(2,558,448
|
)
|
|
|
(2,629,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,116,328
|
)
|
|
|
(1,584,830
|
)
|
|
|
(2,961,708
|
)
|
|
|
(2,831,106
|
)
|
Other expense
|
|
|
(200
|
)
|
|
|
—
|
|
|
|
(1,112
|
)
|
|
|
(36,910
|
)
|
Gain on extinguishment of embedded derivative
liabilities
|
|
|
—
|
|
|
|
1,180,251
|
|
|
|
—
|
|
|
|
2,028,324
|
|
Change in fair
value of derivative liabilities
|
|
|
623,128
|
|
|
|
437,379
|
|
|
|
(412,500
|
)
|
|
|
38,968
|
|
Total
other (expense) income
|
|
|
(493,400
|
)
|
|
|
32,800
|
|
|
|
(3,375,320
|
)
|
|
|
(800,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(945,207
|
)
|
|
|
(657,928
|
)
|
|
|
(5,933,768
|
)
|
|
|
(3,430,160
|
)
|
Accrued dividends
on convertible preferred stock
|
|
|
—
|
|
|
|
1,711
|
|
|
|
—
|
|
|
|
(21,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable
to common shareholders
|
|
$
|
(945,207
|
)
|
|
|
(656,217
|
)
|
|
$
|
(5,933,768
|
)
|
|
$
|
(3,451,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common
stockholders – basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock shares
outstanding used in the basic and diluted net loss per share calculation
|
|
|
29,425,362
|
|
|
|
20,737,827
|
|
|
|
26,139,740
|
|
|
|
19,771,323
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
PRESSURE
BIOSCIENCES, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(945,207
|
)
|
|
$
|
(657,928
|
)
|
|
$
|
(5,933,768
|
)
|
|
$
|
(3,430,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss
on marketable securities
|
|
|
(22,233
|
)
|
|
|
—
|
|
|
|
(234,972
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(967,440
|
)
|
|
$
|
(657,928
|
)
|
|
$
|
(6,168,740
|
)
|
|
$
|
(3,430,160
|
)
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
PRESSURE
BIOSCIENCES, 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
|
|
$
|
(5,933,768
|
)
|
|
$
|
(3,430,160
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
15,489
|
|
|
|
18,279
|
|
Accretion
of interest and amortization of debt discount
|
|
|
2,848,058
|
|
|
|
2,367,381
|
|
Penalty
interest added to debt principal
|
|
|
41,200
|
|
|
|
-
|
|
Gain
on settlement of debt
|
|
|
(5,044
|
)
|
|
|
-
|
|
Stock-based
compensation expense
|
|
|
282,811
|
|
|
|
185,370
|
|
Amortization
of third party fees paid in common stock and warrants
|
|
|
332,700
|
|
|
|
173,538
|
|
Gain
on extinguishment of embedded derivative liabilities
|
|
|
-
|
|
|
|
(2,028,324
|
)
|
Change
in fair value of derivative liabilities
|
|
|
412,500
|
|
|
|
(38,968
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(476,426
|
)
|
|
|
(90,800
|
)
|
Inventories
|
|
|
30,233
|
|
|
|
41,709
|
|
Prepaid
expenses and other assets
|
|
|
33,948
|
|
|
|
123,808
|
|
Accounts
payable
|
|
|
(409,175
|
)
|
|
|
(200,969
|
)
|
Accrued
employee compensation
|
|
|
9,900
|
|
|
|
48,606
|
|
Deferred
revenue and other accrued expenses
|
|
|
80,058
|
|
|
|
150,581
|
|
Net
cash used in operating activities
|
|
|
(2,737,516
|
)
|
|
|
(2,679,949
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property plant and equipment
|
|
|
(3,273
|
)
|
|
|
(6,662
|
)
|
Net
cash used in investing activities
|
|
|
(3,273
|
)
|
|
|
(6,662
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
proceeds from related party convertible debt
|
|
|
96,667
|
|
|
|
6,300
|
|
Payments
on related party debt
|
|
|
-
|
|
|
|
(12,300
|
)
|
Net
proceeds from convertible debt
|
|
|
2,102,382
|
|
|
|
3,991,437
|
|
Payments
on convertible debt
|
|
|
-
|
|
|
|
(2,107,065
|
)
|
Net
proceeds from non-convertible debt
|
|
|
865,152
|
|
|
|
1,300,000
|
|
Payments
on non-convertible debt
|
|
|
(781,221
|
)
|
|
|
(537,641
|
)
|
Net
proceeds from the issuance of common stock
|
|
|
382,965
|
|
|
|
-
|
|
Payment
of prepayment penalty
|
|
|
-
|
|
|
|
(351,193
|
)
|
Net
cash provided by financing activities
|
|
|
2,665,945
|
|
|
|
2,289,538
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH
|
|
|
(74,844
|
)
|
|
|
(397,073
|
)
|
CASH
AT BEGINNING OF YEAR
|
|
|
116,783
|
|
|
|
473,948
|
|
CASH
AT END OF PERIOD
|
|
$
|
41,939
|
|
|
$
|
76,875
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION
|
|
|
|
|
|
|
|
|
Interest
paid in cash
|
|
$
|
1,154
|
|
|
$
|
239,389
|
|
Income
taxes paid in cash
|
|
|
-
|
|
|
|
-
|
|
NON CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
Convertible
debt exchanged for common stock
|
|
|
117,837
|
|
|
|
338,000
|
|
Cashless exercise
of warrants
|
|
|
11,100
|
|
|
|
-
|
|
Discount
due to beneficial conversion feature
|
|
|
20,721
|
|
|
|
-
|
|
Discount
due to warrants issued with debt
|
|
|
39,755
|
|
|
|
-
|
|
Common
stock issued with debt
|
|
|
104,731
|
|
|
|
-
|
|
Common
stock issued to settle non-convertible debt
|
|
|
41,200
|
|
|
|
-
|
|
Conversion
of preferred stock into common stock
|
|
|
63,904
|
|
|
|
-
|
|
Extension
fees added to principal
|
|
|
-
|
|
|
|
84,000
|
|
Issuance
of common stock for investment in available-for-sale equity securities
|
|
|
-
|
|
|
|
399,547
|
|
Accrued
dividends on preferred stock
|
|
|
-
|
|
|
|
21,768
|
|
Unrealized
loss from available-for-sale equity securities
|
|
|
234,972
|
|
|
|
76,687
|
|
Debt
discount from derivative liability
|
|
|
1,304,049
|
|
|
|
5,085,536
|
|
Prepayment
penalty and accrued interest enrolled into debt principal
|
|
|
-
|
|
|
|
48,950
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
PRESSURE
BIOSCIENCES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2016
(UNAUDITED)
|
1)
|
Business
Overview, Liquidity and Management Plans
|
Pressure
BioSciences, Inc. (“we”, “our”, “the Company”) is focused on solving the challenging problems
inherent in biological sample preparation, a crucial laboratory step performed by scientists worldwide working in biological life
sciences research. Sample preparation is a term that refers to a wide range of activities that precede most forms of scientific
analysis. Sample preparation is often complex, time-consuming and, in our belief, one of the most error-prone steps of scientific
research. It is a widely-used laboratory undertaking – the requirements of which drive what we believe is a large and growing
worldwide market. We have developed and patented a novel, enabling technology platform that can control the sample preparation
process. It is based on harnessing the unique properties of high hydrostatic pressure. This process, called pressure cycling technology,
or PCT, uses alternating cycles of hydrostatic pressure between ambient and ultra-high levels i.e., 35,000 pounds per square inch
(“
psi
”) or greater to safely, conveniently and reproducibly control the actions of molecules in biological
samples, such as cells and tissues from human, animal, plant and microbial sources.
Our
pressure cycling technology uses internally developed instrumentation that is capable of cycling pressure between ambient and
ultra-high levels at controlled temperatures and specific time intervals, to rapidly and repeatedly control the interactions of
bio-molecules, such as deoxyribonucleic acid (“
DNA
”), ribonucleic acid (“
RNA
”), proteins,
lipids and small molecules. Our laboratory instrument, the Barocycler
®
, and our internally developed consumables
product line, which include our Pressure Used to Lyse Samples for Extraction (“
PULSE
”) tubes, and other processing
tubes, and application specific kits such as consumable products and reagents, together make up our PCT Sample Preparation System
(“
PCT SPS
”).
In
2015, together with an investment bank, we formed a subsidiary called Pressure BioSciences Europe (“PBI Europe”) in
Poland. We have 49% ownership interest with the investment bank retaining 51%. As of now, PBI Europe does not have any operating
activities but is expected to commence operations in 2017. Therefore, we don’t have control of the subsidiary and did not
consolidate in our financial statements.
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal course of business. However, we have experienced negative
cash flows from operations with respect to our pressure cycling technology business since our inception. As of September 30, 2016,
we do not have adequate working capital resources to satisfy our current liabilities and as a result, there is substantial doubt
regarding our ability to continue as a going concern. We have been successful in raising cash through debt and equity offerings
in the past and as described in Note 6, we completed an over-subscribed $5.0 million debt financing on March 31, 2016 with a total
amount raised of $6.3 million. We have financing efforts in place to continue to raise cash through debt and equity offerings.
Management has developed
a plan to continue operations. This plan includes obtaining equity or debt financing. During the nine months ended September 30,
2016 we received $3,447,166 net proceeds, in additional convertible, non-convertible debt and shares of common stock. Although
we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these
matters in the future will be successful.
We
need substantial additional capital to fund normal operations in future periods. In the event that we are unable to obtain financing
on acceptable terms, or at all, we will likely be required to cease our operations, pursue a plan to sell our operating assets,
or otherwise modify our business strategy, which could materially harm our future business prospects. These financial statements
do not include any adjustments that might result from this uncertainty.
|
3)
|
Interim
Financial Reporting
|
The
accompanying unaudited condensed consolidated balance sheet as of December 31, 2015, which was derived from audited financial
statements, and the unaudited interim condensed consolidated financial statements of Pressure BioSciences, Inc. have been prepared
in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting
principles” or “GAAP”) for interim financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management,
all material adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months and nine months ended September 30, 2016 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2016. For further information, refer to the audited consolidated
financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K (the “Form 10-K”)
for the fiscal year ended December 31, 2015 as filed with the Securities and Exchange Commission on April 5, 2016.
|
4)
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of Pressure BioSciences, Inc., and its wholly-owned subsidiary
PBI BioSeq, Inc. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain
amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation.
Use
of Estimates
To
prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America, we are required to make significant estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. In addition, significant estimates were made in projecting future cash flows
to quantify deferred tax assets, the costs associated with fulfilling our warranty obligations for the instruments that we sell,
and the estimates employed in our calculation of fair value of stock options awarded and warrant derivative liability. We base
our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from the estimates and assumptions used.
Concentrations
Credit
Risk
Our
financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents,
and trade receivables. We have cash investment policies which, among other things, limit investments to investment-grade securities.
We perform ongoing credit evaluations of our customers, and the risk with respect to trade receivables is further mitigated by
the fact that many of our customers are government institutions, large pharmaceutical and biotechnology companies, and academic
laboratories.
The
following table illustrates the level of concentration as a percentage of total revenues during the three months and nine months
ended September 30, 2016 and 2015.
|
|
For the Three Months Ended
|
|
|
|
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
Top Five Customers
|
|
|
60
|
%
|
|
|
43
|
%
|
Federal Agencies
|
|
|
9
|
%
|
|
|
2
|
%
|
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
Top Five Customers
|
|
|
31
|
%
|
|
|
34
|
%
|
Federal Agencies
|
|
|
3
|
%
|
|
|
14
|
%
|
The
following table illustrates the level of concentration as a percentage of net accounts receivable balance as of September 30,
2016 and December 31, 2015:
|
|
September
30, 2016
|
|
|
December,
31, 2015
|
|
Top Five Customers
|
|
|
55
|
%
|
|
|
93
|
%
|
Federal Agencies
|
|
|
9
|
%
|
|
|
1
|
%
|
Product
Supply
A
Massachusetts-based contract manufacturer started building the new NEP2320 Extreme Barocycler instrument in May 2016. We plan
to have this manufacturer build all instruments in the future.
Investment
in Available-For-Sale Equity Securities
As of September 30, 2016,
we held 601,500 shares of common stock of Everest Investments Holdings S.A. (“Everest”), a Polish publicly traded
company listed on the Warsaw Stock Exchange. We account for this investment in accordance with ASC 320
“Investments —
Debt and Equity Securities”
as securities available for sale. On September 30, 2016, our condensed consolidated balance
sheet reflected the fair value of our investment in Everest to be $59,550, based on the closing price of Everest shares of $0.10
per share on that day. The carrying value of our investment in Everest common stock held will change from period to period based
on the closing price of the common stock of Everest as of the balance sheet date. This change in market value will be recorded
by us on a quarterly basis as an unrealized gain or loss in Comprehensive Income or Loss.
Inventories
Inventories
are valued at the lower of cost (average cost) or market (sales price). The cost of Barocyclers consists of the cost charged by
the contract manufacturer. The cost of manufactured goods includes material, freight-in, direct labor, and applicable overhead.
The composition of inventory is as follows:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Raw materials
|
|
$
|
491,254
|
|
|
$
|
310,367
|
|
Finished goods
|
|
|
566,884
|
|
|
|
778,004
|
|
Inventory Reserve
|
|
|
(50,000
|
)
|
|
|
(50,000
|
)
|
Total
|
|
$
|
1,008,138
|
|
|
$
|
1,038,371
|
|
Debt
Issuance Costs
In
April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires
that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liability, consistent
with the presentation of debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented
as deferred charge assets, separate from the related debt liability. ASU 2015-03 does not change the recognition and measurement
requirements for debt issuance costs. The Company early-adopted ASU 2015-03 as of the end of its Fiscal 2015, and applied its
provisions retrospectively.
Computation
of Loss per Share
Basic
loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding.
Diluted loss per share is computed by dividing loss available to common shareholders by the weighted average number of common
shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been
issued. For purposes of this calculation, convertible preferred stock, common stock dividends, and warrants and options to acquire
common stock, are all considered common stock equivalents in periods in which they have a dilutive effect and are excluded from
this calculation in periods in which these are anti-dilutive to our net loss.
The
following table illustrates our computation of loss per share for the three months and nine months ended September 30, 2016 and
2015:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(945,207
|
)
|
|
$
|
(657,928
|
)
|
|
$
|
(5,933,768
|
)
|
|
$
|
(3,430,160
|
)
|
Preferred
dividends accrued
|
|
|
—
|
|
|
|
1,711
|
|
|
|
—
|
|
|
|
(21,768
|
)
|
Net loss applicable
to common shareholders
|
|
$
|
(945,207
|
)
|
|
$
|
(656,217
|
)
|
|
$
|
(5,933,768
|
)
|
|
$
|
(3,451,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock shares
outstanding
|
|
|
29,425,362
|
|
|
|
20,737,827
|
|
|
|
26,139,740
|
|
|
|
19,771,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per
common share – basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.17
|
)
|
The
following table presents securities that could potentially dilute basic loss per share in the future. For all periods presented,
the potentially dilutive securities were not included in the computation of diluted loss per share because these securities would
have been anti-dilutive to our net loss. The Series D Convertible Preferred Stock, Series G Convertible Preferred Stock, Series
H Convertible Preferred Stock, Series J Convertible Preferred Stock and Series K Convertible Preferred Stock are presented below
as if they were converted into common shares according to the conversion terms.
|
|
As
of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Stock options
|
|
|
5,269,250
|
|
|
|
3,201,250
|
|
Convertible debt
|
|
|
26,971,732
|
|
|
|
26,015,029
|
|
Common stock warrants
|
|
|
24,824,695
|
|
|
|
26,125,127
|
|
Convertible preferred stock:
|
|
|
|
|
|
|
|
|
Series D Convertible
Preferred Stock
|
|
|
750,000
|
|
|
|
750,000
|
|
Series G Convertible
Preferred Stock
|
|
|
865,700
|
|
|
|
865,700
|
|
Series H Convertible
Preferred Stock
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Series H2 Convertible
Preferred Stock
|
|
|
2,100,000
|
|
|
|
2,100,000
|
|
Series J Convertible
Preferred Stock
|
|
|
3,521,000
|
|
|
|
3,546,000
|
|
Series
K Convertible Preferred Stock
|
|
|
6,816,000
|
|
|
|
11,399,000
|
|
|
|
|
72,118,377
|
|
|
|
75,002,106
|
|
Accounting
for Stock-Based Compensation Expense
We
maintain equity compensation plans under which incentive stock options and non-qualified stock options are granted to employees,
independent members of our Board of Directors and outside consultants. We recognize stock-based compensation expense over the
requisite service period using the Black-Scholes formula to estimate the fair value of the stock options on the date of grant.
Determining
Fair Value of Stock Option Grants
Valuation
and Amortization Method - The fair value of each option award is estimated on the date of grant using the Black-Scholes pricing
model based on certain assumptions. The estimated fair value of employee stock options is amortized to expense using the straight-line
method over the vesting period.
Expected
Term - The Company uses the simplified calculation of expected life, as the Company does not currently have sufficient historical
exercise data on which to base an estimate of expected term. Using this method, the expected term is determined using the average
of the vesting period and the contractual life of the stock options granted.
Expected
Volatility - Expected volatility is based on the Company’s historical stock volatility data over the expected term of the
award.
Risk-Free
Interest Rate - The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield
currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Forfeitures
- The Company records stock-based compensation expense only for those awards that are expected to vest. The Company estimated
a forfeiture rate of 5% for awards granted based on historical experience and future expectations of options vesting. The Company
used this historical rate as our assumption in calculating future stock-based compensation expense.
The
Company recognized stock-based compensation expense of $90,500 and $74,864 for the three months ended September 30, 2016 and 2015,
respectively. The following table summarizes the effect of this stock-based compensation expense within each of the line items
of our costs and expenses within our Condensed Consolidated Statements of Operations:
|
|
For
the Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
14,735
|
|
|
$
|
18,307
|
|
Selling and marketing
|
|
|
9,911
|
|
|
|
13,310
|
|
General and administrative
|
|
|
65,854
|
|
|
|
43,247
|
|
Total stock-based
compensation expense
|
|
$
|
90,500
|
|
|
$
|
74,864
|
|
The
Company recognized stock-based compensation expense of $282,811 and $185,370 for the nine months ended September 30, 2016 and
2015, respectively. The following table summarizes the effect of this stock-based compensation expense within each of the line
items of our costs and expenses within our Condensed Consolidated Statements of Operations:
|
|
For
the Nine Months Ended September 30
|
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
50,766
|
|
|
$
|
41,172
|
|
Selling and marketing
|
|
|
32,404
|
|
|
|
27,386
|
|
General and administrative
|
|
|
199,641
|
|
|
|
116,812
|
|
Total stock-based
compensation expense
|
|
$
|
282,811
|
|
|
$
|
185,370
|
|
Fair
Value of Financial Instruments
Due
to their short maturities, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate their fair value. Long-term liabilities are primarily related to convertible debentures and deferred revenue
with carrying values that approximate fair value.
Fair
Value Measurements
The
Company follows the guidance of FASB ASC Topic 820, “
Fair Value Measurements and Disclosures
” (“ASC 820”)
as it related to all financial assets and financial liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis.
The
Company generally defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (exit price). The Company uses a three-tier fair value
hierarchy, which classifies the inputs used in measuring fair values. These tiers include: Level 1, defined as observable inputs
such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market
data exists, therefore requiring the Company to develop its own assumptions.
Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement. The Company has determined that its financial assets are classified within Level 1 and its financial liabilities
are currently classified within Level 3 in the fair value hierarchy. The development of the unobservable inputs for Level 3 fair
value measurements and fair value calculations are the responsibility of the Company’s management.
The
following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring
basis as of September 30, 2016:
|
|
|
|
|
Fair
value measurements at September 30, 2016 using:
|
|
|
|
September
30, 2016
|
|
|
Quoted
prices in
active
markets
(Level
1)
|
|
|
Significant
other
observable
inputs (Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Available-For-Sale
Equity Securities
|
|
$
|
59,550
|
|
|
$
|
59,550
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
Financial Assets
|
|
$
|
59,550
|
|
|
$
|
59,550
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
September
30, 2016
|
|
|
Quoted
prices in
active
markets
(Level
1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Series D Preferred Stock
Purchase Warrants
|
|
$
|
189,884
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
189,884
|
|
Warrants Issued with Convertible Debt
|
|
|
4,135,980
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,135,980
|
|
Conversion Option
Derivative Liabilities
|
|
|
4,627,452
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,627,452
|
|
Total Derivatives
|
|
$
|
8,953,316
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,953,316
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for the nine months ended September
30, 2016:
|
|
December
31,2015
|
|
|
Issuance
fair value
|
|
|
Change
in fair
value
|
|
|
Gain
on
extinguishment
of
derivative
liabilities
|
|
|
September
30, 2016
|
|
Available-For-Sale
Equity Securities
|
|
$
|
294,522
|
|
|
$
|
-
|
|
|
$
|
(234,972
|
)
|
|
$
|
—
|
|
|
$
|
59,550
|
|
Total Financial
Assets
|
|
$
|
294,522
|
|
|
$
|
—
|
|
|
$
|
(234,972
|
)
|
|
$
|
—
|
|
|
$
|
59,550
|
|
|
|
December
31, 2015
|
|
|
Issuance
fair value
|
|
|
Change
in
fair value
|
|
|
September
30, 2016
|
|
Series D Preferred Stock
Purchase Warrants
|
|
$
|
173,526
|
|
|
$
|
—
|
|
|
$
|
16,358
|
|
|
$
|
189,884
|
|
Convertible Debt Warrants
|
|
|
3,122,450
|
|
|
|
1,094,432
|
|
|
|
(80,902
|
)
|
|
|
4,135,980
|
|
Conversion Option
Liabilities
|
|
|
3,940,791
|
|
|
|
1,547,127
|
|
|
|
(860,466
|
)
|
|
|
4,627,452
|
|
Total Derivatives
|
|
$
|
7,236,767
|
|
|
$
|
2,641,559
|
|
|
$
|
(925,010
|
)
|
|
$
|
8,953,316
|
|
The
amounts above valued at issuance includes $1,337,510 that was charged directly to “change in fair value of derivative liabilities”
at issuance.
The
following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring
basis as of December 31, 2015:
|
|
|
|
|
Fair
value measurements at December 31, 2015 using:
|
|
|
|
December
31, 2015
|
|
|
Quoted
prices in
active
markets
(Level
1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Available-For-Sale
Equity Securities
|
|
$
|
294,522
|
|
|
$
|
294,522
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Financial
Assets
|
|
$
|
294,522
|
|
|
$
|
294,522
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
December
31, 2015
|
|
|
Quoted
prices in
active
markets
(Level
1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Series D Preferred Stock
Purchase Warrants
|
|
$
|
173,526
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
173,526
|
|
Warrants Issued with Convertible Debt
|
|
|
3,122,450
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,122,450
|
|
Conversion Option
Derivative Liabilities
|
|
|
3,940,791
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,940,791
|
|
Total Derivatives
|
|
$
|
7,236,767
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,236,767
|
|
The
assumptions for the binomial pricing model are represented in the table below for the warrants issued in the Series D private
placement reflected on a per share common stock equivalent basis.
Assumptions
|
|
November
10, 2011
|
|
|
Warrants
revalued at
December
31, 2015
|
|
|
Warrants
revalued at
September
30, 2016
|
|
Expected life (in months)
|
|
|
60.0
|
|
|
|
11.0
|
|
|
|
8.0
|
|
Expected volatility
|
|
|
104.5
|
%
|
|
|
104.9
|
%
|
|
|
92.4
|
%
|
Risk-free interest rate
|
|
|
0.875
|
%
|
|
|
0.65
|
%
|
|
|
0.45
|
%
|
Exercise price
|
|
$
|
0.81
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
Fair value per warrant
|
|
$
|
0.54
|
|
|
$
|
0.16
|
|
|
$
|
0.18
|
|
The
assumptions for the binomial pricing model are represented in the table below for the warrants issued with the Convertible Debt
throughout the period reflected on a per share common stock equivalent basis.
Assumptions
|
|
At
Issuance
Fair value
|
|
Warrants
revalued at December 31, 2015
|
|
|
Warrants
revalued at September 30, 2016
|
|
Expected life (in months)
|
|
36.0-60.0
|
|
|
55.0-60.0
|
|
|
|
46.0-54.0
|
|
Expected volatility
|
|
114.3 - 138.3
|
%
|
|
136.3-141.6
|
%
|
|
|
116.2
-137.4
|
%
|
Risk-free interest rate
|
|
0.86-1.69
|
%
|
|
1.29-1.76
|
%
|
|
|
1.01
|
%
|
Exercise price
|
$
|
00.40-$0.42
|
|
|
0.40
|
|
|
$
|
0.40
|
|
Fair value per warrant
|
$
|
0.19-$0.40
|
|
|
0.30
|
|
|
$
|
0.30-$1.35
|
|
The
assumptions for the binomial pricing model are represented in the table below for the conversion options reflected on a per share
common stock equivalent basis.
Assumptions
|
|
At
Issuance
fair value
|
|
|
Conversion
options
revalued at
December 31, 2015
|
|
|
Conversion
options
revalued at
September 30, 2016
|
|
Expected
life (in months)
|
|
|
3-24
|
|
|
|
18-24
|
|
|
|
10-18
|
|
Expected
volatility
|
|
|
97.6-153.8
|
%
|
|
|
112.2-114.7
|
%
|
|
|
94.3%-96.6
|
%
|
Risk-free
interest rate
|
|
|
0.37-0.99
|
%
|
|
|
1.06
|
%
|
|
|
0.59-0.77
|
%
|
Exercise
price
|
|
$
|
0.24-$0.45
|
|
|
$
|
0.28
|
|
|
$
|
0.28
|
|
Fair
value per conversion option
|
|
$
|
0.07-$0.30
|
|
|
$
|
0.14-$0.33
|
|
|
$
|
0.17-$0.21
|
|
|
5)
|
Commitments
and Contingencies
|
Operating
Leases
Our
corporate offices are currently located at 14 Norfolk Avenue, South Easton, Massachusetts 02375. We are currently paying $4,800
per month, on a lease extension, signed on December 29, 2015, that expires December 31, 2016, for our corporate office.
On
November 1, 2014 we signed a lease for lab space in Medford, MA. We subsequently expanded our space in Medford. The lease expires
December 30, 2017 and requires monthly payments of $5,385 subject to annual cost of living increases.
Rental
costs are expensed as incurred. During the nine months ended September 30, 2016 and 2015 we incurred $108,038 and $73,775 in rent
expense, respectively for the use of our corporate office and research and development facilities.
Government
Grants
We
have received a $1.05 million NIH SBIR Phase II Grant. Under the grant, the NIH has committed to pay the Company to develop a
high-throughput, high pressure-based DNA Shearing System for Next Generation Sequencing and other genomic applications. The grant
terminates in November 2017.
|
6)
|
Convertible
Debt and Other Debt
|
Senior
Secured Convertible Debentures and Warrants
We
entered into Subscription Agreements (the “
Subscription Agreement
”) with various individuals (each, a “
Purchaser
”)
between July 23, 2015 and March 31, 2016, pursuant to which the Company sold Senior Secured Convertible Debentures (the “
Debentures
”)
and warrants to purchase shares of common stock equal to 50% of the number of shares issuable pursuant to the subscription amount
(the “
Warrants
”) for an aggregate purchase price of $6,329,549 (the “
Purchase Price
”).
The
Company issued a principal aggregate amount of $6,962,504 in Debentures which includes a 10% original issue discount on the Purchase
Price. The Debenture does not accrue any additional interest during the first year it is outstanding but accrues interest at a
rate equal to 10% per annum for the second year it is outstanding. The Debenture has a maturity date of two years from issuance.
The Debenture is convertible any time after its issuance date. The Purchaser has the right to convert the Debenture into shares
of the Company’s common stock at a fixed conversion price equal to $0.28 per share, subject to applicable adjustments. In
the second year that the Debenture is outstanding, any interest accrued shall be payable quarterly in either cash or common stock,
at the Company’s discretion.
At
any time after the Issuance Date, the Company has the option, subject to certain conditions, to redeem some or all of the then
outstanding principal amount of the Debenture for cash in an amount equal to the sum of (i) 120% of the then outstanding principal
amount of the Debenture, (ii) accrued but unpaid interest and (iii) any liquidated damages and other amounts due in respect of
the Debenture.
The
Company issued warrants exercisable into a total of 11,302,766 shares of our common stock. The Warrants issued in this transaction
are immediately exercisable at an exercise price of $0.40 per share, subject to applicable adjustments including full ratchet
anti-dilution in the event that we issue any securities at a price lower than the exercise price then in effect. The Warrants
have an expiration period of five years from the original issue date. The Warrants are subject to adjustment for stock splits,
stock dividends or recapitalizations and also include anti-dilution price protection for subsequent equity sales below the exercise
price.
Subject
to the terms and conditions of the Warrants, at any time commencing six months from the Final Closing, the Company has the right
to call the Warrants for cancellation if the volume weighted average price of its Common Stock on the OTC QB Market (or other
primary trading market or exchange on which the Common Stock is then traded) equals or exceeds three times the per share exercise
price of the Warrants for 15 out of 20 consecutive trading days.
In
connection with the Subscription Agreement and Debenture, the Company entered into Security Agreements with the Purchasers whereby
the Company agreed to grant to Purchasers an unconditional and continuing, first priority security interest in all of the assets
and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations
under the Debentures, Warrants and the other Transaction Documents.
The
Company determined that the conversion feature of the Debentures met the definition of a liability in accordance with ASC 815-40
and therefore bifurcated the conversion feature on each debt agreement and accounted for it as a derivative liability. The fair
value of the conversion feature was accounted for as a note discount and are amortized to interest expense over the life of the
loan. The fair value of the conversion feature was reflected in the conversion option liability line in the condensed consolidated
balance sheets.
The
proceeds from these convertible debts were allocated between the host debt instrument and the convertible option based on the
residual method. The estimated fair value of the convertible option was determined using a binomial formula, resulting in allocations
to the convertible option and accounted for as a liability in the Company’s condensed consolidated balance sheet. In accordance
with the provisions of ASC 815-40, the gross proceeds are offset by debt discounts, which are amortized to interest expense over
the expected life of the debt.
ASC
470-20 states that the proceeds from the issuance of debt with detachable stock warrants should be allocated between the debt
and warrants on the basis of their relative fair market values. The debt discount will be amortized to interest expense over the
two year term of these loans. We amortized $2,768,527 of the debt discount to interest expense in 2016. The warrants issued in
connection with the convertible debentures are classified as warrant derivative liabilities because the warrants are entitled
to certain rights in subsequent financings and the warrants contain “down-round protection” and therefore, do not
meet the scope exception for treatment as a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). Since
“down-round protection” is not an input into the calculation of the fair value of the warrants, the warrants cannot
be considered indexed to the Company’s own stock which is a requirement for the scope exception as outlined under ASC 815.
The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $2,847,624 to
the total warrants out of the gross proceeds of $6,329,549. The fair value will be affected by changes in inputs to that model
including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. We will continue
to classify the fair value of the warrants as a liability until the warrants are exercised, expire or are amended in a way that
would no longer require these warrants to be classified as a liability, whichever comes first.
Other
convertible notes
On
May 13, 2016, one lender converted an outstanding note issued on April 28, 2015 and the related accrued interest totaling $117,837
to 420,849 common shares. As of September 30, 2016, the outstanding balance on the note was zero.
On
May 24, we sold an additional convertible note for $107,000 with warrants to purchase 50,000 shares of common stock at an exercise
price of $0.55 per share. The purchaser has the right to convert the notes into shares of the Company’s common stock at
a fixed conversion price equal to $0.45 per share, subject to applicable adjustments. The estimated fair value of the warrants
was determined using the binomial model, resulting in an allocation of $12,406 to the total warrants and the recognition of a
beneficial conversion feature of $7,962, both of which were recorded as a discount to the note. We evaluated the convertible note
and warrants for derivative liability treatment and determined that these instruments do not include certain rights such as price
protection like our previous debt financings. Accordingly, we concluded that this financing arrangement did not qualify for derivative
accounting treatment.
On
June 14, 2016, we sold an additional convertible note for $115,000 and issued 30,667 common shares to compensate the lender. On
July 1, 2016, the note was modified to increase the principal amount to $200,000 and we received the remaining proceeds of $85,000
on the same date and issued 34,333 common shares as compensation to the lender. The lender has the right to convert the note into
shares of the Company’s common stock at fixed conversion price equal to $0.45 per share, subject to applicable adjustments.
We valued the total 65,000 common shares using the stock prices at the respective dates the note proceeds were received and recorded
the relative fair value of the shares amounting to $26,000 as a debt discount to be amortized over the term of the loan. We then
computed the effective conversion price of the note, noting that no beneficial conversion feature exists. We also evaluated the
convertible note for derivative liability treatment and determined that the instrument does not include certain rights such as
price protection like our previous debt financing. Accordingly, we concluded that this financing arrangement did not qualify for
derivative accounting treatment.
On
July 29, 2016, we sold an additional convertible note for $100,000 and issued 32,500 common shares to compensate the lender. The
lender has the right to convert the notes into shares of the Company’s common stock at a fixed conversion price equal to
$0.45 per share, subject to applicable adjustments. The proceeds were allocated between the convertible note and shares of common
stock based on their relative fair values. The relative fair values of the convertible note and the common shares was $87,241
and $12,759, respectively. We then computed the effective conversion price of the note, noting that the convertible debt gave
rise to a beneficial conversion feature (BCF) of $12,759. The sum of the relative fair value of the common shares and the BCF
of $25,518 was recorded as a debt discount to be amortized over the term of the loan. We also evaluated the convertible note for
derivative liability treatment and determined that the instruments does not include certain rights such as price protection like
our previous debt financings. Accordingly, we concluded that this financing arrangements did not qualify for derivative accounting
treatment.
On September 15, 2016,
we sold an additional convertible note for $500,000 and issued 200,000 common shares to compensate the lender. The lender has
the right to convert the notes into shares of the Company’s common stock at a fixed conversion price equal to $0.45 per
share, subject to applicable adjustments. The convertible note includes an original issue discount of $40,541 and is subject to
annual interest of 9%. The proceeds were allocated between the convertible note and shares of common stock based on their relative
fair values. The relative fair value of the convertible note was $434,028. The allocation of the gross proceeds to the shares
of common stock was $65,972 and recorded as a debt discount to be amortized over the term of the loan. We then computed the effective
conversion price of the note, noting that no beneficial conversion feature exists. We also evaluated the convertible note for
derivative liability treatment and determined that the instrument does not include certain rights such as price protection like
our previous debt financings. Accordingly, we concluded that this financing arrangement did not qualify for derivative accounting
treatment.
The
specific terms of the convertible debts and outstanding balances as of September 30, 2016 are listed in the table below.
Fixed
Rate Convertible Notes
Inception
Date
|
|
Term
|
|
Loan
Amount
|
|
|
Outstanding
Balance
|
|
|
Original
Issue
Discount
|
|
|
Interest
Rate
|
|
|
Deferred
Finance
Fees
|
|
|
Discount
related
to fair
value of
conversion
feature
and
warrants/shares
|
|
July
22, 2015
|
|
24
months
|
|
$
|
2,180,000
|
|
|
$
|
2,180,000
|
|
|
$
|
218,000
|
1
|
|
|
10
|
%
2
|
|
$
|
388,532
|
|
|
$
|
2,163,074
|
|
September
25, 2015
|
|
24
months
|
|
|
1,100,000
|
|
|
|
1,100,000
|
|
|
|
110,000
|
1
|
|
|
10
|
%
2
|
|
|
185,956
|
|
|
|
1,022,052
|
|
October
2, 2015
|
|
24
months
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
15,000
|
1
|
|
|
10
|
%
2
|
|
|
26,345
|
|
|
|
140,832
|
|
October
6, 2015
|
|
24
months
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
3,000
|
1
|
|
|
10
|
%
2
|
|
|
5,168
|
|
|
|
26,721
|
|
October
14, 2015
|
|
24
months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
1
|
|
|
10
|
%
2
|
|
|
8,954
|
|
|
|
49,377
|
|
November
2, 2015
|
|
24
months
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
25,000
|
1
|
|
|
10
|
%
2
|
|
|
43,079
|
|
|
|
222,723
|
|
November
10, 2015
|
|
24
months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
1
|
|
|
10
|
%
2
|
|
|
8,790
|
|
|
|
46,984
|
|
November
12, 2015
|
|
24
months
|
|
|
215,000
|
|
|
|
215,000
|
|
|
|
21,500
|
1
|
|
|
10
|
%
2
|
|
|
38,518
|
|
|
|
212,399
|
|
November
20, 2015
|
|
24
months
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
20,000
|
1
|
|
|
10
|
%
2
|
|
|
37,185
|
|
|
|
200,000
|
|
December
4, 2015
|
|
24
months
|
|
|
170,000
|
|
|
|
170,000
|
|
|
|
17,000
|
1
|
|
|
10
|
%
2
|
|
|
37,352
|
|
|
|
170,000
|
|
December
11, 2015
|
|
24
months
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
36,000
|
1
|
|
|
10
|
%
2
|
|
|
75,449
|
|
|
|
360,000
|
|
December
18, 2015
|
|
24
months
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
5,500
|
1
|
|
|
10
|
%
2
|
|
|
11,714
|
|
|
|
55,000
|
|
December
31, 2015
|
|
24
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
10,000
|
1
|
|
|
10
|
%
2
|
|
|
20,634
|
|
|
|
100,000
|
|
January
11, 2016
|
|
24
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
10,000
|
1
|
|
|
10
|
%
2
|
|
|
24,966
|
|
|
|
80,034
|
|
January
20, 2016
|
|
24
months
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5,000
|
1
|
|
|
10
|
%
2
|
|
|
9,812
|
|
|
|
40,188
|
|
January
29, 2016
|
|
24
months
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
30,000
|
1
|
|
|
10
|
%
2
|
|
|
60,887
|
|
|
|
239,113
|
|
February
26, 2016
|
|
24
months
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
20,000
|
1
|
|
|
10
|
%
2
|
|
|
43,952
|
|
|
|
156,048
|
|
March
10, 2016
|
|
24
months
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
12,500
|
1
|
|
|
10
|
%
2
|
|
|
18,260
|
|
|
|
106,740
|
|
March
18, 2016
|
|
24
months
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
36,000
|
1
|
|
|
10
|
%
2
|
|
|
94,992
|
|
|
|
265,008
|
|
March
24, 2016
|
|
24
months
|
|
|
106,667
|
|
|
|
106,667
|
|
|
|
10,667
|
1
|
|
|
10
|
%
2
|
|
|
15,427
|
|
|
|
91,240
|
|
March
31, 2016
|
|
24
months
|
|
|
167,882
|
|
|
|
167,882
|
|
|
|
16,788
|
1
|
|
|
10
|
%
2
|
|
|
2,436
|
|
|
|
165,446
|
|
April
5, 2016
|
|
24
months
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
1,000
|
1
|
|
|
10
|
%
2
|
|
|
-
|
|
|
|
10,000
|
|
May
24, 2016
|
|
7
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
7,000
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
20,368
|
|
June
15, 2016
|
|
6
months
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,680
|
|
June
17, 2016
|
|
6
months
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,899
|
|
June
22, 2016
|
|
6
months
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
3,373
|
|
July
6, 2016
|
|
6
months
|
|
|
85,000
|
|
|
|
85,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
15,048
|
|
July
29, 2016
|
|
6
months
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
25,518
|
|
September
15, 2016
|
|
8
months
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
40,541
|
|
|
|
9
|
%
|
|
|
-
|
|
|
|
65,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,229,549
|
|
|
$
|
7,229,549
|
|
|
$
|
680,496
|
|
|
|
|
|
|
$
|
1,158,408
|
|
|
$
|
6,060,837
|
|
1
The original issue discount is reflected in the first year.
2
The annual interest starts accruing in the second year.
The
closings above on March 10, 24, and 31, 2016 included $264,667 of proceeds received from related parties.
At
any time after six months from the Inception Date, the Company has the right to prepay the above Debentures in cash for 120% of
the principal amount outstanding and any accrued interest. As of September 30, 2016, a total of approximately $291,000 convertible
debentures were purchased by related parties who were members of the Company’s Board of Directors.
The
following table provides a summary of the changes in convertible debt, net of unamortized discount, during 2016:
|
|
2016
|
|
Balance at January 1,
|
|
$
|
277,342
|
|
Issuance of convertible debt, face value
|
|
|
2,509,045
|
|
Original issue discount
|
|
|
(189,496
|
)
|
Debt discount from derivative liabilities (embedded conversion option and warrants)
|
|
|
(1,153,817
|
)
|
Debt discount from shares and warrants issued with the notes
|
|
|
(117,137
|
)
|
Debt discount from beneficial conversion feature
|
|
|
(20,721
|
)
|
Deferred financing fees
|
|
|
(270,732
|
)
|
Conversion of debentures to common shares
|
|
|
(100,000)
|
|
Accretion of interest and amortization of debt discount to
interest expense through September 30,
|
|
|
2,808,261
|
|
Balance at September 30,
|
|
|
3,742,745
|
|
Less: current portion
|
|
|
2,664,334
|
|
Convertible debt, long-term portion
|
|
$
|
1,078,411
|
|
Other
Notes
On January 6, 2016 we
signed a Merchant Agreement with a lender. Under the agreement we received $250,000 in exchange for rights to all customer receipts
until the lender is paid $322,500, which is collected at the rate of $1,280 per business day. The payments were secured by second
position rights to all customer receipts until the loan has been paid in full. $138,840 of the proceeds were used to pay off the
outstanding balance of a previous loan from another lender. The Company recognized a gain on the settlement of the previous loan
of $5,044 which was credited to interest expense. The Company paid $2,500 in fees in connection with this loan. We received an
additional $93,161 in June 2016 under the existing Merchant Agreement. The note was still outstanding as of September 30, 2016
with a balance of $105,125.
On
January 20, 2016, we borrowed $50,000 from an individual with no interest or fees. We paid back the loan in March 2016.
On February 8, 2016 we
signed a Merchant Agreement with a lender. Under the agreement we received $100,000 in exchange for third position rights to all
customer receipts until the lender is paid $129,900, which is collected at the rate of $927 per business day. The Company paid
$2,000 in fees in connection with this loan. We received an additional $125,000 in June 2016 under the existing Merchant Agreement
of which $48,420 was used to pay off the prior loan. The note was still outstanding as of September 30, 2016 with a balance of
$2,119 after payments of $56,841. The lender provided an additional $70,000 on August 16, 2016. We repaid a portion of the $70,000
with $49,200 remaining as outstanding as of September 30, 2016.
On May 9, 2016 we signed
a promissory note with a lender. Under the agreement we received $200,000 net of a $6,000 original issue discount and we repaid
$206,000 on August 25, 2016. In connection with this promissory note, we issued warrants exercisable into 100,000 shares of our
common stock. The warrants issued in this transaction are immediately exercisable at an exercise price of $0.55 per share. The
warrants have an expiration period of three years from the original issue date. The warrants are subject to adjustment for stock
splits, stock dividends or recapitalizations. The warrants were recorded as a component of our Stockholders’ Equity. The
estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $27,349 to the total
warrants and recorded as a discount to the note to be amortized over the term of the loan. We evaluated the warrants for derivative
liability treatment and determined that these instruments do not include certain rights such as price protection like our previous
debt financings. Accordingly, we concluded that these instruments did not qualify for derivative accounting treatment. In August
2016, the lender extended the maturity date of the note from August 11, 2016 to August 25, 2016. Consequently, a penalty interest
of $41,200 was added to the principal amount and settled through the issuance of 100,049 common shares. As of September 30, 2016,
the outstanding balance on this note was zero.
On August 26, 2016 we
signed a Merchant Agreement with a lender. Under the agreement we received $122,465 net proceeds in exchange for rights to all
customer receipts which is collected at the rate of $1,386 per business day. The note was still outstanding as of September 30,
2016 with a balance of $91,736.
Preferred
Stock
We
are authorized to issue 1,000,000 shares of preferred stock with a par value of $0.01. Of the 1,000,000 shares of preferred stock:
|
1)
|
20,000
shares have been designated as Series A Junior Participating Preferred Stock (“
Junior A
”)
|
|
|
|
|
2)
|
313,960
shares have been designated as Series A Convertible Preferred Stock (“
Series A
”)
|
|
|
|
|
3)
|
279,256
shares have been designated as Series B Convertible Preferred Stock (“
Series B
”)
|
|
|
|
|
4)
|
88,098
shares have been designated as Series C Convertible Preferred Stock (“
Series C
”)
|
|
|
|
|
5)
|
850
shares have been designated as Series D Convertible Preferred Stock (“
Series D
”)
|
|
|
|
|
6)
|
500
shares have been designated as Series E Convertible Preferred Stock
(“Series E”)
|
|
|
|
|
7)
|
240,000
shares have been designated as Series G Convertible Preferred Stock (“
Series G
”)
|
|
|
|
|
8)
|
10,000
shares have been designated as Series H Convertible Preferred Stock (“
Series H
”)
|
|
|
|
|
9)
|
21
shares have been designated as Series H2 Convertible Preferred Stock (“
Series H2
”)
|
|
|
|
|
10)
|
6,250
shares have been designated as Series J Convertible Preferred Stock (“
Series J
”)
|
|
|
|
|
11)
|
15,000
shares have been designated as Series K Convertible Preferred Stock (“
Series K
”)
|
As
of September 30, 2016, there were no shares of Junior A, and Series A, B, C and E issued and outstanding. See our Annual Report
on Form 10-K for the year ended December 31, 2015 for the pertinent disclosures of preferred stock.
Stock
Options and Warrants
Our
stockholders approved our amended 2005 Equity Incentive Plan (the “Plan”) pursuant to which an aggregate of 1,800,000
shares of our common stock were reserved for issuance upon exercise of stock options or other equity awards made under the Plan.
Under the Plan, we may award stock options, shares of common stock, and other equity interests in the Company to employees, officers,
directors, consultants, and advisors, and to any other persons the Board of Directors deems appropriate. As of September 30, 2016,
options to acquire 1,153,750 shares were outstanding under the Plan with 646,250 shares available for future grant under the Plan.
On December 12, 2013
at the Company’s special meeting the shareholders approved the 2013 Equity Incentive Plan (the “2013 Plan”)
pursuant to which 3,000,000 shares of our common stock were reserved for issuance upon exercise of stock options or other equity
awards. Under the 2013 Plan, we may award stock options, shares of common stock, and other equity interests in the Company to
employees, officers, directors, consultants, and advisors, and to any other persons the Board of Directors deems appropriate.
As of September 30, 2016, a total of 2,047,500 options have been granted under the 2013 Plan with 952,500 shares available for
future grants.
On November 29, 2015
the Company’s Board of Directors adopted the 2015 Nonqualified Stock Option Plan (the “2015 Plan”) pursuant
to which 5,000,000 shares of our common stock were reserved for issuance upon exercise of non-qualified stock options. Under the
2015 Plan, we may award non-qualified stock options in the Company to employees, officers, directors, consultants, and advisors,
and to any other persons the Board of Directors deems appropriate. As of September 30, 2016, non-qualified options to acquire
2,068,000 shares were outstanding under the Plan with 2,932,000 shares available for future grants.
All
of the outstanding non-qualified options had an exercise price that was at or above the Company’s common stock share price
on September 30, 2016.
The
following tables summarize information concerning options and warrants outstanding and exercisable:
|
|
Stock
Options
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
Price
per share
|
|
|
Shares
|
|
|
Price
per share
|
|
|
Shares
|
|
|
Exercisable
|
|
Balance
outstanding, 01/01/15
|
|
|
3,406,250
|
|
|
$
|
0.51
|
|
|
|
19,182,201
|
|
|
$
|
0.49
|
|
|
|
22,588,451
|
|
|
|
16,611,528
|
|
Granted
|
|
|
2,500,000
|
|
|
|
0.40
|
|
|
|
10,837,141
|
|
|
|
0.40
|
|
|
|
13,337,141
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
(205,000
|
)
|
|
|
1.00
|
|
|
|
(791,678
|
)
|
|
|
0.31
|
|
|
|
(996,678
|
)
|
|
|
|
|
Forfeited
|
|
|
(130,000
|
)
|
|
|
0.70
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(130,000
|
)
|
|
|
|
|
Balance outstanding,
12/31/15
|
|
|
5,571,250
|
|
|
$
|
0.44
|
|
|
|
29,227,664
|
|
|
$
|
0.44
|
|
|
|
34,798,914
|
|
|
|
31,664,469
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
4,294,552
|
|
|
|
0.43
|
|
|
|
4,294,552
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
(70,000
|
)
|
|
|
0.31
|
|
|
|
(70,000
|
)
|
|
|
|
|
Expired
|
|
|
(186,000
|
)
|
|
|
1.00
|
|
|
|
(8,627,521
|
)
|
|
|
0.61
|
|
|
|
(8,813,521
|
)
|
|
|
|
|
Forfeited
|
|
|
(116,000
|
)
|
|
|
0.51
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(116,000
|
)
|
|
|
|
|
Balance outstanding,
9/30/2016
|
|
|
5,269,250
|
|
|
$
|
0.42
|
|
|
|
24,824,695
|
|
|
$
|
0.39
|
|
|
|
30,093,945
|
|
|
|
28,095,959
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
Range
of
Exercise Prices
|
|
|
Number
of
Options
|
|
|
Remaining
Contractual
Life
(Years)
|
|
|
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Remaining
Contractual
Life
(Years)
|
|
|
Exercise
Price
|
|
$0.30
- $0.39
|
|
|
|
1,625,500
|
|
|
|
8.0
|
|
|
$
|
0.30
|
|
|
|
1,248,514
|
|
|
|
8.0
|
|
|
$
|
0.30
|
|
0.40 - 0.49
|
|
|
|
2,786,000
|
|
|
|
9.0
|
|
|
|
0.40
|
|
|
|
1,165,000
|
|
|
|
8.6
|
|
|
|
0.40
|
|
0.50 - 0.59
|
|
|
|
226,250
|
|
|
|
5.9
|
|
|
|
0.50
|
|
|
|
226,250
|
|
|
|
5.9
|
|
|
|
0.50
|
|
0.60 - 0.69
|
|
|
|
385,500
|
|
|
|
3.4
|
|
|
|
0.60
|
|
|
|
385,500
|
|
|
|
3.4
|
|
|
|
0.60
|
|
0.70
- 1.25
|
|
|
|
246,000
|
|
|
|
2.6
|
|
|
|
1.00
|
|
|
|
246,000
|
|
|
|
2.6
|
|
|
|
1.00
|
|
$0.30
- $1.25
|
|
|
|
5,269,250
|
|
|
|
7.8
|
|
|
$
|
0.42
|
|
|
|
3,271,264
|
|
|
|
7.1
|
|
|
$
|
0.44
|
|
As
of September 30, 2016, the total estimated fair value of unvested stock options to be amortized over their remaining vesting period
was $459,724. The non-cash, stock-based compensation expense associated with the vesting of these options is expected to be $90,445
for the remainder of 2016, $212,957 in 2017 and $156,322 in 2018.
Common
Stock Issuances
On April 22, 2016, we
issued 22,996 shares of common stock in connection with a cashless exercise of 70,000 warrants.
On May 6, 2016, all remaining
Series K preferred shareholders except one converted 4,600 shares of preferred stock into approximately 4.6 million shares of
the Company’s common stock. The Company issued 247,435 shares of common stock to pay the accrued dividend of $63,413 on
Series K preferred stock.
On May 13, 2016, we issued
420,849 shares of common stock to convert $117,837 of convertible note principal and related interest. See Note 6
On various dates from
January to September 2016, we issued a total of 297,500 shares of common stock in connection with the convertible notes issued
to lenders. We also issued 100,049 shares of common stock to settle debt of $41,200. See Note 6.
On
August 29, 2016, a Series J preferred shareholder converted 25 shares of preferred stock into 25,000 shares of the Company’s
common stock. The Company issued 1,112 shares of common stock to pay the accrued dividend of $445 on Series J preferred stock.
On various dates from
January to September 2016 the Company issued 755,000 shares of restricted common stock to investor relations firms for services
rendered.
Sale
of Common Stock
On
August 29, September 9 and September 14, 2016, we completed private placements, pursuant to which we sold an aggregate of 1,125,000
shares of common stock, $0.01 par value, for a purchase price of $0.40 per share, resulting in gross proceeds to us of approximately
$450,000. The shares were issued and sold to a total of 2 accredited investors pursuant to a securities purchase agreement entered
into as of August 29, 2016. The investors received warrants to purchase 1,125,000 shares of the Company’s common stock at
$0.50 exercise price. The warrants expire 5 years after issuance. We also incurred stock issuance costs related to broker and
legal fees of $67,035 which were charged to additional paid in capital.
On
October 11 and November 10, 2016, we completed two additional tranches of the Fall 2016 Private Placement, pursuant to which we
sold an aggregate of 400,000 shares of common stock, $0.01 par value, for a purchase price of $0.40 per share, resulting in gross
proceeds to us of approximately $160,000. The Shares were issued and sold to a total of 2 accredited investors pursuant to a Securities
Purchase Agreement entered into as of the date of their investments. The investors received warrants to purchase a total of 400,000
shares of the Company’s common stock at an exercise price of $0.50. The warrants expire 5 years after issuance.
On
October 28, 2016, an accredited investor (the “Investor”) purchased a promissory note in the aggregate principal amount
of up to $2,000,000 (the “Note”) due and payable on the earlier of October 28, 2017 or on the seventh business day
after the closing of a Qualified Offering (as defined in the Note). Although the Note is dated October 26, 2016, the transaction
did not close until October 28, 2016, when the Company received its initial $250,000 advance pursuant to the Note. As a result,
on the same day and pursuant to the Note, the Company issued to the Investor a Common Stock Purchase Warrant to purchase 625,000
shares of the Company’s common stock (“Common Stock”) at an exercise price per share equal to $0.40 per share.
The Investor is obligated to provide the Company $250,000 advances under the Note, but the Investor shall not be required to advance
more than $250,000 in any individual fifteen (15) day period and no more than $500,000 in the thirty (30) day period immediately
following the date of the initial advance. Notwithstanding the fifteen (15) day period limitation, on November 2, 2016, the Company
received a second $250,000 advance pursuant to the Note and the Company issued to the Investor the second warrant to purchase
625,000 shares of the Common Stock. The terms of the first and second warrants are identical except for the exercise date, issue
date, and termination date. Interest on the principal balance of the Note shall be paid in full on the Maturity Date, unless otherwise
paid prior to the Maturity Date. Interest shall be assessed as follows: (i) 10% on all principal amounts advanced prior to April
28, 2017; (ii) the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between April 28, 2017
and July28, 2017; or (iii) both of the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid
between July 28, 2017 and October 28, 2017. Our placement agent is being paid eight percent (8%) of all principal amounts advanced
in connection with this transaction.
On
November 1, 2016, we signed a consulting agreement with an investor relations firm for a twelve month period with a six-month
cancellation clause. In connection with this agreement, we issued a warrant exercisable at $0.40 per share for 660,000 shares
of our common stock. Of these shares, 330,000 vest immediately and 330,000 shares vest 181 days after November 1, 2016. The warrant
expires five years from issuance.
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q of Pressure BioSciences, Inc. (“PBI”, “we”, “us”, “our”,
“the Company”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). In some cases, forward-looking statements are identified by terms such as “may,” “will,”
“should,” “could,” “would,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “projects,” “predicts,” “potential” and similar
expressions intended to identify forward-looking statements. Such statements include, without limitation, statements regarding:
|
●
|
our
need for, and our ability to raise, additional equity or debt financing on acceptable terms, if at all;
|
|
|
|
|
●
|
our
need to take additional cost reduction measures, cease operations or sell our operating assets, if we are unable to obtain
sufficient additional financing;
|
|
|
|
|
●
|
our
belief that we have sufficient liquidity to finance normal operations;
|
|
|
|
|
●
|
the
options we may pursue in light of our financial condition;
|
|
|
|
|
●
|
the
amount of cash necessary to operate our business;
|
|
|
|
|
●
|
the
anticipated uses of grant revenue and the potential for increased grant revenue in future periods;
|
|
|
|
|
●
|
our
plans and expectations with respect to our continued operations;
|
|
|
|
|
●
|
our
belief that pressure cycling technology (“PCT”) has achieved initial market acceptance in the mass spectrometry
and other markets;
|
|
|
|
|
●
|
the
expected increase in the number of PCT and constant pressure based units installed and the increase in revenues from the sale
of consumable products and extended service contracts;
|
|
|
|
|
●
|
the
expected development and success of new instrument and consumables product offerings;
|
|
|
|
|
●
|
the
potential applications for our instrument and consumables product offerings;
|
|
|
|
|
●
|
the
expected expenses of, and benefits and results from, our research and development efforts;
|
|
|
|
|
●
|
the
expected benefits and results from our collaboration programs, strategic alliances and joint ventures;
|
|
|
|
|
●
|
our
expectation of obtaining additional research grants from the government in the future;
|
|
|
|
|
●
|
our
expectations of the results of our development activities funded by government research grants;
|
|
|
|
|
●
|
the
potential size of the market for biological sample preparation;
|
|
|
|
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general
economic conditions;
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the
anticipated future financial performance and business operations of our company;
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our
reasons for focusing our resources in the market for genomic, proteomic, lipidomic and small molecule sample preparation;
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the
importance of mass spectrometry as a laboratory tool;
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the
advantages of PCT over other current technologies as a method of biological sample preparation in biomarker discovery, forensics,
and histology and for other applications;
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the
capabilities and benefits of our PCT sample preparation system, consumables and other products;
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our
belief that laboratory scientists will achieve results comparable with those reported to date by certain research scientists
who have published or presented publicly on PCT and our other products;
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our
ability to retain our core group of scientific, administrative and sales personnel; and
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our
ability to expand our customer base in sample preparation and for other applications of PCT and our other products.
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These
forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance or achievements to be materially different from any future results,
levels of activity, performance or achievements, expressed or implied, by such forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as otherwise
required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking
statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations or any change in events, conditions
or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences
in our future financial and other results include those discussed in the risk factors set forth in Part I, Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2015. We qualify all of our forward-looking statements by these cautionary
statements.
OVERVIEW
We
are focused on solving the challenging problems inherent in biological sample preparation, a crucial laboratory step performed
by scientists worldwide working in biological life sciences research. Sample preparation is a term that refers to a wide range
of activities that precede most forms of scientific analysis. Sample preparation is often complex, time-consuming and, in our
belief, one of the most error-prone steps of scientific research. It is a widely-used laboratory undertaking – the requirements
of which drive what we believe is a large and growing worldwide market. We have developed and patented a novel, enabling technology
platform that can control the sample preparation process. It is based on harnessing the unique properties of high hydrostatic
pressure. This process, called PCT, uses alternating cycles of hydrostatic pressure between ambient and ultra-high levels i.e.,
45,000 pounds per square inch (“psi”) or greater to safely, conveniently and reproducibly control the actions of molecules
in biological samples, such as cells and tissues from human, animal, plant and microbial sources.
Our
pressure cycling technology uses internally developed instrumentation that is capable of cycling pressure between ambient and
ultra-high levels at controlled temperatures and specific time intervals, to rapidly and repeatedly control the interactions of
bio-molecules, such as deoxyribonucleic acid (“
DNA
”), ribonucleic acid (“
RNA
”), proteins,
lipids and small molecules. Our laboratory instrument, the Barocycler
®
, and our internally developed consumables
product line, which include our Pressure Used to Lyse Samples for Extraction (“
PULSE
”) tubes, and other processing
tubes, and application specific kits such as consumable products and reagents, together make up our PCT Sample Preparation System
(“
PCT SPS
”).
We
have experienced negative cash flows from operations with respect to our pressure cycling technology business since our inception.
As of September 30, 2016, we did not have adequate working capital resources to satisfy our current liabilities and as a result
we have substantial doubt about our ability to continue as a going concern. Based on our current projections, including equity
financing subsequent to September 30, 2016, we believe we will have the cash resources that will enable us to continue to fund
normal operations into the foreseeable future.
We
need substantial additional capital to fund normal operations in future periods. If we are able to obtain additional capital or
otherwise increase our revenues, we may increase spending in specific research and development applications and engineering projects
and may hire additional sales personnel or invest in targeted marketing programs. In the event that we are unable to obtain financing
on acceptable terms, or at all, we will likely be required to cease our operations, pursue a plan to sell our operating assets,
or otherwise modify our business strategy, which could materially harm our future business prospects.
We
hold 14 United States and 10 foreign patents covering multiple applications of PCT in the life sciences field. Our pressure cycling
technology employs a unique approach that we believe has the potential for broad use in a number of established and emerging life
sciences areas, including;
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sample
preparation for genomic, proteomic, and small molecule studies;
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pathogen
inactivation;
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protein
purification;
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control
of chemical (particularly enzymatic) reactions; and
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immunodiagnostics
(clinical laboratory testing).
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We
reported a number of accomplishments in the first nine months of 2016:
On
January 12, 2016 SCIEX, a global leader in life science analytical technologies (Framingham, MA) and a wholly-owned subsidiary
of Danaher Corporation (NYSE: DHR), announced an exclusive co-marketing agreement with PBI to improve protein quantification in
complex samples.
On
January 28, 2016 in a report focused on the exclusive co-marketing agreement between SCIEX and PBI, Emerging Growth LLC indicated
the combination of the two company’s technologies could result in superior biological insights and discoveries and in rapid
and dramatic revenue growth for PBI.
On
February 3, 2016 SCIEX and Children’s Medical Research Institute (Sydney, Australia) announced they had joined forces to
advance the promise of precision medicine. The partners stated they would benefit from SCIEX’s exclusive collaborators,
including Pressure BioSciences, and PBI’s PCT platform for increased protein quantitation and reproducibility.
On
March 14, 2016 the Company announced that we would participate in a SCIEX workshop on new innovations towards industrialized proteomics
at the US HUPO scientific conference in Boston.
On
April 12, 2016, the Company announced that we had been added to the high-performing Richmond Club Index. The Richmond Index has
outperformed the S&P 500 Index by an average of 11% each year for the past ten years.
On
July 13, 2016, the Company announced the unveiling of the newest addition to our product line based on their patented and powerful
PCT platform, the Barocycler 2320EXTREME (“2320EXT”). The product unveiling took place during the recent annual conference
of the American Society for Mass Spectrometry (“ASMS”) in San Antonio, Texas.
On
July 21, 2016, the Company announced the initial shipment of our Barocycler 2320EXTREME instrument to an Australian cancer research
group (ProCan) named by the White House as a collaborator in the U.S.’s “Cancer Moonshot” initiative.
On
October 26, 2016, the Company announced its featured participation in the recent opening of The ACRF International Centre for
the Proteome of Human Cancer located in newly renovated laboratory facilities at the Children’s Medical Research Institute
near Sydney, Australia.
Results
of Operations
Comparison
for the three months ended September 30, 2016 and 2015
Revenue
We
recognized total revenue of $535,334 for the three months ended September 30, 2016 as compared to $580,334 during the three months
ended September 30, 2015, a decrease of $45,000 or 8%. This decrease is solely attributable to decreases in grant related activities
and technical support services as detailed below.
Products,
Services, Other
. Revenue from the sale of products and services increased 4% to $500,949 for the three months ended September
30, 2016 as compared to $481,452 during the three months ended September 30, 2015. This increase was primarily attributable to
the launch of the Barocycler 2320 Extreme pressure-based instrument systems. Sales of consumables also increased for the three
months ended September 30, 2016 to $32,811 compared to $28,339 during the same period in the prior year, an increase of 16%.
Grant
Revenue
. During the three months ended September 30, 2016, we recorded grant revenue of $34,385 compared to grant revenue
of $98,882 in the comparable period in 2015. Work on the $1.05 million NIH grant decreased during the third quarter as we continued
to wait for certain significant parts to be manufactured. These parts were received during the second quarter of 2016, and are
currently being put through our quality control procedures. Once released from quality control, the availability of these parts
should result in an increase in grant work in future periods.
Cost
of Products and Services
The
cost of products and services was $262,894 for the three months ended September 30, 2016 compared to $209,804 for the comparable
period in 2015. Gross profit margin on products and services was 47% for the three months ended September 30, 2016, as compared
to 56% for the prior period. Cost of products increased and gross profit margin decreased because we sold several of our new Barocycler
2320EXTREME units during the quarter and the cost to manufacture these units was higher than expected because of start-up costs
related to the initial manufacture of these systems. We expect the cost to manufacture these units will decrease and the sales
price to increase in the coming quarters..
Research
and Development
Research
and development expenditures were $268,317 during the three months ended September 30, 2016 as compared to $355,574 in the same
period in 2015, a decrease of $87,257 or 25%. The prior period included the cost of research performed by a customer on our behalf.
Research
and development expense recognized in the three months ended September 30, 2016 and 2015 included $14,735 and $18,307 of non-cash,
stock-based compensation expense, respectively.
Selling
and Marketing
Selling
and marketing expenses increased to $224,380 for the three months ended September 30, 2016 from $207,888 for the comparable period
in 2015, an increase of $16,492 or 8%. This increase was due to commissions paid to our sales person and the cost of part-time
help over the summer months in 2016.
During
the three months ended September 30, 2016 and 2015, selling and marketing expense included $9,911 and $13,310 of non-cash, stock-based
compensation expense, respectively.
General
and Administrative
General
and administrative costs totaled $231,550 for the three months ended September 30, 2016 as compared to $497,796 for the comparable
period in 2015. This decrease was due primarily to credits received from charges incurred with a former professional service provider.
During
the three months ended September 30, 2016 and 2015, general and administrative expense included $65,854 and $43,247 of non-cash,
stock-based compensation expense, respectively.
Operating
Loss
Our
operating loss was $451,807 for the three months ended September 30, 2016 as compared to $690,728 for the comparable period in
2015, a decrease of $238,921. This decrease was due primarily to credits received from a former professional service provider.
Other
Income (Expense), Net
Interest
(Expense) Income
Interest expense was
$1,116,328 for the three months ended September 30, 2016 as compared to interest expense of $1,584,830 for the three months ended
September 30, 2015. Interest expense primarily relate to debt discounts from the sale of senior secured convertible debentures
and other convertible and non-convertible notes.
Change
in fair value of warrant derivative liability
During the three months
ended September 30, 2016, we recorded non-cash income of $227,131 for warrant revaluation in our condensed consolidated statements
of operations due to a decrease in the fair value of the warrant liability related to warrants issued in our private placement
offerings. This decrease in fair value was primarily due to lower volatility in the price of the Company’s common stock
at September 30, 2016 as compared to the price on June 30, 2016. The components for determining the fair value of the warrants
are contained in the table in Note 4 of the accompanying condensed consolidated financial statements.
Change
in fair value of conversion option liability
During
the three months ended September 30, 2016, we recorded non-cash income of $395,997 for conversion option revaluation in our condensed
consolidated statements of operations due to a decrease in the fair value of the conversion option liability related to convertible
debt. This decrease in fair value was primarily due to lower volatility in the price of the Company’s common stock at September
30, 2016 as compared to the price on June 30, 2016 or the date the debt was incurred during the quarter and the shorter time to
maturity of the debt. The components for determining the fair value of the conversion option liabilities are contained in the
table in Note 4 of the accompanying condensed consolidated financial statements.
Other
Expense
We had minimal other
expenses for the three months ended September 30, 2016 and zero for the comparable period in 2015.
Net
Loss Applicable to Common Shareholders
During the three months
ended September 30, 2016, we recorded a net loss to common shareholders of $945,207 or $(0.03) per share, as compared to a net
loss to common shareholders of $656,217 or $(0.03) per share in the three months ended September 30, 2015. The weighted average
common shares outstanding for the period increased because of the issuance of shares of common stock to investor relations firms
for services rendered and sales of common stock.
Comparison
for the nine months ended September 30, 2016 and 2015
Revenue
We
recognized total revenue of $1,556,776 for the nine months ended September 30, 2016 as compared to $1,433,572 during the nine
months ended September 30, 2015, an increase of $123,204 or 9%. This increase is attributable to increases in the sales of our
products and services as detailed below.
Products,
Services, Other
. Revenue from the sale of products and services increased 22% for the nine months ended September 30, 2016
as compared to the year-earlier period from $1,174,391 to $1,429,487. This increase was primarily attributable to sales of the
NEP2320 Enhanced Barocycler and the launch and subsequent sale of the Barocycler 2320EXTREME PCT-based instrument systems. Sales
of consumables also increased for the nine months ended September 30, 2016 compared to the year-earlier period, from $124,687
to $149,819, an increase of 20%.
Grant
Revenue
. During the nine months ended September 30, 2016, we recorded grant revenue of $127,289 compared to grant revenue
of $259,181 in the comparable period in 2015. Work on the $1.05 million NIH grant decreased during the first half of 2016 as we
needed to wait for certain significant parts to be manufactured. These parts were received during the second quarter of 2016,
which should result in an increase in grant work in future periods.
Cost
of Products and Services
The
cost of products and services was $727,698 for the nine months ended September 30, 2016 compared to $575,780 for the comparable
period in 2015. Gross profit margin on products and services was 49% for the nine months ended September 30, 2016, as compared
to 51% for the prior period. Cost of products increased concomitant with the increase in product sales recorded for the period.
Research
and Development
Research
and development expenditures were $925,015 during the nine months ended September 30, 2016 as compared to $878,899 in the same
period in 2015, an increase of $46,116 or 5%. This increase resulted primarily from the addition of a Ph.D. level electrical engineer,
costs related to the continued development of an enhanced rape kit test based on the PCT Platform, and a rent increase related
to the additional R&D space.
Research
and development expense recognized in the nine months ended September 30, 2016 and 2015 included $50,766 and $41,172 of non-cash,
stock-based compensation expense, respectively.
Selling
and Marketing
Selling
and marketing expenses increased to $609,501 for the nine months ended September 30, 2016 from $574,289 for the comparable period
in 2015, an increase of $35,212 or 6%. This increase is primarily attributed to an increase in part-time employee related costs
over the summer and holiday periods.
During
the nine months ended September 30, 2016 and 2015, selling and marketing expense included $32,404 and $27,386 of non-cash, stock-based
compensation expense, respectively.
General
and Administrative
General
and administrative costs totaled $1,853,010 for the nine months ended September 30, 2016 as compared to $2,034,040 for the comparable
period in 2015. This decrease was due primarily to credits received from charges incurred with a former professional service provider.
During
the nine months ended September 30, 2016 and 2015, general and administrative expense included $199,641 and $116,812 of non-cash,
stock-based compensation expense, respectively.
Operating
Loss
Our
operating loss was $2,558,448 for the nine months ended September 30, 2016 as compared to $2,629,436 for the comparable period
in 2015. This decrease was primarily due to credits from a former professional services provider offset by research and development
and investor relations activities.
Other
Income (Expense), Net
Interest
(Expense) Income
Interest expense was
$2,961,708 for the nine months ended September 30, 2016 as compared to interest expense of $2,831,106 for the nine months ended
September 30, 2015. Interest expense primarily relate to debt discounts from the sale of senior secured convertible debentures
and other convertible and non-convertible notes.
Change
in fair value of warrant derivative liability
During
the nine months ended September 30, 2016, we recorded non-cash income of $59,864 for warrant revaluation in our consolidated statements
of operations due to an overall decrease in the fair value of the warrant liability related to warrants issued in our private
placement offerings. The components for determining the fair value of the warrants are contained in the table in Note 4 of the
accompanying condensed consolidated financial statements.
Change
in fair value of conversion option liability
During
the nine months ended September 30, 2016, we recorded non-cash charges of $472,364 for conversion option revaluation in our condensed
consolidated statements of operations due to increases in the fair value of the conversion option liability related to convertible
debt. We recorded $1,337,510 as non-cash charge at issuance of these convertible debentures. The components for determining the
fair value of the conversion option liabilities are contained in the table in Note 4 of the accompanying condensed consolidated
financial statements.
Other
Expense
Other
Expense totaled $1,112 for the nine months ended September 30, 2016 as compared to $513,352 for the comparable period in 2015.
The prior period activity represented revaluations for conversion options.
Net
Loss Applicable to Common Shareholders
During the nine months
ended September 30, 2016, we recorded a net loss to common shareholders of $5,933,768 or ($0.23) per share as compared to a net
loss to common shareholders of $3,451,928 or $(0.17) per share in the nine months ended September 30, 2015. The weighted average
common shares outstanding for the period increased because of the issuance of shares of common stock to investor relations firms
for services rendered and conversions of Series K preferred stock into common stock.
Liquidity
and Financial Condition
We
have experienced negative cash flows from operations with respect to our pressure cycling technology business since our inception.
As of September 30, 2016, we did not have adequate working capital resources to satisfy our current liabilities and as a result,
we have substantial doubt regarding our ability to continue as a going concern. We have been successful in raising cash through
debt and equity offerings in the past and as described in Note 6 to our unaudited consolidated financial statements for the three
and nine months ended September 30, 2016, we completed an over-subscribed $5 million debt financing on March 21, 2016, raising
a total of $6.3 million between July 2015 and March 2016. We have efforts in place to continue to raise cash through debt and
equity offerings.
We
will need substantial additional capital to fund our operations in future periods. In the event that we are unable to obtain financing
on acceptable terms, or at all, we will likely be required to cease our operations, pursue a plan to sell our operating assets,
or otherwise modify our business strategy, which could materially harm our future business prospects.
Net cash used in operations
for the nine months ended September 30, 2016 was $2,737,516 as compared to $2,679,949 for the nine months ended September 30,
2015. The increase in cash used in operations in 2016 is principally due to the interest expense from the senior convertible debentures.
Cash used in investing
activities for the nine months ended September 30, 2016 and 2015 was not significant.
Net cash provided by
financing activities for the nine months ended September 30, 2016 was $2,665,945 as compared to $2,289,538 for the same period
in the prior year. The cash from financing activities in the period ending September 30, 2016 included $2,102,382 from senior
secured convertible debt. We also received $865,150 from non-convertible debt, net of fees, less payment on non-convertible debt
of $781,221. In the prior year we received $3,991,437 from convertible debt and $1,300,000 in proceeds from non-convertible debt.