Pressure BioSciences, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies (Policies)

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2015

Principles of Consolidation

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

Use of Estimates

Use of Estimates

To prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In addition, significant estimates were made in projecting future cash flows to quantify deferred tax assets, the costs associated with fulfilling our warranty obligations for the instruments that we sell, and the estimates employed in our calculation of fair value of stock options awarded and warrant derivative liability. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from the estimates and assumptions used.

Concentrations

Concentrations

Credit Risk

Our financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, and trade receivables. We have cash investment policies which, among other things, limit investments to investment-grade securities. We perform ongoing credit evaluations of our customers, and the risk with respect to trade receivables is further mitigated by the fact that many of our customers are government institutions, large pharmaceutical and biotechnology companies, and academic laboratories.

The following table illustrates the level of concentration as a percentage of total revenues during the three months and nine months ended September 30, 2015 and 2014.

	For the Three Months Ended
	September 30,
	2015			2014
Top Five Customers		43	%		53	%
Federal Agencies		2	%		1	%

	For the Nine Months Ended
	September 30,
		2015		2014
Top Five Customers		34	%	31	%
Federal Agencies		14	%	1	%

The following table illustrates the level of concentration as a percentage of net accounts receivable balance as of September 30, 2015 and December 31, 2014:

	September 30, 2015			December 31, 2014
Top Five Customers		61	%		86	%
Federal Agencies		1	%		9	%

Product Supply

BIT Group, Inc. of California has been our sole contract manufacturer for our PCT NEP3229 and NEP2320 instrumentation. However, the Company has reached agreement for a Massachusetts-based contract manufacturer to assemble its future builds of the NEP2320 instrument, effective in early 2016.

Investment in Available-For-Sale Equity Securities

Investment in Available-For-Sale Equity Securities

As of September 30, 2015, we held 601,500 shares of common stock of Everest Investments Holdings S.A. (“Everest”), a Polish publicly traded company listed on the Warsaw Stock Exchange. We account for this investment in accordance with ASC 320 “Investments — Debt and Equity Securities” as securities available for sale. On September 30, 2015, our balance sheet reflected the fair value of our investment in Everest to be $323,860, based on the closing price of Everest shares of $0.54 per share on that day. The carrying value of our investment in Everest common stock held will change from period to period based on the closing price of the common stock of Everest as of the balance sheet date. This change in market value will be recorded by us on a quarterly basis as an unrealized gain or loss in Comprehensive Income or Loss.

Debt Issuance Costs

Debt Issuance Costs

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”, or ASU 2015-03. ASU 2015-03 amends current presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

Costs incurred in obtaining debt funding are currently deferred and amortized on an effective interest method over the terms of the loans. Amortization expense for 2015 and 2014 was $41,085 and $0 respectively, and has been classified with interest expense in the consolidated financial statements.

Computation of Loss per Share

Computation of Loss per Share

Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding. Diluted loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. For purposes of this calculation, convertible preferred stock, common stock dividends, and warrants and options to acquire common stock, are all considered common stock equivalents in periods in which they have a dilutive effect and are excluded from this calculation in periods in which these are anti-dilutive to our net loss.

The following table illustrates our computation of loss per share for the three months and nine months ended September 30, 2015 and 2014:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Numerator:
Net loss	$	(657,928	)	$	(959,050	)	$	(3,430,160	)	$	(3,321,892	)
Accrued dividend for Preferred Stock		1,711			(43,362	)		(21,768	)		(97,955	)
Deemed dividend on Series K Convertible Preferred Stock		-			-			-			(1,388,062	)
Net loss applicable to common shareholders	$	(656,217	)	$	(1,002,412	)	$	(3,451,928	)	$	(4,807,909	)

Denominator for basic and diluted loss per share:
Weighted average common stock shares outstanding		20,737,827			15,238,466			19,771,323			13,648,795

Loss per common share - basic and diluted	$	(0.03	)	$	(0.07	)	$	(0.17	)	$	(0.35	)

The following table presents securities that could potentially dilute basic loss per share in the future. For all periods presented, the potentially dilutive securities were not included in the computation of diluted loss per share because these securities would have been anti-dilutive to our net loss. The Series D Convertible Preferred Stock, Series G Convertible Preferred Stock, Series H Convertible Preferred Stock, Series J Convertible Preferred Stock and Series K Convertible Preferred Stock are presented below as if they were converted into common shares according to the conversion terms.

	For the Nine Months Ended
	September 30,
	2015		2014
Stock options		3,201,250		3,356,250
Convertible debt		26,015,029		4,091,151
Common stock warrants		26,125,127		17,895,717
Convertible preferred stock:
Series D Convertible Preferred Stock		750,000		750,000
Series G Convertible Preferred Stock		865,700		865,700
Series H Convertible Preferred Stock		1,000,000		1,000,000
Series H2 Convertible Preferred Stock		2,100,000		-
Series J Convertible Preferred Stock		3,546,000		3,548,000
Series K Convertible Preferred Stock		11,399,000		11,399,000
		75,002,106		42,905,818

Accounting for Stock-Based Compensation Expense

Accounting for Stock-Based Compensation Expense

We maintain equity compensation plans under which incentive stock options and non-qualified stock options are granted to employees, independent members of our Board of Directors and outside consultants. We recognize stock-based compensation expense over the requisite service period using the Black-Scholes formula to estimate the fair value of the stock options on the date of grant.

Determining Fair Value of Stock Option Grants

Valuation and Amortization Method - The fair value of each option award is estimated on the date of grant using the Black-Scholes pricing model based on certain assumptions. The estimated fair value of employee stock options is amortized to expense using the straight-line method over the vesting period.

Expected Term - The Company uses the simplified calculation of expected life, as the Company does not currently have sufficient historical exercise data on which to base an estimate of expected term. Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted.

Expected Volatility - Expected volatility is based on the Company’s historical stock volatility data over the expected term of the award.

Risk-Free Interest Rate - The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.

Forfeitures - The Company records stock-based compensation expense only for those awards that are expected to vest. The Company estimated a forfeiture rate of 5% for awards granted based on historical experience and future expectations of options vesting. The Company used this historical rate as our assumption in calculating future stock-based compensation expense.

The Company recognized stock-based compensation expense of $74,864 and $6,387 for the three months ended September 30, 2015 and 2014, respectively. The following table summarizes the effect of this stock-based compensation expense within each of the line items of our costs and expenses within our Condensed Consolidated Statements of Operations:

	For the Three Months Ended September 30,
	2015		2014
Research and development	$	18,307	$	1,749
Selling and marketing		13,310		1,391
General and administrative		43,247		3,247
Total stock-based compensation expense	$	74,864	$	6,387

We recognized stock-based compensation expense of $185,370 and $46,771 for the nine months ended September 30, 2015 and 2014, respectively. The following table summarizes the effect of this stock-based compensation expense within each of the line items of our costs and expenses within our Condensed Consolidated Statements of Operations:

	For the Nine Months Ended September 30,
	2015		2014
Research and development	$	41,172	$	19,602
Selling and marketing		27,386		13,296
General and administrative		116,812		13,873
Total stock-based compensation expense	$	185,370	$	46,771

Fair Value of Financial Instruments

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 liabilities transferred under contractual arrangements with carrying values that approximate fair value.

Fair Value Measurements

Fair Value Measurements

The Company follows the guidance of FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) as it related to all financial assets and financial liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.

The Company generally defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company has determined that its financial assets are classified within Level 1 and its financial liabilities are currently classified within Level 3 in the fair value hierarchy. The development of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management.

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015.

			Fair value measurements at September 30, 2015 using:

	September 30,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
	2015		(Level 1)		(Level 2)		(Level 3)
Series D Preferred Stock Purchase Warrants	$	122,692		-		-	$	122,692
Available-For-Sale Equity Securities		322,860		322,860		-		-
Convertible Debt Warrants		1,418,438		-		-		1,418,438
Conversion Option Liabilities		2,227,330		-		-		2,227,330
Total Derivatives	$	4,091,320	$	322,860	$	-	$	3,768,460

	January 1, 2015		Issuance fair value		Change in fair value			Gain on extinguishment of derivative liabilities			September 30, 2015
Series D Preferred Stock Purchase Warrants	$	159,875	$	-	$	(37,183	)	$	-		$	122,692
Convertible Debt Warrants		-		1,418,927		(489	)		-			1,418,438
Conversion Option Liabilities		590,341		4,143,051		(477,738	)		(2,028,324	)		2,227,330
Total Derivatives	$	750,216	$	5,561,978	$	(515,410	)	$	(2,028,324	)	$	3,768,460

The assumptions for the binomial pricing model are represented in the table below for the warrants issued in the Series D private placement reflected on a per share common stock equivalent basis.

Assumptions	November 10, 2011			Warrants revalued at December 31, 2014			Warrants revalued at September 30, 2015
Expected life (in months)		60.0			22.0			13.0
Expected volatility		104.5	%		116.0	%		117.5	%
Risk-free interest rate		0.875	%		0.58	%		0.33	%
Exercise price	$	0.81		$	0.25		$	0.25
Fair value per warrant	$	0.54		$	0.15		$	0.11

The assumptions for the binomial pricing model are represented in the table below for the warrants issued with the Convertible Debt throughout the year reflected on a per share common stock equivalent basis.

Assumptions	For the three months ended September 30, 2015			Warrants revalued at September 30, 2015
Expected life (in months)		60.0			60.0
Expected volatility		118.3 - 120.1	%		136.5 -138.2	%
Risk-free interest rate		1.48-1.69	%		1.37	%
Exercise price	$	0.40		$	0.40
Fair value per warrant	$	0.19-$.21		$	0.20

The assumptions for the binomial pricing model are represented in the table below for the conversion options reflected on a per share common stock equivalent basis.

Assumptions	At Issuance fair value	At Settlement fair value	Conversion options revalued at September 30, 2015
Expected life (in months)	6-24	0-18	2-21
Expected volatility	104.2-153.8%	86.9%-142.2%	88.6-130.6%
Risk-free interest rate	0.05-0.99%	0.01-0.72%	0.01-0.64%
Exercise price	$0.10-$0.35	$0.10-$0.25	$0.11-$0.25
Fair value per conversion option	$0.09-$0.28	$0.07-$0.26	$0.08-$0.16