UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2018

 

or

 

[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____________ to _____________

 

Commission File Number 001-38185

 

PRESSURE BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

Massachusetts   04-2652826
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

14 Norfolk Avenue    
South Easton, Massachusetts   02375
(Address of principal executive offices)   (Zip Code)

 

(508) 230-1828

(Registrant’s telephone number, including area code)

 

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

 

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

[X] Yes [  ] No

 

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

 

Large accelerated filer [  ]  

Accelerated filer

[  ]

 

Non-accelerated

filer [  ]

  Smaller reporting company [X]   Emerging growth company [  ]
        (Do not check if a smaller reporting company)        

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act.

 

[  ] Yes [X] No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 7, 2018.

 

Class  Number of Shares 
Common Stock, par value $.01 per share   

1,565,082

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
PART I - FINANCIAL INFORMATION 3
   
Item 1. Unaudited Financial Statements 3
   
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 3
   
Consolidated Statements of Operations for the Three- and Six-Months Ended June 30, 2018 and 2017 4
   
Consolidated Statements of Comprehensive Loss for the Three Months and Six Months Ended June 30, 2018 and 2017 5
   
Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2018 and 2017 6
   
Notes to Unaudited Consolidated Financial Statements 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
   
Item 3. Quantitative and Qualitative Disclosure About Market Risk 32
   
Item 4. Controls and Procedures 32
   
PART II - OTHER INFORMATION 33
   
Item 1. Legal Proceedings 33
   
Item 1A. Risk Factors 33
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
   
Item 3. Defaults Upon Senior Securities 34
   
Item 4. Mine Safety Disclosures 34
   
Item 5. Other Information 34
   
Item 6. Exhibits 35
   
SIGNATURES 36

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PRESSURE BIOSCIENCES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   June 30, 2018   December 31, 2017 
ASSETS          
CURRENT ASSETS          
Cash and cash equivalents  $18,491   $81,033 
Accounts receivable   526,090    206,848 
Inventories, net of $139,700 reserve at June 30, 2018 and $179,600 at December 31, 2017   900,063    857,662 
Prepaid expenses and other current assets   202,736    222,158 
Total current assets   1,647,380    1,367,701 
Intangible assets, net of amortization of $43,269 and $0, respectively   707,611    750,000 
Investment in available-for-sale equity securities   17,991    19,825 
Property and equipment, net   19,177    22,662 
TOTAL ASSETS  $2,392,159   $2,160,188 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
CURRENT LIABILITIES          
Accounts payable  $697,961   $589,263 
Accrued employee compensation   427,625    368,700 
Accrued professional fees and other   917,498    800,620 
Other current liabilities   912,402    1,536,507 
Deferred revenue   208,857    263,106 
Revolving note payable   -    3,500,000 
Related party convertible debt, net of debt discount of $0 and $31,372, respectively   -    259,762 
Convertible debt, net of unamortized debt discounts of $547,582 and $401,856, respectively   3,222,167    8,028,014 
Other debt, net of unamortized discounts of $25,982 and $48,194, respectively   703,130    1,379,863 
Total current liabilities   7,089,640    16,725,835 
LONG TERM LIABILITIES          
Deferred revenue   45,990    57,149 
TOTAL LIABILITIES   7,135,630    16,782,984 
COMMITMENTS AND CONTINGENCIES (Note 5)          
STOCKHOLDERS’ DEFICIT          
Series D Convertible Preferred Stock, $.01 par value; 850 shares authorized; 300 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively (Liquidation value of $300,000)   3    3 
Series G Convertible Preferred Stock, $.01 par value; 240,000 shares authorized; 80,570 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively   806    806 
Series H Convertible Preferred Stock, $.01 par value; 10,000 shares authorized; 10,000 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively   100    100 
Series H2 Convertible Preferred Stock, $.01 par value; 21 shares authorized; 21 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively   -    - 
Series J Convertible Preferred Stock, $.01 par value; 6,250 shares authorized; 3,458 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively   35    35 
Series K Convertible Preferred Stock, $.01 par value; 15,000 shares authorized; 6,880 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively   68    68 
Series AA Convertible Preferred Stock, $.01 par value; 10,000 shares authorized; 5,195.4 and 0 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively   52    - 
Common stock, $.01 par value; 100,000,000 shares authorized; 1,537,094 and 1,342,858 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively   15,371    13,429 
Warrants to acquire common stock   17,450,717    9,878,513 
Additional paid-in capital   37,747,441    30,833,549 
Accumulated deficit   (59,958,064)   (55,349,299)
Total stockholders’ deficit   (4,743,471)   (14,622,796)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $2,392,159   $2,160,188 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

3

 

 

PRESSURE BIOSCIENCES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

  

For the Three Months Ended

June 30,

   For the Six Months Ended
June 30,
 
   2018   2017   2018   2017 
Revenue:                    
Products, services, other  $618,418   $480,400   $1,203,662   $1,006,398 
Grant revenue   20,355    59,972    45,885    85,331 
Total revenue   638,773    540,372    1,249,547    1,091,729 
                     
Costs and expenses:                    
Cost of products and services   270,046    287,299    594,835    523,296 
Research and development   323,832    241,783    648,808    505,239 
Selling and marketing   224,942    300,111    499,410    513,120 
General and administrative   740,843    915,470    1,535,448    1,753,468 
Total operating costs and expenses   1,559,663    1,744,663    3,278,501    3,295,123 
                     
Operating loss   (920,890)   (1,204,291)   (2,028,954)   (2,203,394)
                     
Other expense:                    
Interest expense   (1,159,242)   (1,983,112)   (2,282,387)   (3,509,744)
Other expense   (9,582)   (80)   (14,312)   (7,108)
Gain on extinguishment of debt   471,612    -    475,897    - 
Incentive shares/warrants   (663,130)   (186,802)   (663,130)   (186,802)
Change in fair value of derivative liabilities   -    2,790,525    -    (271,227)
Total other (expense) income   (1,360,342)   620,531    (2,483,932)   (3,974,881)
                     
Net loss   (2,281,232)   (583,760)   (4,512,886)   (6,178,275)
Deemed dividend on down round feature   (213,012)   -    (213,012)   - 
Deemed dividend on beneficial conversion feature   (10,532,291)   -    (10,532,291)   - 
Preferred stock dividends   (95,879)   -    (95,879)   - 
Net loss attributable to common stockholders  $(13,122,414)  $(583,760)  $(15,354,068)  $(6,178,275)
Basic and diluted net loss per share attributable to common stockholders  $(9.20)  $(0.54)  $(11.01)  $(5.83)
                     
Weighted average common stock shares outstanding used in the basic and diluted net loss per share calculation   1,426,698    1,077,529    1,395,187    1,059,250 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

4

 

 

PRESSURE BIOSCIENCES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Comprehensive Loss                    
                     
Net loss  $(2,281,232)  $(583,760)  $(4,512,886)  $(6,178,275)
                     
Other comprehensive loss                    
Unrealized income on marketable securities   -    6,190    -    6,190 
                     
Comprehensive loss  $(2,281,232)  $(577,570)  $(4,512,886)  $(6,172,085)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

5

 

 

PRESSURE BIOSCIENCES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the Six Months Ended 
   June 30, 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(4,512,886)  $(6,178,275)
Adjustments to reconcile net loss to net cash used in operating activities:          
Common stock issued for debt extension   28,490    10,000 
Depreciation and amortization   45,874    4,716 
Accretion of interest and amortization of debt discount   986,155    2,922,265 
Issuance of incentive shares and common stock warrants   663,130    186,802 
Inventory reserve recovery   (39,900)   - 
Gain on extinguishment of debt   (475,897)   -
Stock-based compensation expense   148,270    179,511 
Amortization of third party fees paid in common stock and warrants   -    30,558 
Shares issued with debt   7,800    - 
Change in fair value of derivative liabilities   -    271,227 
Impairment loss on investment   1,834    6,069 
Changes in operating assets and liabilities:          
Accounts receivable   (319,242)   (282,728)
Inventories   (2,501)   (226,204)
Prepaid expenses and other assets   19,422    82,193 
Accounts payable   108,698    338,838 
Accrued employee compensation   58,925    310,615 
Deferred revenue and other accrued expenses   678,789    4,715 
Net cash used in operating activities   (2,603,039)   (2,339,698)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property plant and equipment   -    (16,617)
Net cash used in investing activities   -    (16,617)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net proceeds from revolving note payable   460,000    1,610,000 
Net proceeds from warrant exercises   -    140,215 
Net proceeds from Series AA convertible preferred stock   226,091    - 
Net proceeds from convertible debt   3,242,950    - 
Net proceeds from non-convertible debt – third party   952,501    1,987,752 
Net proceeds from non-convertible debt – related party   102,100    - 
Payments on convertible debt   (1,518,500)   (840,541)
Payments on non-convertible debt – related party   (52,100)   - 
Payments on non-convertible debt   (872,545)   (478,141)
Net cash provided by financing activities   2,540,497    2,419,285 
           
NET INCREASE (DECREASE) IN CASH   (62,542)   62,970 
CASH AT BEGINNING OF YEAR   81,033    138,363 
CASH AT END OF PERIOD  $18,491   $201,333 
           
SUPPLEMENTAL INFORMATION          
Interest paid in cash  $525,979   $173,243 
Income taxes paid   -    - 
NON CASH TRANSACTIONS:          
Common stock issued in lieu of cash for interest   90,023    - 
Common stock issued with debt   170,745    297,252 
Discount from warrants issued with convertible debt   162,023    554,998 
Discount from one-time interest   154,500    175,000 
Unrealized gain from available-for-sale equity securities   -    6,190 
Preferred stock dividends   95,879    - 
Conversion of debt into preferred stock   12,688,634    - 
Contingent beneficial conversion feature on convertible note   253,000    - 
Deemed dividend-triggered down round feature   213,012    - 
Deemed dividend-beneficial conversion feature   10,532,291    - 
Derivative liability released upon warrant exercise   -    49,327 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

6

 

 

PRESSURE BIOSCIENCES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(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 (45,000 psi or greater) to safely, conveniently and reproducibly control the actions of molecules in biological samples, such as cells and tissues from human, animal, plant, and microbial sources.

 

Our pressure cycling technology uses internally developed instrumentation that is capable of cycling pressure between ambient and ultra-high levels - at controlled temperatures and specific time intervals - to rapidly and repeatedly control the interactions of bio-molecules, such as DNA, RNA, proteins, lipids, and small molecules. Our laboratory instrument, the Barocycler®, and our internally developed consumables product line, including PULSE® (Pressure Used to Lyse Samples for Extraction) Tubes, other processing tubes, and application specific kits (which include consumable products and reagents) together make up our PCT Sample Preparation System, or PCT SPS.

 

In 2015, together with an investment bank, we formed a subsidiary called Pressure BioSciences Europe (“PBI Europe”) in Poland. We have 49% ownership interest with the investment bank retaining 51%. As of now, PBI Europe does not have any operating activities and we cannot reasonably predict when operations will commence. Therefore, we do not have control of the subsidiary and did not consolidate in our financial statements. PBI Europe did not have any operations in the six months ended June 30, 2018 or in fiscal year 2017.

 

  2) Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. However, we have experienced negative cash flows from operations with respect to our pressure cycling technology business since our inception. As of June 30, 2018, we do not have adequate working capital resources to satisfy our current liabilities and as a result, there is substantial doubt regarding our ability to continue as a going concern. We have been successful in raising cash through debt and equity offerings in the past and as described in Notes 6 and 7. In addition we raised cash through debt financing after June 30, 2018 as described in Note 8. We have financing efforts in place to continue to raise cash through debt and equity offerings. 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. These financial statements do not include any adjustments that might result from this uncertainty.

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. (“ASU 2015-14”). Under the new standard, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. This standard was adopted by the Company at January 1, 2017.

 

7

 

 

  3) Interim Financial Reporting

 

The accompanying unaudited consolidated balance sheet as of December 31, 2017, which was derived from audited financial statements, and the unaudited interim 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 six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017 as filed with the Securities and Exchange Commission on April 2, 2018.

 

  4) Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Pressure BioSciences, Inc., and its wholly-owned subsidiary PBI BioSeq, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to our current year presentation.

 

Recent Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods therein. We will adopt ASC 842 effective January 1, 2019. We are currently in the process of evaluating the impact of the guidance on our consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The Company early adopted the ASU 2016-18 on January 1, 2017.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to provide additional guidance with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company early adopted the ASU 2016-18 on January 1, 2017 starting with its purchase of BaroFold assets.

 

8

 

 

Effective January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The standard amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The most significant impact to our consolidated financial statements relates to the recognition and measurement of equity investments at fair value with changes recognized in Net income. The amendment also updates certain presentation and disclosure requirements. The adoption of ASU 2016-01 did not have a material impact on the consolidated financial statements. The adoption of ASU 2016-01 is expected to increase volatility in net income as changes in the fair value of available-for-sale equity investments and changes in observable prices of equity investments without readily determinable fair values will be recorded in net income.

 

Effective January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective method. This guidance supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company updated its accounting policy for the new standard based on a detailed review of its business and contracts. Based on the new guidance, the Company continues to recognize revenue at a point in time for the majority of its contracts with customers, which is generally when products are either shipped or delivered. Therefore, the adoption of ASC 606 did not have a material impact on the consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-07, Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting as an amendment and update expanding the scope of Topic 718. The amendment specifies that Topic 718 now applies to all share-based payment transactions, even non-employee awards, in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Under the new guidance, awards to nonemployees are measured on the grant date, rather than on the earlier of the performance commitment date or the date at which the nonemployee’s performance is complete. Also, the awards would be measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can be measured more reliably. In addition, entities may use the expected term to measure nonemployee awards or elect to use the contractual term as the expected term, on an award-by-award basis. The new guidance is effective for the Company in annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact of this new guidance.

 

Revenue Recognition

 

We recognize revenue in accordance with FASB ASC 606, ASC 606, Revenue from Contracts with Customers, and ASC 340-40, Other Assets and Deferred Costs—Contracts with Customers. Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period. We measure and allocate revenue according to ASC 606-10.

 

We identify a performance obligation as distinct if both the following criteria are true: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determining the standalone selling price (“SSP”) and allocation of consideration from a contract to the individual performance obligations, and the appropriate timing of revenue recognition, is the result of significant qualitative and quantitative judgments. Management considers a variety of factors such as historical sales, usage rates, costs, and expected margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenue recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.

 

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

 

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are in included in cost of revenues as consistent with treatment in prior periods.

 

Our current Barocycler® instruments require a basic level of instrumentation expertise to set-up for initial operation. To support a favorable first experience for our customers, upon customer request, and for an additional fee, will send a highly trained technical representative to the customer site to install Barocyclers® that we sell, lease, or rent through our domestic sales force. The installation process includes uncrating and setting up the instrument, followed by introductory user training. Our sales arrangements do not provide our customers with a right of return. Any shipping costs billed to customers are recognized as revenue.

 

The majority of our instrument and consumable contracts contain pricing that is based on the market price for the product at the time of delivery. Our obligations to deliver product volumes are typically satisfied and revenue is recognized when control of the product transfers to our customers. Concurrent with the transfer of control, we typically receive the right to payment for the shipped product and the customer has significant risks and rewards of ownership of the product. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.

 

We apply ASC 845, “Accounting for Non-Monetary Transactions”, to account for products and services sold through non-cash transactions based on the fair values of the products and services involved, where such values can be determined. Non-cash exchanges would require revenue to be recognized at recorded cost or carrying value of the assets or services sold if any of the following conditions apply:

 

9

 

 

  a) The fair value of the asset or service involved is not determinable.
     
  b) The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
     
  c) The transaction lacks commercial substance.

 

We currently record revenue for its non-cash transactions at recorded cost or carrying value of the assets or services sold.

 

In accordance with FASB ASC 840, Leases, we account for our lease agreements under the operating method. We record revenue over the life of the lease term and we record depreciation expense on a straight-line basis over the thirty-six-month estimated useful life of the Barocycler® instrument. The depreciation expense associated with assets under lease agreement is included in the “Cost of PCT products and services” line item in our accompanying consolidated statements of operations. Many of our lease and rental agreements allow the lessee to purchase the instrument at any point during the term of the agreement with partial or full credit for payments previously made. We pay all maintenance costs associated with the instrument during the term of the leases.

 

Revenue from government grants is recorded when expenses are incurred under the grant in accordance with the terms of the grant award.

 

Deferred revenue represents amounts received from grants and service contracts for which the related revenues have not been recognized because one or more of the revenue recognition criteria have not been met. Revenue from service contracts is recorded ratably over the length of the contract.

 

Disaggregation of revenue

 

In the following table, revenue is disaggregated by primary geographical market, major product line, and timing of revenue recognition.

 

In thousands of US dollars ($)   Three Months Ended
June 30,
    Six Months Ended
June 30,
 
Primary geographical markets   2018     2017     2018     2017  
North America     351       396       716       722  
Europe     64       1       219       158  
Asia     224       143       315       211  
      639       540       1,250       1,091  

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
Major products/services lines  2018   2017   2018   2017 
Hardware   397    347    817    743 
Grants   20    60    45    85 
Consumables   64    52    139    115 
Contract research services   67    -    67    - 
Sample preparation accessories   47    39    96    74 
Technical support/extended service contracts   22    26    50    43 
Shipping and handling   16    11    28    21 
Other   6    5    8    10 
    639    540    1,250    1,091 

 

10

 

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
Timing of revenue recognition  2018   2017   2018   2017 
Products transferred at a point in time   609    471    1,185    985 
Products and services transferred over time   30    69    65    106 
    639    540    1,250    1,091 

 

Contract balances

 

In thousands of US dollars ($)  June 30, 2018   December 31, 2017 
Receivables, which are included in ‘Accounts Receivable’   526    207 
Contract liabilities (deferred revenue)   255    320 

 

Transaction price allocated to the remaining performance obligations

 

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.

 

In thousands of US dollars ($)  2018   2019   2020   Total 
Extended warranty service   209    46    -    255 

 

All consideration from contracts with customers is included in the amounts presented above.

 

Contract Costs

 

The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general, and administrative expenses. The costs to obtain a contract are recorded immediately in the period when the revenue is recognized either upon shipment or installation. The costs to obtain a service contract are considered immaterial when spread over the life of the contract so the Company records the costs immediately upon billing.

 

Use of Estimates

 

To prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In addition, significant estimates were made in projecting future cash flows to quantify 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.

 

11

 

 

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 six months ended June 30, 2018 and 2017.

 

   For the Three Months Ended 
   June 30, 
   2018   2017 
Top Five Customers   54%   60%
Federal Agencies   12%   11%

 

   For the Six Months Ended 
   June 30, 
   2018   2017 
Top Five Customers   38%   42%
Federal Agencies   8%   8%

 

The following table illustrates the level of concentration as a percentage of net accounts receivable balance as of June 30, 2018 and December 31, 2017. The Top Five Customers category may include federal agency receivable balances if applicable.

 

   June 30, 2018   December, 31, 2017 
Top Five Customers   70%   85%
Federal Agencies   11%   1%

 

Product Supply

 

CBM Industries (Taunton, MA) has recently become the manufacturer of the Barocycler® 2320EXT. CBM is ISO 13485:2003 and 9001:2008 Certified. CBM provides us with precision manufacturing services that include management support services to meet our specific application and operational requirements. Among the services provided by CBM to us are:

 

  CNC Machining
     
  Contract Assembly & Kitting
     
  Component and Subassembly Design
     
  Inventory Management
     
  ISO certification

 

At this time, we believe that outsourcing the manufacturing of our new Barocycler® 2320EXT to CBM is the most cost-effective method for us to obtain and maintain ISO Certified, CE and CSA Marked instruments. CBM’s close proximity to our South Easton, MA facility is a significant asset enabling interactions between our Engineering, R&D, and Manufacturing groups and their counterparts at CBM. CBM was instrumental in helping PBI achieve CE Marking on our Barocycler® 2320EXT, as announced on February 2, 2017.

 

Although we currently manufacture and assemble the Barozyme HT48, Barocycler® HUB440, the SHREDDER SG3, and most of our consumables at our South Easton, MA facility, we plan to take advantage of the established relationship with CBM and transfer manufacturing of the entire Barocycler® product line, future instruments, and other products to CBM.

 

The Barocycler® NEP3229, launched in 2008, and manufactured by the BIT Group, will be phased out over the next several years and replaced by the new state-of-the-art Barocycler® HUB and Barozyme HT48 product lines.

 

12

 

 

Investment in Available-For-Sale Equity Securities

 

As of June 30, 2018, we held 100,250 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 June 30, 2018, our consolidated balance sheet reflected the fair value of our investment in Everest to be approximately $18,000, based on the closing price of Everest shares of $0.18 USD per share on that day. The carrying value of our investment in Everest common stock held will change from period to period based on the closing price of the common stock of Everest as of the balance sheet date. The change in market value since the receipt of stock was determined to be other than temporary. We recorded $1,834 as an impairment loss in the first half of 2018.

 

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 six months ended June 30, 2018 and 2017:

 

 

    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2018     2017     2018     2017  
Numerator:                                
Net loss   $ (2,281,232 )   $ (583,760 )   $ (4,512,886 )   $ (6,178,275 )
Deemed dividend on down round feature     (213,012 )     -       (213,012 )     -  
Deemed dividend on beneficial conversion feature     (10,532,291 )     -       (10,532,291 )     -  
Preferred stock dividends     (95,879 )     -       (95,879 )     -  
Net loss applicable to common shareholders   $ (13,122,414 )   $ (583,760 )   $ (15,354,068 )   $ (6,178,275 )
                                 
Denominator for basic and diluted loss per share:                                
Weighted average common stock shares outstanding     1,426,698       1,077,529       1,395,187       1,059,250  
                                 
Loss per common share – basic and diluted   $ (9.20 )   $ (0.54 )   $ (11.01 )   $ (5.83 )

 

13

 

 

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 H2 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 June 30, 
   2018   2017 
Stock options   244,467    250,109 
Convertible debt   346,133    827,560 
Common stock warrants   6,263,607    890,047 
Convertible preferred stock:          
Series D Convertible Preferred Stock   25,000    25,000 
Series G Convertible Preferred Stock   26,857    28,857 
Series H Convertible Preferred Stock   33,334    33,334 
Series H2 Convertible Preferred Stock   70,000    70,000 
Series J Convertible Preferred Stock   115,267    117,367 
Series K Convertible Preferred Stock   229,334    227,200 
Series AA Convertible Preferred Stock   5,195,400    - 
    12,549,399    2,469,474 

 

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.

 

14

 

 

The Company recognized stock-based compensation expense of $62,249 and $104,982 for the three months ended June 30, 2018 and 2017, respectively. The Company recognized stock-based compensation expense of $148,270 and $179,511 for the six months ended June 30, 2018 and 2017, 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 Consolidated Statements of Operations:

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Research and development  $15,649   $22,949   $31,148   $38,918 
Selling and marketing   7,279    13,447    14,476    24,334 
General and administrative   39,321    68,586    102,646    116,259 
Total stock-based compensation expense  $62,249   $104,982   $148,270   $179,511 

 

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.

 

The issuances of our convertible promissory notes and common stock purchase warrant are accounted for under the fair value and relative fair value method.

 

The warrant is first analyzed per its terms as to whether it has derivative features or not. If the warrant is determined to be a derivative, then it is measured at fair value using the Black Scholes Option Model and recorded as a liability on the balance sheet. The warrant is re-measured at its then current fair value at each subsequent reporting date (it is “marked-to-market”).

 

If the warrant is determined to not have derivative features, it is recorded into equity at its fair value using the Black Scholes option model, however, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the convertible note.

 

The convertible note is recorded at its fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrant. Further, the convertible promissory note is examined for any intrinsic beneficial conversion feature (“BCF”) of which the convertible price of the note is less than the closing stock price on date of issuance. If the relative fair value method is used to value the convertible promissory note and there is an intrinsic BCF, a further analysis is undertaken of the BCF using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares the convertible debt is converted into by its terms. The adjusted BCF value is accounted for as equity.

 

The warrant and BCF relative fair values are also recorded as a discount to the convertible promissory notes. At present, these equity features of the convertible promissory notes have been recorded at a discount to the convertible notes that is substantially equal to the proceeds received.

 

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.

 

In determining the fair value of its assets and liabilities, the Company uses various valuation approaches. The Company employs a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

 

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

Level 2–Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

 

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

15

 

 

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.

 

Adoption of ASU 2017-11

 

The Company changed its method of accounting for the Debentures, Debenture Warrants and Series D Warrants through the early adoption of ASU 2017-11 during the year ended December 31, 2017 on a modified retrospective basis. Accordingly, the Company reclassified the warrant derivative and conversion option derivative liabilities to additional paid in capital on its January 1, 2017 consolidated balance sheets totaling approximately $2.6 million, reduced debt discount by approximately $0.9 million and recorded the cumulative effect of the adoption to the beginning balance of accumulated deficit of approximately $2.4 million. This resulted to an increase in stock warrants by $2.6 million and additional paid-in capital by $1.4 million. The following table provides a reconciliation of the warrant derivative liability, convertible debt, conversion option derivative liability, stock warrant, additional paid-in capital and accumulated deficit on the consolidated balance sheet as of December 31, 2016:

 

   Convertible debt, current portion   Convertible debt, long term portion   Warrant Derivative Liability   Conversion Option Liability   Warrants to acquire common stock   Additional Paid-in Capital   Accumulated deficit 
Balance, January 1, 2017 (Prior to adoption of ASU 2017-11)  $4,005,702   $529,742   $1,685,108   $951,059   $6,325,102   $27,544,265   $(42,264,190)
Reclassified derivative liabilities and cumulative effect of adoption   769,316    154,152   (1,685,108)   (951,059)   2,636,236    1,446,011    (2,369,548)
Balance, January 1, 2017 (After adoption of ASU 2017-11)  $4,775,018   $683,894   $-   $-   $8,961,338   $28,990,276   $(44,633,738)

 

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2018:

 

       Fair value measurements at
June 30, 2018 using:
 
   June 30, 2018   Quoted
prices in
active
markets
(Level 1)
  

Significant
other
observable
inputs

(Level 2)

  

Significant
unobservable
inputs

(Level 3)

 
Available-For-Sale Equity Securities   17,991    17,991                -                  - 
Total Financial Assets  $17,991   $17,991   $-   $- 

 

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, 2017:

 

       Fair value measurements at
December 31, 2017 using:
 
   December 31, 2017  

Quoted
prices in
active

markets
(Level 1)

   Significant
other
observable
inputs
(Level 2)
   Significant
unobservable
inputs
(Level 3)
 
Available-For-Sale Equity Securities   19,825    19,825                  -                  - 
Total Financial Assets  $19,825   $19,825   $-   $- 

 

16

 

 

  5) Commitments and Contingencies

 

Operating Leases

 

Our corporate office is currently located at 14 Norfolk Avenue, South Easton, Massachusetts 02375. We are currently paying $6,950 per month, on a lease extension, signed on December 29, 2017, that expires December 31, 2018, for our corporate office. We expanded our space to include offices, warehouse and a loading dock on the first floor starting May 1, 2017 with a monthly rent increase already reflected in the current payments.

 

We extended our lease for our space in Medford, MA to December 30, 2020. The lease requires monthly payments of $6,912.75 subject to annual cost of living increases. The lease shall be automatically extended for additional three years unless either party terminates at least six months prior to the expiration of the current lease term.

 

Rental costs are expensed as incurred. During the six months ended June 30, 2018 and 2017 we incurred $92,216 and $69,092 in rent expense, respectively for the use of our corporate office and research and development facilities.

 

Following is a schedule by years of future minimum rental payments required under operating leases with initial or remaining non-cancelable lease terms in excess of one year as of June 30, 2018:

 

2018  $83,177 
2019   82,953 
2020   82,953 
2021   - 
Thereafter   - 
   $249,083 

 

Government Grants

 

We received a $1.02 million NIH SBIR Phase II Grant in November 2014. 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. In March 2018, we received an extension on the SBIR Phase II grant to utilize unused funds until November 30, 2018.

 

  6) Convertible Debt and Other Debt

 

Conversion of Notes

 

We issued 5,075.40 shares of our Series AA Convertible Preferred Stock in satisfaction of $12,688,634 of convertible promissory notes, Revolving Note and short-term loans issued:

 

   Debt converted
to stock
 
Current liabilities     
Convertible Debentures, face value  $6,962,634 
Revolving Note with interest   4,750,000 
May 19, 2017 Promissory Note with interest   750,000 
Other Notes with interest   226,000 
Total debt converted in the second quarter of 2018  $12,688,634 

 

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 $6,962,634 in Debentures which includes a 10% original issue discount on the Purchase Price. The Debenture does not accrue any additional interest during the first year it is outstanding but accrues interest at a rate equal to 10% per annum for the second year it is outstanding. The Debenture has a maturity date of two years from issuance. The Debenture is convertible any time after its issuance date. The Purchaser has the right to convert the Debenture into shares of the Company’s common stock at a fixed conversion price equal to $8.40 per share, subject to applicable adjustments. In the second year that the Debenture is outstanding, any interest accrued shall be payable quarterly in either cash or common stock, at the Company’s discretion.

 

In connection with the Debentures issued, the Company issued warrants exercisable into a total of 376,759 shares of our common stock. The Warrants issued in this transaction are immediately exercisable at an exercise price of $12.00 per share, subject to applicable adjustments including full ratchet anti-dilution if 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.

 

On May 2, 2018, the Company entered into a Securities Purchase Agreement with an existing shareholder pursuant to which the Company sold an aggregate of 100 shares of Series AA Convertible Preferred Stock for an aggregate Purchase Price of $250,000. We issued to the shareholder a new warrant to purchase 100,000 shares of common stock with an exercise price of $3.50 per share.

 

17

 

 

The Company, pursuant to a price protection provision triggered on May 2, 2018 with the sale of Series AA units, amended the Debentures and Warrants to purchase Common Stock held by the Debenture Holders entered into between July 22, 2015 and March 31, 2016 as first disclosed in the Company’s Current Report on Form 8-K filed on July 28, 2015. The fair value of $207,899 relating to the reduction in exercise price was treated as a deemed dividend and recorded as a charge against additional paid-in capital within equity. The amended Debenture conversion price was exempt from revaluation because a beneficial conversion feature had already been recorded on the Debenture at issuance.

 

Subject to the terms and conditions of the Warrants, at any time commencing six months from the Final Closing, the Company has the right to call the Warrants for cancellation if the volume weighted average price of its Common Stock on the OTCQB (or other primary trading market or exchange on which the Common Stock is then traded) equals or exceeds three times the per share exercise price of the Warrants for 15 out of 20 consecutive trading days.

 

In connection with the Subscription Agreement and Debenture, the Company entered into Security Agreements with the Purchasers whereby the Company agreed to grant to Purchasers an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, Warrants and the other Transaction Documents. On May 14 and June 11, 2018, the Company signed letter agreements with the Debenture holders as explained below that discharged all of the Company’s obligations within the Debenture Agreement.

 

Conversion of Debentures

 

On May 14, 2018, we entered into letter agreements (the “Letter Agreements”) with 22 investors (each a “Debenture Holder” and together the “Debenture Holders”) holding convertible debentures (collectively the “Debentures”) and warrants to purchase common stock (the “Debenture Warrants”) whereby the Debenture Holders agreed to convert a total of $6,220,500 in principal and original issue discount due them under the Debentures into 2,448.20 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended Debenture Warrants such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of $3.50 per share to purchase 2,448,200 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the Debenture conversions). The Debenture Holders also agreed to waive any and all defaults or events of default by the Company with respect to any failure by the Company to comply with any covenants contained in the Debentures. The fair value of $29,865 relating to the adjustment in exercise price was treated as a loan modification and recorded as a gain toward the extinguishment of debt.

 

On June 11, 2018, the Company entered into additional Letter Agreements with 15 Debenture Holders whereby the Debenture Holders agreed to convert a total of $742,134 in principal and original issue discount due them under the Debentures into 296.80 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended Debenture Warrants such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of $3.50 per share to purchase 296,800 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the Debenture conversions). The Debenture Holders also agreed to waive any and all defaults or events of default by the Company with respect to any failure by the Company to comply with any covenants contained in the Debentures. The fair value of $3,155 relating to the adjustment in exercise price was treated as a loan modification and recorded as a gain toward the extinguishment of debt.

 

In connection with the above Debenture conversions and cancellation of the debt term, the Company recorded the full amount of the remaining unamortized Debenture discounts of $157,908 as interest expense during the three months of June 30, 2018. The Company recorded $287,676 of the Debenture discounts during the six months ended June 30, 2018.

 

On various dates for the six months ended June 30, 2018, the Company issued 25,243 shares of common stock based on the 10-day VWAP prior to quarter end to holders of the Debentures in payment of the quarterly interest accrued from the Debentures first anniversary date through December 31, 2017 for an aggregate amount of $95,121. We recognized a $5,101 gain on extinguishment of debt by calculating the difference of the shares valued on the issuance date and the amount of accrued interest through December 31, 2017.

 

Other convertible notes

 

The Company, pursuant to a price protection provision triggered on May 2, 2018 with the sale of Series AA units, amended the conversion price of a March 12, 2018 loan to $2.50 per share. The fair value of $253,000, limited to the face value of the loan, relating to the reset in the conversion price was recorded as a debt discount and amortized as interest expense over the remaining loan term.

 

On various dates during the six months ended June 30, 2018, the Company issued convertible notes for net proceeds of $3,242,950 which contained varied terms and conditions as follows: a) maturity dates ranging from 3 to 12 months; b) interest rates that accrue per annum ranging from 5% to 12%; c) convertible to the Company’s common stock at issuance at a fixed rate of $7.50 or convertible at variable conversion rates either after 6 months after issuance or in the event of a default. Certain of these notes were issued with shares of common stock or warrants to purchase common stock that were fair valued at issuance dates. The aggregate relative fair value of $214,351 of the shares of common stock or warrants to purchase common stock issued with the notes was recorded as a debt discount and amortized over the term of the notes. We then computed the effective conversion price of the notes, noting that no beneficial conversion feature exists. We also evaluated the convertible notes for derivative liability treatment and determined that the notes did not qualify for derivative accounting treatment as of June 30, 2018.

 

18

 

 

The specific terms of the convertible notes and outstanding balances as of June 30, 2018 are listed in the tables below.

 

Convertible Notes

 

Inception Date   Term     Loan Amount    

Outstanding Balance

with OID 

    Original Issue Discount     Interest Rate     Conversion Price (Convertible at Inception Date)     Deferred Finance Fees     Discount related to fair value of conversion feature and warrants/shares  
July 22, 2015     30 months 1   $ 2,398,000     $ -    $ 218,000 2     10 %3   $ 8.40     $ 388,532     $ 2,163,074  
September 25, 2015     30 months 1     1,210,000       -     110,000 2     10 %3   $ 8.40       185,956       1,022,052  
October 2, 2015     30 months 1     165,000       -     15,000 2     10 %3   $ 8.40       26,345       140,832  
October 6, 2015     30 months 1     33,000       -     3,000 2     10 %3   $ 8.40       5,168       26,721  
October 14, 2015     30 months 1     55,000       -     5,000 2     10 %3   $ 8.40       8,954       49,377  
November 2, 2015     30 months 1     275,000       -     25,000 2     10 %3   $ 8.40       43,079       222,723  
November 10, 2015     30 months 1     55,000       -     5,000 2     10 %3   $ 8.40       8,790       46,984  
November 12, 2015     30 months 1     236,500       -     21,500 2     10 %3   $ 8.40       38,518       212,399  
November 20, 2015     30 months 1     220,000       -     20,000 2     10 %3   $ 8.40       37,185       200,000  
December 4, 2015     30 months 1     187,000       -     17,000 2     10 %3   $ 8.40       37,352       170,000  
December 11, 2015     30 months 1     396,000       -     36,000 2     10 %3   $ 8.40       75,449       360,000  
December 18, 2015     30 months 1     60,500       -     5,500 2     10 %3   $ 8.40       11,714       55,000  
December 31, 2015     30 months 1     110,000       -     10,000 2     10 %3   $ 8.40       20,634       100,000  
January 11, 2016     30 months 1     110,000       -     10,000 2     10 %3   $ 8.40       24,966       80,034  
January 20, 2016     30 months 1     55,000       -     5,000 2     10 %3   $ 8.40       9,812       40,188  
January 29, 2016     30 months     330,000       -     30,000 2     10 %3   $ 8.40       60,887       239,113  
February 26, 2016     30 months     220,000       -     20,000 2     10 %3   $ 8.40       43,952       156,048  
March 10, 2016     30 months     137,500       -     12,500 2     10 %3   $ 8.40       18,260       106,740  
March 18, 2016     30 months     396,000       -     36,000 2     10 %3   $ 8.40       94,992       265,008  
March 24, 2016     30 months     117,334       -     10,667 2     10 %3   $ 8.40       15,427       91,240  
March 31, 2016     30 months     195,670       -     17,788 2     10 %3   $ 8.40       2,436       175,446  
October 20, 2017     12 months       150,000       -       -       5 %   $ 7.50       7,500       -  
October 25, 2017     6 months       103,000       -       -       12 %     -       3,000          
October 27, 2017     12 months       170,000       -       -       5 %     -       4,250       10,000  
November 13, 2017     9 months       380,000       -       15,200       8 %   $ 7.50       15,200       46,274  
November 22, 2017     12 months       100,000       -       10,000       5 %     -       2,000       -  
November 28, 2017     10 months       103,000       -       3,000       12 %     -       -       -  
November 29, 2017     6 months       150,000       -       -       15 %   $ 7.50       -       15,200  
November 30, 2017     3 months       50,000       -       -       8 %   $ 7.50       -       -  
December 5, 2017     3 months       52,500       -       -       10 %   $ 7.50       2,500       -  
December 6, 2017     4 months       100,000       -       -       10 %   $ 7.50       -       -  
December 11, 2017     6 months       130,000       -       1,500       5 %     -       6,500       6,460  
December 19, 2017     6 months       110,000       -       1,500       5 %     -       5,500       5,775  
December 28, 2017     6 months       55,000       -       -       15 %   $ 7.50       5,000       -  
December 29, 2017     12 months       105,000       -       -       5 %     -       5,000       -  
January 3, 2018     12 months       95,000       95,000       4,750       5 %     -       2,000       -  
January 16, 2018     12 months       131,250       131,250       -               -       6,250       -  
January 19, 2018     6 months       150,000       150,000       -       10 %   $ 7.50       6,000       12,267  
February 9, 2018     6 months       100,000       100,000       -       15 %   $ 7.50       23,500       -  
February 15, 2018     6 months       100,000       100,000       -       15 %   $ 7.50       9,000       10,474  
March 12, 2018     6 months       85,000       85,000       1,150       5 %     -       4,250       5,183  
March 12, 2018     6 months       253,000       253,000       53,000       0 %     -               28,722  
April 11, 2018     6 months       100,000       100,000       4,000       15 %   $ 7.50       20,000       7,218  
April 23, 2018     6 months       103,000       103,000       -       12 %     -       3,000       -  
April 24, 2018     9 months       77,000       77,000       -       12 %   $ 7.50       2,000       -  
April 25, 2018     12 months       105,000       105,000       -       4 %   $ 7.50       5,000       4,590  
April 25, 2018     12 months       105,000       105,000       -       4 %   $ 7.50       5,000       4,590  
April 25, 2018     12 months       130,000       130,000       -       6 %   $ 7.50       6,500       -  
April 26, 2018     12 months       65,000       65,000       6,500       5 %     -       2,000       -  
May 9, 2018     12 months       250,000       250,000       -       10 %   $ 7.50       12,500       26,466  
May 11, 2018     6 months       161,250       161,250       11,250       15 %   $ 7.50       10,000       -  
May 14, 2018     9 months       50,000       50,000       2,500       15 %   $ 7.50       2,500       3,704  
May 17, 2018     12 months       380,000       380,000       15,200       8 %   $ 7.50       15,200       43,607  
May 23, 2018     9 months       103,000       103,000       -       12 %     -       3,000       -  
May 24, 2018     9 months       52,500       52,500       2,500       4 %     -       -       2,075  
May 25, 2018     12 months       78,750       78,750       -       4 %   $ 7.50       3,750       3,112  
May 30, 2018     2 months       150,000       150,000       -       8 %   $ 7.50       -       6,870  
June 4, 2018     12 months       75,000       75,000       7,500       5 %     -       2,000       3,869  
June 8, 2018     6 months       50,000       50,000       2,500       15 %   $ 7.50       2,500       3,271  
June 12, 2018     6 months       100,000       100,000       -       5 %   $ 7.50       5,000       -  
June 14, 2018     9 months       280,000       280,000       25,000       10 %     -       5,000       17,573  
June 16, 2018     9 months       130,000       130,000       -       5 %     -       -       -  
June 16, 2018     6 months       110,000       110,000       -       5 %     -       -       -  
June 26, 2018     3 months       150,000       150,000       -       15 %   $ 7.50       -       20,242  
June 28, 2018     6 months       50,000       50,000       -       15 %   $ 7.50       -       10,518  
            $ 12,490,754     $ 3,769,750     $ 800,005                     $ 1,343,858     $ 6,221,039  

 

1. The loan term was extended by 180 days and further extended on January 15, 2018 by 60 days to repay in common stock. The Debenture holders signed letter agreements on May 14, 2018 and June 11, 2018 to waive default penalties relating to the maturity date.

2. The original issue discount is reflected in the first year.

3. The annual interest started accruing in the second year.

4. The Debentures were converted into Series AA Convertible Preferred Stock.

 

Deferred finance fees included cash commissions amounting to $621,500 and the fair value of the 2,101,786 warrants issued to the placement agent amounting to $536,908. For the six months ended June 30, 2018, the Company recognized amortization expense related to the convertible debt discounts indicated above of $905,171. The unamortized debt discounts as of June 30, 2018 related to the convertible debentures and other convertible notes amounted to $547,582.

 

19

 

 

Revolving Note Payable and May 19, 2017 Promissory Note

 

On October 28, 2016, an accredited investor (the “Investor”) purchased from us a promissory note in the aggregate principal amount of up to $2,000,000 (the “Revolving Note”) due and payable on the earlier of October 28, 2017 (the “Maturity Date”) or on the seventh business day after the closing of a Qualified Offering (as defined in the Revolving Note). Although the Revolving Note is dated October 26, 2016, the transaction did not close until October 28, 2016, when we received its initial $250,000 advance pursuant to the Revolving Note. As a result, on the same day and pursuant to the Revolving Note, we issued to the Investor a Common Stock Purchase Warrant (the “Line of Credit Warrants”) to purchase 20,834 shares of our common stock at an exercise price per share equal to $12.00 per share. The Investor is obligated to provide us with advances of $250,000 under the Revolving Note, but the Investor shall not be required to advance more than $250,000 in any individual fifteen (15) day period and no more than $500,000 in the thirty (30) day period immediately following the date of the initial advance. We received $3,500,000 pursuant to the Revolving Note as amended of which $2,070,000 net proceeds was received in 2017 and we issued to the Investor Line of Credit Warrants to purchase 291,667 shares of our Common Stock at an exercise price per share equal to $12.00 per share. The terms of the Line of Credit Warrants are identical except for the exercise date, issue date, and termination date which are based on the advance date.

 

The Revolving Note was amended on May 2, 2017 to increase the aggregate principal amount to $3,000,000, to issue 16,667 shares of our Common Stock to the Investor, to decrease the exercise price per share of the warrants to the lower of (i) $12.00 or (ii) the per share purchase price of the shares of our Common Stock sold in the Qualified Offering, and to change the references in the Revolving Note from “the six (6) month anniversary of October 28, 2016” to “July 25, 2017.” The fair value of the 16,667 shares issued of $149,018 was accounted for as a note discount and are amortized to interest expense over the life of the loan. We evaluated the accounting impact of the Revolving Note amendment and deemed that the amendment did not have a material impact on our consolidated financial statements.

 

The Revolving Note was amended on August 18, 2017 to increase the aggregate principal amount to $3,500,000 with all other terms unchanged. The Revolving Note, previously amended, was further amended on January 30, 2018 to increase the aggregate principal amount to $4,000,000 with all other terms unchanged.

 

In the event that a Qualified Offering had occurred after July 25, 2017, but prior to the Maturity Date, within seven (7) Business Days of the closing of the Qualified Offering, the Company was to pay a cash fee equal to five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering or, at the option of the Company, issue to the Holder a number of restricted shares of the Company’s common stock equal to (x) five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering divided by (y) the purchase price provided by the documents governing the Qualified Offering. A Qualified Offering means the completion of a public offering of the Company’s securities pursuant to which the Company receives aggregate gross proceeds of at least Seven Million United States Dollars (US$7,000,000) in consideration of the purchase of its securities and resulting in, pursuant to the effectiveness of the registration statement for such offering, the Company’s common stock being traded on the NASDAQ Capital Market, NASDAQ Global Select Market or the New York Stock Exchange. A Qualified Offering did not occur on or prior to the Maturity Date.

 

Interest on the principal balance of the Revolving Note shall be paid in full on the Maturity Date, unless otherwise paid prior to the Maturity Date. Interest shall be assessed as follows: (i) a one-time interest of 10% on all principal amounts advanced prior to April 28, 2017; (ii) the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between April 28, 2017 and July 28, 2017; or (iii) both of the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between July 28, 2017 and October 28, 2017.

 

Broker fees amounting to $336,500, the one-time interest of $400,000 and the relative fair value of the 333,334 warrants issued to the Investor amounting to $1,266,691 were recorded as debt discounts and amortized over the term of the revolving note. The unamortized debt discounts related to the Revolving Note were fully amortized as of December 31, 2017. The finance costs from advances after December 31, 2017 were charged to interest expense directly because the maturity date had passed.

 

On May 19, 2017, we received a 45-day non-convertible loan of $630,000 from the Investor. The loan provided guaranteed interest of $63,000 and had an origination fee of $32,000. We paid a broker $31,500 in connection with this loan. The unamortized debt discount as of June 30, 2018 was zero.

 

Conversion of October 26, 2016 Revolving Note and May 19, 2017 Promissory Note

 

On June 11, 2018, the Company entered into a Letter Agreement with the Investor to convert a total of $5,500,000 in principal and interest due to the Investor pursuant to the Revolving Note and the May 19, 2017 promissory note into 2,200 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Company also amended the Line of Credit Warrants held by the Investor. The Company lowered the Line of Credit Warrants’ exercise price from $12.00 per share to $3.50 per share. The fair value of $82,904 relating to the reduction in exercise price was treated as a loan modification and recorded as a charge against the extinguishment of debt.

 

The Company also issued a new warrant to the Investor with an exercise price of $3.50 per share to purchase 2,200,000 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the conversion of a total of $5,500,000). In connection with the Letter Agreement, the Investor also waived $520,680 of interest and fees owed as of June 30, 2018. We recognized $520,680 as a gain on extinguishment of debt.

 

The following table provides a summary of the changes in convertible debt and revolving note payable, net of unamortized discounts, during 2018:

 

   2018 
Balance at January 1,  $11,787,776 
Issuance of convertible debt, face value   4,029,750 
Deferred financing cost   (326,800)
Debt discount related to one-time interest charge   (132,000)
Contingent beneficial conversion feature on convertible note   (253,000)
Debt discount from warrants issued with debt   (162,023)
Debt discount from shares issued with the notes   (170,745)
Conversion of debt into equity   (10,962,634)
Payments   (1,518,500)
Accretion of interest and amortization of debt discount to interest expense through June 30,   930,343 
Balance at June 30,   3,222,167 
Less: current portion   3,222,167 
Convertible debt, long-term portion  $- 

 

20

 

 

Other Notes 

 

In March 2018, we received non-convertible loans totaling $150,000 from private investors. The loans include one-year term and 10% guaranteed interest. We converted these loans into Series AA Units. See below.

 

In April 2018, we received a non-convertible loan for $10,000 from a private investor. The loan includes a one-year term and 10% guaranteed interest. We converted this loan into Series AA Units. See below.

 

On March 21, 2017, we received an eight-month, non-convertible loan of $170,000 from an accredited investor. The loan earns an annual interest rate of 10% and includes a 10% original issue discount. We also agreed to issue the investor 5,667 shares of restricted common stock. We recorded the fair value of the shares amounting to $35,079 as a debt discount that will be amortized to interest expense during the term of the loan. The loan still remains outstanding as of June 30, 2018 with a balance of $170,000. The lender extended the term to December 31, 2017 and further to March 31, 2018 in exchange for a total of 9,500 shares of common stock with a fair value of $28,490 recorded as interest expense. The lender further extended the term to September 30, 2018 in exchange for 7,200 shares yet to be issued. We fully amortized $52,079 of the original debt discount in the year ended December 31, 2017.

 

On August 1, 2017, we signed a non-convertible installment loan with a lender. Under the agreement we received a loan of $75,000 with a weekly repayment of $3,500 until payment in full. The loan includes $18,750 representing an original issue discount, interest and fees resulting in a total payable of $93,750. The loan was paid off entirely as of June 30, 2018.

 

On September 12, 2017, we received a 9-month non-convertible loan of $225,000 from a privately-held investment firm. The loan earns an annual interest rate of 10%. The Company paid total fees of $25,000 including original issue discount and other costs related to this loan. We agreed to issue 3,333 shares at closing. We recorded the fair value of the shares as a debt discount that will be amortized to interest expense during the term of the loan. We amortized the entire debt discount of $38,000 as of June 30, 2018. In the event of default and at the option of the holder, the loan is convertible into common stock at a 35% discount to the average of the two lowest daily volume weighted average closing stock price for the 20 trading days prior to conversion. The loan was paid off entirely as of June 30, 2018.

 

In June 2018, we received a non-convertible loan of $15,000 from a private investor. The loan includes a one-year term and 10% guaranteed interest.

 

Conversion of Non-Convertible Notes

 

On June 11, 2018, the Company entered into Letter Agreements with certain private investors to convert a total of $176,000 in principal and interest due to the private investors pursuant to certain loan documents into 70.4 Series AA Units representing 70.4 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share and warrants to purchase 70,400 shares of common stock.

 

21

 

 

Merchant Agreements

 

We have signed various Merchant Agreements which entitle the lenders to our customer receipts. We accounted for the Merchant Agreements as loans under ASC 860 because while we provided rights to current and future receipts, we still had control over the receipts. The following table shows our Merchant Agreements as of June 30, 2018.

 

Inception Date  Purchase Price   Purchased Amount   Outstanding Balance   Daily Payment   Interest Rate   Deferred Finance Fees 
September 29, 2017   75,000    102,000   $-    1,200.00    15%   1,500 
October 25, 2017   110,000    153,890    -    1,539.00    15%   8,800 
December 7, 2017   160,000    212,800    -    1,251.76    25%   5,799 
December 12, 2017   160,000    212,800    -    1,251.76    15%   5,258 
February 27, 2018   110,000    147,400    -    921.25    25%   1,650 
April 11, 2018   140,000    187,600    

96,503

    1,275.00    13%   2,800 
May 11, 2018   180,000    243,000    151,542    1,518.75    25%   2,599 
May 15, 2018   180,000    244,800    156,067    1,530.00    15%   3,600 
June 29, 2018   140,000    190,400    140,000    1,269.33    25%   2,100 
   $1,255,000   $1,694,690   $544,112             $34,106 

 

We amortized $55,811 and $168,860 of debt discounts during the six months ended June 30, 2018 and 2017, respectively for all non-convertible notes. The total unamortized discount for all non-convertible notes as of June 30, 2018 was $25,982.

 

Related Party Notes

 

On March 14, 2018, we received a one-year, non-convertible loan of $50,000 from a related party who was a member of the Company’s Board of Directors. This loan is included in net proceeds from non-convertible debt in the Statement of Cash Flows. The amount of $50,000 was converted on June 11, 2018 into 20 shares of Series AA Convertible Preferred Stock and 20,000 warrants to purchase common stock. The $7,500 guaranteed interest on the loan was recorded as a debt discount and amortized over the term of the debt. The interest is outstanding as of June 30, 2018.

 

On May 31, 2018, we received two short-term loans of $46,500 and $5,600 from two members of the Company’s Board of Directors, respectively. We repaid both loans in full during June 2018 and paid interest of $6,975.

 

On June 11, 2018, the Company entered into a Letter Agreement with one non-employee member of the Board, to convert $50,000 in principal due to the board member pursuant to a certain loan document into 20 Series AA Units representing 20 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share and warrants to purchase 20,000 shares of common stock.

 

  7) Stockholders’ Deficit

 

Preferred Stock

 

We are authorized to issue 1,000,000 shares of preferred stock with a par value of $0.01. Of the 1,000,000 shares of preferred stock:

 

<
  1) 20,000 shares have been designated as Series A Junior Participating Preferred Stock (“Junior A”)
     
  2) 313,960 shares have been designated as Series A Convertible Preferred Stock (“Series A”)
     
  3) 279,256 shares have been designated as Series B Convertible Preferred Stock (“Series B”)
     
  4) 88,098 shares have been designated as Series C Convertible Preferred Stock (“Series C”)
     
  5) 850 shares have been designated as Series D Convertible Preferred Stock (“Series D”)
     
  6) 500 shares have been designated as Series E Convertible Preferred Stock (“Series E”)
     
  7) 240,000 shares have been designated as Series G Convertible Preferred Stock (“Series G”)
     
  8) 10,000 shares have been designated as Series H Convertible Preferred Stock (“Series H”)