NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description -
Gyrotron Technology, Inc. (the "Company") is incorporated under the business laws of Delaware. The Company develops and seeks to license unique industrial technologies primarily to the glass, semiconductor, food, footwear, adhesives and plastics industries, providing a novel method for heating for industrial processing. It also develops, licenses, and sells autoclave-free laminating systems. The Company is organized and managed as a single operating segment.
Liquidity and Management Plans -
As shown in the accompanying financial statements, the Company incurred a net loss for the years ended December 31, 2015 and 2014 of $720,783 and $916,203 , respectively, had negative working capital of $1,653,863 and stockholders' deficiency of $8,694,723 at December 31, 2015. Further, cash used in operating activities during the year ended December 31, 2015 amounted to $294,678. The Company is expected to continue to incur losses throughout 2016. These factors raise substantial doubt as to the ability of the Company to continue as a going concern.
The Company's business strategy is to overcome these losses through commercialization and continued development of (i) applications for the gyrotron beam which will be marketed and monetized through licensing, engineering consulting and servicing and (ii) the lamination system.
The Company's management and Board of Directors have obtained additional funding of approximately $198,000 through stockholder advances and loans and the sale of equity securities (see Notes 6 and 13) and intends to obtain additional funding for general working capital needs and professional fees through private placement of its equity securities. The Company will continually evaluate funding options including additional offerings of its securities to investors. There can be no assurance as to the availability or terms upon which such financing alternatives might be available.
Accounts Receivable -
The Company grants credit to substantially all of its customers, and carries its accounts receivable at original invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on history of past write-offs, collections, and current credit conditions. The allowance for doubtful accounts amounted to $3,218 at December 31, 2015 and 2014.
Machinery and Equipment -
Machinery and equipment are stated at cost net of accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods for both financial statement and income tax reporting purposes. Maintenance and repairs are charged to operations as incurred; significant betterments are capitalized.
Patents -
The Company capitalizes costs relative to patent applications. Patents are recorded at acquired cost and amortized over their estimated useful economic life of 15 years, beginning at the date of issuance. Costs incurred to renew or extend the term of recognized patents, including annuities and fees, are expensed as incurred.
Impairment of Long-Lived Assets -
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future cash flows of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flow or appraised values, depending on the nature of the assets. During the year ended December 31, 2015 there was an impairment of a patent in the amount of $6,168 included in operating expenses in the accompanying statement of operations. During the year ended December 31, 2014 there was no impairment of long-lived assets.
NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes -
The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense.
Share-Based Payments
- The Company accounts for stock option awards granted in accordance with Share-Based Payments Topic of the FASB Accounting Standards Codification (ASC) 718. Under ASC 718, compensation expense related to stock based payments is recorded over the requisite service period based on the grant date fair value of the awards. The Corporation uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option's expected term and the price volatility of the underlying stock.
Treasury Stock -
The Company accounts for treasury stock under the cost method, which requires the Company to record the shares as a reduction to equity at the purchased amount.
Revenue Recognition -
In accordance with Revenue Recognition Topic of the FASB Accounting Standards Codification (ASC) 605, the Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Company's price to the customer is fixed or determinate, and collectability is reasonably assured.
Research and Development Expenses -
Research and development expenses are charged to operations as incurred. Customer funded research and development is included within operating expenses in the accompanying statement of operations as a reduction of research and development expense.
Loss Per Common Share -
Basic loss per common share is computed using the weighted average number of common shares outstanding. Diluted loss per common share gives effect to dilutive convertible preferred stock, options and warrants outstanding during the period. Shares to be issued upon the exercise of these instruments have not been included in the computation of diluted loss per share as their effect is anti-dilutive based on the net loss incurred.
As of December 31, 2015, after giving effect to the payment default on the Series B-1 redeemable convertible preferred described in Note 8, there were the following common shares underlying securities that could potentially dilute future earnings:
Preferred A stock
|
|
|
1,637,903
|
|
Preferred A-1 stock
|
|
|
232,163
|
|
Preferred A-2 stock
|
|
|
86,938
|
|
Preferred B stock
|
|
|
1,410,315
|
|
Preferred B-1 stock
|
|
|
2,391,173
|
|
Preferred B-2 stock
|
|
|
25,000
|
|
Warrants expiring 3/31/16
|
|
|
1,938,950
|
|
Warrants expiring 12/15/16
|
|
|
65,875
|
|
Warrants expiring 10/01/18
|
|
|
60,000
|
|
Stock options
|
|
|
60,000
|
|
|
|
|
7,908,317
|
|
NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Estimates -
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of 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. Accordingly, actual results may differ from estimated amounts.
Fair Value of Financial Instruments -
The carrying amount of cash, receivables, loans, advances, accounts payable and accrued expenses and other liabilities are reasonable estimates of their fair value due to their short maturity.
Redeemable Convertible Preferred Stock
- The Company classifies conditionally redeemable convertible preferred shares, which includes preferred shares subject to redemption upon the occurrence of uncertain events not solely within control of the Company, as temporary equity in the mezzanine section of the balance sheet, in accordance with the guidance enumerated in FASB ASC No. 480-10 "Distinguishing Liabilities from Equity", FASB ASC No. 210-10 "Balance Sheet" and Rule 5-02.27 of Regulation S-X, when determining the classification and measurement of preferred stock.
The Company evaluated the detachable warrants in accordance with FASB ASC No. 470-20, "Debt with Conversion and Other Options" and FASB ASC 815, "Derivatives and Hedging" and determined they were not considered a liability. As a result, proceeds from the preferred stock are allocated to the detachable stock purchase warrants based on the relative fair value of the preferred stock and warrants at issuance and recorded as additional paid-in capital.
The Company evaluated the conversion feature of the convertible preferred shares in accordance with FASB ASC No. 470-20, "Debt with Conversion and Other Options". A convertible financial instrument includes a Beneficial Conversion Feature ("BCF") when the fair market value of the preferred stock is lower than the value of common stock when the preferred stock converts to common stock at the issuance date. The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital.
Redeemable securities initially are recorded at their fair value minus the detachable warrants, BCF and preferred stock issuance costs. The Company recognizes discounts from the redemption value of the preferred stock immediately as they occur and adjusts the carrying amount to equal redemption value at the end of each reporting period. The Company recognizes accumulated dividends as an increase to preferred stock in the mezzanine section of the balance sheet and increase of stockholders' deficiency.
Recent Accounting Pronouncements Not Yet Adopted -
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, subsequently extended to December 15, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Company is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.
In February 2016, the FASB issued an accounting standard update ASU 2016-02, "Leases", which requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company has not yet evaluated nor has it determined the effect of the standard on its ongoing financial reporting.
NOTE 2. - LOAN RECEIVABLES, OFFICER AND DIRECTOR
The Company had a non-interest bearing loan to an officer that was due on demand in the amount of $24,155 which the Company forgave in 2014. The expense is included in selling, general and administrative expenses on the accompanying statements of operations for the year ended December 31, 2014.
NOTE 3. - MACHINERY AND EQUIPMENT
The components of machinery and equipment are as follows:
|
Estimated
Useful Life
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
5 to 7 years
|
|
$
|
1,018,231
|
|
|
$
|
882,338
|
|
Furniture and fixtures
|
5 to 7 years
|
|
|
25,874
|
|
|
|
25,874
|
|
Deposit on capital lease
|
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
|
|
1,084,105
|
|
|
|
948,212
|
|
Less accumulated depreciation
|
|
|
|
907,337
|
|
|
|
(900,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
176,768
|
|
|
$
|
47,362
|
|
Depreciation expense for the years ended December 31, 2015 and 2014 amounted to $6,486 and $82,114, respectively and is included within operating expenses in the accompanying statements of operations.
NOTE 4. – PATENTS
The components of patents are as follows:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
156,419
|
|
|
$
|
153,607
|
|
Less accumulated amortization
|
|
|
(103,063
|
)
|
|
|
(102,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,356
|
|
|
$
|
51,353
|
|
The Company amortizes patent costs on a straight-line basis over the expected period of benefit of the related capitalized expenditures. Amortization expense included in operating expenses on the statement of operations amounted to $15,615 and $10,189 for the years ended December 31, 2015 and 2014, respectively. Amortization expense for patents placed in service for the next five years is expected to be approximately $9,300 in 2016, approximately $5,700 in 2017, approximately $3,000 in 2018, 2019, and 2020 and approximately $11,000 in aggregate thereafter.
NOTE 5. - NOTE PAYABLE
The Company had a note payable due to Ben Franklin Technology Center of Southeastern Pennsylvania (the Center). During the year ended December 31, 2014, the Company paid the Center $28,000 in full settlement of its obligation under the note and recognized a gain on extinguishment in the amount of $16,835, included in other income on the accompanying statement of operations.
NOTE 6. - STOCKHOLDER LOANS AND ADVANCES FROM STOCKHOLDERS
Gabriel Capital LP ("Gabriel"), a major stockholder of the Company, made two loans to the Company in 2014 in the amounts of $40,000 and $45,000, to purchase machinery and equipment. There is no interest on these informal loans. The $40,000 loan was to be repaid on July 1, 2015, or earlier to the extent the Company has cash in excess of $250,000. As of the date hereof, this loan has not been repaid. The $45,000 loan was to be repaid on October 1, 2015, or earlier to the extent the Company has cash in excess of $250,000. As of the date hereof, this loan has not been repaid. In May 2015, Gabriel loaned the Company an additional $60,000 interest free to be repaid from 50% of the net proceeds of any equity financing obtained by the Company, and, in any event, to be repaid by September 30, 2015. In October 2015, Gabriel agreed to extend the maturity of all of the above loans to January 4, 2016 and to waive the obligation to repay the May 2015 loan from equity proceeds. In April 2016 Gabriel loaned the Company an additional $25,000 interest free to be repaid by December 31, 2016, and extended the maturity date of all its loans to the Company to December 31, 2016.
As of December 31, 2015, stockholders had advanced the Company approximately $30,500 to be repaid at a premium upon collection of the accounts receivable, of which $9,728 had been collected and had not been repaid. As of the date hereof, stockholders have loaned the Company approximately $45,000 for future accounts receivable to be repaid at premiums ranging from 1.25% - 3.25% upon collection of the accounts receivable.
During the year ended December 31, 2015, a director and his affiliates advanced $162,800 to the Company that bears no interest. Subsequent to December 31, 2015, the director and his affiliates advanced $112,500 to the Company that bears no interest. The Company expects that a substantial portion of such advances will be converted into preferred stock units (see Note 8).
NOTE 7. - INCOME TAXES
The components of the income tax provision (benefit) are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(179,119
|
)
|
|
|
(296,022
|
)
|
State
|
|
|
(57,078
|
)
|
|
|
(97,018
|
)
|
|
|
|
(236,197
|
)
|
|
|
(393,040
|
)
|
Increase in valuation allowance
|
|
|
236,197
|
|
|
|
393,040
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2015 and 2014, the Company recorded deferred income tax and liabilities, which were attributed to the following temporary differences:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Deferred tax assets/(liabilities)
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
3,515,836
|
|
|
$
|
3,340,056
|
|
Tax benefit carry-forwards
|
|
|
164,854
|
|
|
|
160,587
|
|
Depreciation and amortization
|
|
|
11,658
|
|
|
|
25,468
|
|
Accrued employee compensation
|
|
|
195,609
|
|
|
|
147,803
|
|
Other
|
|
|
26,982
|
|
|
|
7,902
|
|
Stock based compensation
|
|
|
75,621
|
|
|
|
72,546
|
|
Total gross deferred tax assets
|
|
|
3,990,560
|
|
|
|
3,754,362
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(3,990,560
|
)
|
|
|
(3,754,362
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has approximately $8,661,000 ($8,228,000 - 2014) in federal and state net operating loss carryforwards ("NOL's") as of December 31, 2015 available to reduce future taxable income which begin to expire in 2018. Due to the uncertainty of the Company's ability to generate sufficient taxable income in the future to utilize the NOL's before they expire, the Company has recorded a valuation allowance to reduce the gross deferred tax asset to zero. The Company also has approximately $165,000 ($161,000 – 2014) of tax benefit carryforwards as of December 31, 2015 related to research and development credits that expire at various dates through 2035.
Internal Revenue Code Section 382 ("Section 382") imposes limitations on the utilization of a company's net operating losses and other corporate tax attributes as ownership changes occur. As a result of the historical equity instruments issued by the Company, a Section 382 ownership change may have occurred and a study will be required to determine the date of the ownership changes, if any. The amount of the Company's net operating losses and other tax attributes incurred prior to the ownership change may be limited based on the Company's value. A full valuation allowance has been established for the gross deferred tax asset related to the net operating losses and other corporate tax attributes available. Accordingly, any limitation resulting from Section 382 application is not expected to have a material effect on the balance sheets or statements of operations of the Company.
The differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying statements of operations are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Statutory United States federal rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal effect
|
|
|
5.2
|
|
|
|
5.5
|
|
Permanent differences
|
|
|
(6.9
|
)
|
|
|
(5.4
|
)
|
Change in valuation allowance
|
|
|
(32.9
|
)
|
|
|
(42.9
|
)
|
Deferred tax true-up adjustments
|
|
|
0.5
|
|
|
|
8.7
|
|
Other
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
-%
|
|
|
|
-%
|
|
During the years ended December 31, 2015 and 2014, the Company recognized no interest and penalties related to unrecognized tax benefits and has no unrecognized tax benefits.
The Company files income tax returns in the U.S. federal jurisdiction and Pennsylvania. The tax years 2011 through 2015 generally remain open to examination by major taxing jurisdictions to which the Company is subject.
NOTE 8. – REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Board of Directors has designated six series of redeemable convertible par value $.001 preferred stock: Series A, Series A-1, Series A-2, Series B, Series B-1, and Series B-2. Series A, Series A-1, and Series A-2 rank equal for all purposes. Series B, Series B-1, and Series B-2 rank equal for all purposes. Series A, A-1 and A-2 each rank senior to each of Series B, B-1, and B-2.
As further detailed below, holders of Series A, A-1, A-2, B, B-1, and B-2 redeemable convertible preferred stock can take control of the board of directors in the event the Company does not accept a redemption request or the Company fails to pay dividends. In addition, a majority of the current members of the board of directors own various classes of preferred shares. As a result, these instruments have conditions for their redemption that are not within the control of the Company. Accordingly, the fair value of the Series A, A-1, A-2, B, B-1, and B-2 redeemable convertible preferred stock are recorded outside of stockholders' deficiency as temporary equity in the mezzanine section of the balance sheet. The Company recognizes changes in the redemption value of the convertible preferred stock immediately as they occur, and the carrying amount of the instrument is adjusted to equal the redemption value at the end of each reporting period. The adjustment to record preferred stock at its redemption value was charged to the redeemable convertible preferred stock carrying value and additional paid in capital for the years ended December 31, 2015 and 2014 and is further detailed in the following schedule:
|
|
Series A
|
|
|
Series A-1
|
|
|
Series A-2
|
|
|
Series B
|
|
|
Series B-1
|
|
|
Series B-2
|
|
|
Total
|
|
Fair Value of Redeemable Preferred Stock as of December 31, 2013
|
|
$
|
4,599,727
|
|
|
$
|
614,900
|
|
|
|
-
|
|
|
$
|
1,318,613
|
|
|
$
|
747,008
|
|
|
|
-
|
|
|
$
|
7,280,248
|
|
New issuances including dividends paid in kind
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
675,740
|
|
|
|
-
|
|
|
$
|
675,740
|
|
Dividends accumulated
|
|
$
|
262,152
|
|
|
$
|
37,146
|
|
|
|
-
|
|
|
$
|
119,878
|
|
|
$
|
111,706
|
|
|
|
-
|
|
|
$
|
530,882
|
|
Dividends satisfied
|
|
$
|
(1,913,567
|
)
|
|
$
|
(243,440
|
)
|
|
|
-
|
|
|
$
|
(59,939
|
)
|
|
$
|
(21,625
|
)
|
|
|
-
|
|
|
$
|
(2,238,571
|
)
|
Fair Value of Redeemable Preferred Stock as of December 31, 2014
|
|
$
|
2,948,312
|
|
|
$
|
408,606
|
|
|
|
-
|
|
|
$
|
1,378,552
|
|
|
$
|
1,512,829
|
|
|
|
-
|
|
|
$
|
6,248,299
|
|
New issuances including dividends paid in kind
|
|
|
-
|
|
|
|
-
|
|
|
$
|
60,857
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
17,500
|
|
|
$
|
78,357
|
|
Dividends accumulated
|
|
$
|
471,716
|
|
|
$
|
66,863
|
|
|
|
-
|
|
|
$
|
215,779
|
|
|
$
|
175,205
|
|
|
$
|
78
|
|
|
$
|
929,641
|
|
Fair Value of Redeemable Preferred Stock as of December 31, 2015
|
|
$
|
3,420,028
|
|
|
$
|
475,469
|
|
|
$
|
60,857
|
|
|
$
|
1,594,331
|
|
|
$
|
1,688,034
|
|
|
$
|
17,578
|
|
|
$
|
7,256,297
|
|
The terms of these preferred shares are summarized in the table below. All series carry an initial dividend rate of 10% payable quarterly and are convertible in the common stock of the Company. The holders of preferred stock have the right to one vote for each share of common stock into which such share of preferred stock could then be converted. The conversion ratio and price are subject to adjustment when the Company declares or pays dividends, makes a distribution on common stock payable in common shares, or affects a subdivision, split, consolidation, combination, or reverse split of outstanding common shares into a greater or lesser number of common shares.
The dividends accrue and accumulate whether or not they have been declared by the board of directors and whether or not there are profits or other funds legally available. As specified in the certificate of designation for each series, the Company may have the option to pay dividends in kind for a specified period of time.
For each series any holder can request on the date specified for that series that the Company repurchase 30 calendar days thereafter (the "Repurchase Date"), all shares of that series held by the holder for cash equal to the liquidation preference per share plus accrued and unpaid dividends as of the Repurchase Date. The Company has the option whether or not to agree to the repurchase. In the event the Company fails to repurchase, or payment
of dividends of a series is a number of quarters in arrears specified for that series (either being a Default), the dividend rate on that series increases to 18%, and the majority holders of that series, voting together with the holders of any pari – passu series, have the right to elect the majority of the board of directors, so long as the dividends continue to be the specified number of quarters in arrears. For Series A-2, B, B-1, and B-2, in the event of a Default the conversion price ("Default Conversion Price") for that series permanently decreases 15%.
The Company, at its option, may require conversion of all or any pro-rata portion of shares of a series into common stock at the conversion price if at any time i) the common stock is listed for trading on a national securities exchange, an inter-dealer automated quotation system, or over the counter bulletin board (or for the series A-2 and B-2 the "OTC Pinks"), ii) the Company shall have prepared and filed with the Securities and Exchange Commission a registration statement covering the shares of common stock to be issued upon due conversion of preferred stock, and such registration statement shall have been declared effective under the Securities Act of 1933, as amended, and continues to be effective, iii) during any preceding period of twenty consecutive trading days (while i) and ii) are fulfilled) the closing price equals or exceeds a specified percentage ("Mandatory conversion percentage") of the conversion price, and iv) the Company is current on its dividends for that Series.
|
|
Series A
|
|
|
Series A-1
|
|
|
Series A-2
|
|
|
Series B
|
|
|
Series B-1
|
|
|
Series B-2
|
|
|
Total
|
|
Shares designated
|
|
|
450,000
|
|
|
|
125,000
|
|
|
|
8,750
|
|
|
|
40,000
|
|
|
|
80,000
|
|
|
|
30,000
|
|
|
|
733,750
|
|
Shares outstanding at December 31, 2015
|
|
|
436,774
|
|
|
|
61,910
|
|
|
|
1,739
|
|
|
|
39,959
|
|
|
|
40,650
|
|
|
|
500
|
|
|
|
-
|
|
Liquidation preference per share
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
35
|
|
|
$
|
30
|
|
|
$
|
35
|
|
|
$
|
35
|
|
|
|
-
|
|
Number of shares of common issued upon conversion of one preferred
|
|
|
3.75
|
|
|
|
3.75
|
|
|
|
50.00
|
|
|
|
35.29
|
|
|
|
58.82
|
|
|
|
50.00
|
|
|
|
-
|
|
Conversion price per common share
|
|
$
|
1.600
|
|
|
$
|
1.600
|
|
|
$
|
0.700
|
|
|
$
|
0.850
|
|
|
$
|
0.595
|
|
|
$
|
0.700
|
|
|
|
-
|
|
In default at December 31, 2015
|
|
YES
|
|
|
YES
|
|
|
NO
|
|
|
YES
|
|
|
YES
|
|
|
NO
|
|
|
|
-
|
|
Number of quarters in arrears that triggers default rate
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
-
|
|
Number of quarters in arrears
|
|
|
9
|
|
|
|
8
|
|
|
|
-
|
|
|
|
10
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
Repurchase date
|
|
6/30/2015
|
|
|
6/30/2015
|
|
|
6/30/2020
|
|
|
6/30/2016
|
|
|
9/30/2017
|
|
|
12/31/2019
|
|
|
|
-
|
|
May be paid in kind through and including
|
|
|
|
|
|
|
|
|
|
9/30/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Mandatory conversion percentage
|
|
|
150
|
%
|
|
|
150
|
%
|
|
|
150
|
%
|
|
|
196.1
|
%
|
|
|
184.9
|
%
|
|
|
150
|
%
|
|
|
-
|
|
Dividends accrued during the year ended December 31, 2014
|
|
$
|
262,064
|
|
|
$
|
37,146
|
|
|
$
|
-
|
|
|
$
|
119,878
|
|
|
$
|
111,706
|
|
|
$
|
-
|
|
|
$
|
530,794
|
|
Dividends accrued during the year ended December 31, 2015
|
|
$
|
471,716
|
|
|
$
|
66,863
|
|
|
$
|
3,632
|
|
|
$
|
215,779
|
|
|
$
|
175,205
|
|
|
$
|
78
|
|
|
$
|
933,273
|
|
Dividends paid during the year ended December 31, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
59,939
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
59,939
|
|
Dividends paid in kind during the year ended December 31, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,625
|
|
|
$
|
-
|
|
|
$
|
21,625
|
|
Dividends paid in kind during the year ended December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,632
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,632
|
|
Cumulative unpaid dividends at December 31, 2014
|
|
$
|
327,668
|
|
|
$
|
37,146
|
|
|
$
|
-
|
|
|
$
|
179,781
|
|
|
$
|
90,081
|
|
|
$
|
-
|
|
|
$
|
634,676
|
|
Cumulative unpaid dividends at December 31, 2015
|
|
$
|
799,384
|
|
|
$
|
104,009
|
|
|
$
|
-
|
|
|
$
|
395,560
|
|
|
$
|
265,286
|
|
|
$
|
78
|
|
|
$
|
1,564,317
|
|
Dividend rate
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
10
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
10
|
%
|
|
|
-
|
|
In January 2014, the Company amended the certificate of designation of the Series A Preferred with the effect of satisfying cumulative unpaid dividends through September 30, 2013 with common stock at the rate of one common share per $0.65 of dividends, and reducing the dividend rate to 10% from 18% beginning October 1, 2013. As a result of the board of directors' declaration of dividends in February 2014, $1,913,479 of cumulative dividends were satisfied with 2,943,837 shares of common stock. These shares were issuable at December 31, 2015 and 2014, and a portion of them have not been issued for administrative reasons. Accordingly, the presentation in these financial statements considers these shares as effectively issued.
In May 2014, the Company amended the certificate of designation of the Series A-1 Preferred with the effect of satisfying cumulative unpaid dividends through December 31, 2013 with common stock at the rate of one common share per $0.65 of dividends, and reducing the dividend rate to 10% from 18% beginning January 1, 2014. As a result of the board of directors' declaration of dividends in June 2014, $243,440 of cumulative dividends were satisfied with 374,523 shares of common stock. These shares were issuable at December 31, 2015 and 2014 and a portion of them had not been issued for administrative reasons. Accordingly, the presentation in these financial statements considers these shares as effectively issued.
Under both the Series A and Series A-1 certificates of designation, as a result of a prior default, the holder had the right, at any time, to convert each share of preferred stock into 3.53 (the conversion ratio) shares of common stock , or a conversion price of $1.70. The amendment to the certificate of designation of the Series A preferred stock in the first quarter of 2014 and the amendment to the certificate of designation of the Series A-1 preferred stock in the second quarter of 2014 reduced the conversion price to $1.60, resulting in each share being convertible into 3.75 shares of common stock.
Registration Rights -
In connection with its stock subscription agreements, the Company has agreed, on various dates since December 2009, to pay the various subscribers 1/2% of the aggregate purchase price of shares acquired monthly until (i) with respect to the common shares underlying the related preferred stock, either (x) the Company has prepared and filed a registration statement with the Securities and Exchange Commission which has been declared effective under the Securities Act or (y) the holder is then able to sell such shares under Rule 144 promulgated pursuant to the Securities Act (in certain agreements also with the condition that said sale can be made without volume restriction), and (ii) the Company has obtained a ticker symbol and common shares are eligible to trade, as specified in the particular subscription agreement, on the OTCBB or OTC PINKS. At December 31, 2015 and 2014, the estimated liability under these agreements amounted to $558,872 and $404,800, respectively, and the changes in such estimated liability for the years ending December 31, 2015 and 2014 amounting to $154,072 and $144,664, respectively are included as other expense in the accompanying statements of operations. The agreements provide for no limitation as to the maximum potential consideration to be transferred. At December 31, 2015 the aggregate investment for which the right to registration rights payments had not terminated was $2,110,886.
Sales of Equity Securities –
During the years ending December 31, 2015 and 2014, the Company sold units consisting of 1 share of Series A-2, B-1 or B-2 preferred and warrants to purchase one share of common stock, referred to as A-2, B-1, or B-2 units respectively. These sales are summarized in the table below. Proceeds are shown net of offering expenses.
|
|
A-2 units
|
|
|
B-1 units
|
|
|
B-2 units
|
|
Warrants per unit
|
|
|
25
|
|
|
|
50
|
|
|
|
50
|
|
Warrant exercise price
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Warrant expiration date
|
|
12/15/2016
|
|
|
3/31/2016
|
|
|
12/15/2016
|
|
Price/unit
|
|
$
|
35
|
|
|
$
|
35
|
|
|
$
|
35
|
|
Units sold during the year ended December 31, 2014
|
|
|
-
|
|
|
|
18,689
|
|
|
|
-
|
|
Units sold during the year ended December 31, 2015
|
|
|
1,635
|
|
|
|
-
|
|
|
|
500
|
|
Proceeds net of offering expenses received during the year ended December 31, 2014
|
|
$
|
-
|
|
|
$
|
654,090
|
|
|
$
|
-
|
|
Proceeds net of offering expenses received during the year ended December 31, 2015
|
|
$
|
54,807
|
|
|
$
|
-
|
|
|
$
|
16,450
|
|
Warrants -
The warrants contain customary terms for the adjustment of their exercise price and/or the consideration issued upon exercise upon the occurrence of certain corporate events such as mergers, splits and dividends.
The proceeds of the preferred stock unit offerings are allocated between the preferred stock and the warrants based on the relative fair value of each instrument. The assumed value of the preferred stock is determined based on the fair value of the underlying common shares and the fair value of the warrants was valued using a management estimate verified using the Black-Scholes option pricing model. During the years ended December 31, 2015 and 2014,
$8,525 and $73,722 respectively was recognized as additional paid-in capital allocable to such warrants and immediately accreted
to Fair Value of Redeemable Preferred Stock
.
Beneficial Conversion Feature
- The effective conversion price of the various series of preferred stock at issuance was at a price lower than the market price of the common stock at the date of the issuance, resulting in a non-cash beneficial conversion feature for the years ended December 31, 2015 and 2014 of
$16,953 and $101,398, respectively.
As there is an accumulated deficit, this beneficial conversion feature was recognized as additional paid-in capital and immediately accreted to Fair Value of Redeemable Preferred Stock.
NOTE 9. MOST FAVORED NATION RIGHTS
If, prior to December 31, 2016 for purchasers of Series A-2 and B-2 units and prior to December 31, 2015 for purchasers of 7,913 of Series B-1 units, the Company closes a financing or series of financing with gross proceeds in excess of $50,000 and terms and conditions more favorable than the terms and conditions provided for in the respective Series A-2 or B-1 subscription agreement, the holders of such units may exchange all or any part of the unit, at the purchase price per unit plus accrued dividends, for the securities issued in the subsequent financing on the same terms of such subsequent financing ("Most Favored Nation (or "MFN") right").
In April 2015, the Company agreed with a holder of 5,000 Series B-1 units that in the event the MFN right is triggered, he will waive such right and the Company will issue him 250,000 warrants expiring December 15, 2016 in exchange for 250,000 warrants expiring March 31, 2016 that such holder acquired as part of his purchase of Series B-1 units. During the year ended December 31, 2015, it was considered probable that the MFN right would be triggered and the Company recorded other expense in the amount of $18,000 representing the difference in fair value between the warrants to be issued and the warrants to be forfeited. As noted below in October of 2015, the MFN right was triggered.
The Company analyzed units that have MFN rights for embedded derivatives that require bifurcation. In connection with this analysis, the Company's determined that such units are more akin to equity than debt and that the embedded features were clearly and closely related to the economic characteristics and risks of the unit. As a result, the Company concluded that the embedded features would not need to be bifurcated from the unit. Any benefit received by the holder related to the exercise of the MFN right would be recognized upon the occurrence of the contingent events based on its intrinsic value at the commitment date.
The MFN right of the purchasers of 7,913 of the Series B-1 units was triggered by the sale of A-2 units in October 2015 when the aggregate sales of such units exceeded $50,000. As a result of other discussions regarding a possible restructuring of the B-1 units, as well as the subsequent sale of B-2 units, the Company has not come to a final agreement with the holders of those B-1 units as to how their MFN rights will be ultimately handled. Subsequent to December 31, 2015, the Company agreed with Gabriel Capital in principle that Gabriel would convert its B-1 units (including accrued dividends) into B-2 units.
NOTE 10. COMMON STOCK WARRANTS
The following is a summary of warrants outstanding and exercisable at December 31, 2015 and 2014 and activity during the years then ended:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1
|
|
|
3,043,814
|
|
|
$
|
1.00
|
|
|
|
2,109,364
|
|
|
$
|
1.00
|
|
Granted during the year
|
|
|
65,875
|
|
|
|
1.00
|
|
|
|
934,450
|
|
|
|
1.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(1,044,864
|
)
|
|
|
1.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
2,064,825
|
|
|
$
|
1.00
|
|
|
|
3,043,814
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31
|
|
|
2,064,825
|
|
|
$
|
1.00
|
|
|
|
3,043,814
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average months remaining
|
|
|
|
|
|
|
4.16
|
|
|
|
|
|
|
|
11.47
|
|
See Note 9 regarding warrants granted during the years ended December 31, 2015 and 2014. During the year ended December 31, 2015, the 1,044,864 Series B warrants expired unexercised.
The Company issued 60,000 warrants to a consultant in October 2013 vesting immediately with an expiration date in October 2018 and an exercise price of $0.75 per share of underlying common stock. At the time, the Company recorded $25,142 as a prepaid expense and additional paid-in capital based on the fair value of the warrants granted using the Black-Scholes option pricing model. During the year ended December 31, 2014, $9,428 was amortized into selling, general and administrative expenses as services were rendered.
NOTE 11. - STOCK BASED COMPENSATION
During 2006, the Board of Directors authorized the creation of a pool of 1,200,000 stock options to purchase shares of the Company's common stock for grant to officers and salaried employees of the Company, members of the Board of Directors, consultants, and any other key employees as determined by the Board of Directors as an incentive to remain in the service of the Company, enhance the long-term performance of the Company, and to acquire a proprietary interest in the success of the Company. Awards of these options shall be determined by the Board of Directors or an authorized committee thereof. The right to grant options under the plan expires in 2016.
In July 2014, the Company granted a director 60,000 five year options to purchase common stock at an exercise price of $0.725 per share, of which 12,000 options vested on the grant date, and 12,000 vest in each of October 2014, January 2015, April 2015 and July 2015. The value of the options was determined to be $16,962 using the Black Scholes pricing model. During the years ended December 31, 2015 and 2014, $7,576 and $9,386 respectively, were recognized as stock based compensation expense. As of December 31, 2015, there is no unrecognized expense. Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. At December 31, 2015 the aggregate intrinsic value was not material to the financial statements.
NOTE 12. - COMMITMENTS AND CONTINGENCIES
Leases -
The Company leases office and warehouse space under an operating lease which expires on July 31, 2016. Rent expense for the lease for the years ended December 31, 2015 and 2014 amounted to $117,745 and $103,377, respectively. Aggregate future minimum lease payments under the non-cancelable operating lease are $67,285 for the year ended December 31, 2016. The Company has made a $12,253 security deposit included within other assets in the accompanying balance sheets as of December 31, 2015 and 2014.
In July 2014, the Company entered into an agreement to lease a new gyrotron and associated equipment from a vendor pursuant to a capital lease. As amended in May 2016, the lease requires four payments aggregating $220,000, $40,000 of which was paid up-front and is included in machinery and equipment in the accompanying balance sheet as of December 31, 2014, and $45,000, $75,000 and $60,000, are due on August 1, 2016, January 31, 2017, and January 31, 2018, respectively. Should the Company fail to timely make the $45,000 payment, it is required to return the gyrotron to the manufacturer by September 30, 2016. The lease contains a $1 bargain purchase option following the completion of payments made by the Company.
In February 2015, the Company entered into an agreement to purchase a cryomagnet for $134,700 of which $40,410 was paid, $40,410 was due 30 days after delivery (which took place in the fourth quarter of 2015) and has not yet been paid, $26,940 will be due 6 months after successful provisional acceptance testing (which has not taken place), and $26,940 will be due 18 months after successful provisional acceptance testing. The Company recorded $67,350 in accounts payable and $26,940 in other non-current liability on the accompanying balance sheet as of December 31, 2015.
Claims -
The Company is subject to a claim arising in the normal course of business. In the opinion of management, the amount of the ultimate liability, if any, with respect this action will not have a material adverse effect on the financial position, results of operation or cash flow of the Company.
Concentration
- During the year ended December 31, 2015, substantially all revenue was derived from one customer. During the year ended December 31, 2014, all revenue was derived from two customers.
NOTE 13. – SUBSEQUENT EVENTS
Subsequent to December 31, 2015, the Company has sold 507 B-2 units at a price of $30 per unit for gross proceeds of $15,200. See also Note 6 regarding stockholder loans and advances subsequent to December 31, 2015, and Note 12 regarding the Company's lease of a gyrotron and purchase of a cryomagnet.
F-17