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, 2017

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.

Recent Accounting Standards

Recent Accounting Standards

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity transactions. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. The Company early adopted the ASU 2017-11 in the third quarter of 2017.

Adoption of ASU 2017-11

The Company changed its method of accounting for the Debentures and Warrants through the early adoption of ASU 2017-11 during the three months ended September 30, 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 $2.2 million. This resulted to an increase in stock warrants by $2.5 million and additional paid-in capital by $1.4 million. In addition, because of the modified retrospective adoption, the Company credited the change in fair value of warrant derivative and conversion option derivative liabilities on its consolidated statements of operations by $245,215 and reduced amortization of debt discount by $812,904 for the nine months ended September 30, 2017. 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	)	$	(1,661,795	)		(951,059	)	$	2,525,623		1,377,108		(2,213,345	)
Balance, January 1, 2017 (After adoption of ASU 2017-11)	$	3,236,386		$	375,590		$	23,313		$	-		$	8,850,725	$	28,921,373	$	(44,477,535	)

Use of Estimates

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.

Concentrations Credit Risk

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, 2017 and 2016. The Top Five Customers category may include federal agency revenues if applicable.

	For the Three Months Ended
	September 30,
	2017			2016
Top Five Customers		73	%		60	%
Federal Agencies		30	%		9	%

	For the Nine Months Ended
	September 30,
	2017			2016
Top Five Customers		38	%		31	%
Federal Agencies		19	%		3	%

The following table illustrates the level of concentration as a percentage of net accounts receivable balance as of September 30, 2017 and December 31, 2016. The Top Five Customers category may include federal agency revenues if applicable

	September 30, 2017			December, 31, 2016
Top Five Customers		74	%		82	%
Federal Agencies		28	%		1	%

Product Supply

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.

Investment in Available-For-Sale Equity Securities

Investment in Available-For-Sale Equity Securities

As of September 30, 2017, 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 September 30, 2017, our consolidated balance sheet reflected the fair value of our investment in Everest to be approximately $30,000, based on the closing price of Everest shares of $0.29 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 $6,069 as an impairment loss in the first quarter of 2017. The carrying value increased in the first nine months of 2017 by $6,190 and was reflected as an unrealized gain in our Comprehensive Loss Statement.

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, 2017 and 2016:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Numerator:
Net loss	$	(2,343,576	)	$	(945,207	)	$	(7,889,676	)	$	(5,933,768	)
Denominator for basic and diluted loss per share:
Weighted average common stock shares outstanding		1,133,791			980,846			1,084,370			871,325

Loss per common share – basic and diluted	$	(2.07	)	$	(0.96	)	$	(7.28	)	$	(6.81	)

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 and 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 September 30,
	2017		2016
Stock options		249,636		175,642
Convertible debt		828,870		899,058
Common stock warrants		902,033		827,490
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		227,200		227,200
		2,478,197		2,403,948

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 $139,399 and $90,500 for the three months ended September 30, 2017 and 2016, respectively. The Company recognized stock-based compensation expense of $318,910 and $282,811 for the nine months ended September 30, 2017 and 2016, 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 Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Research and development	$	37,345	$	14,735	$	76,263	$	50,766
Selling and marketing		21,778		9,911		46,112		32,404
General and administrative		80,276		65,854		196,535		199,641
Total stock-based compensation expense	$	139,399	$	90,500	$	318,910	$	282,811

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 convertible debentures and deferred revenue 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. A slight change in an unobservable input like volatility could have a significant impact on the fair value measurement of the derivative liability.

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, 2017:

			Fair value measurements at September 30, 2017 using:
	September 30, 2017		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Available-For-Sale Equity Securities		25,986		25,986		-		-
Total Financial Assets	$	25,986	$	25,986	$	-	$	-

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs for the nine months ended September 30, 2017:

	December 31, 2016		Issuance fair value		Change in fair value		Settlement			Adjustment due to ASU 2017-11			September 30, 2017
Series D Preferred Stock Purchase Warrants	$	23,313	$	-	$	26,014	$	(49,327	)		-		$	-
Warrants Issued with Convertible Debt		1,661,795		-		-		-			(1,661,795	)		-
Conversion Option Derivative Liabilities		951,059		-		-		-			(951,059	)		-
Total Derivatives	$	2,636,167	$	-	$	26,014	$	(49,327	)	$	(2,612,854	)		-

Refer to this Note for accounting of early adoption of ASU 2017-11.

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, 2016:

			Fair value measurements at December 31, 2016 using:
	December 31, 2016		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Available-For-Sale Equity Securities		25,865		25,865		-		-
Total Financial Assets	$	25,865	$	25,865	$	-	$	-

	December 31, 2016		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Series D Preferred Stock Purchase Warrants	$	23,313		-		-	$	23,313
Warrants Issued with Convertible Debt		1,661,795		-		-		1,661,795
Conversion Option Derivative Liabilities		951,059		-		-		951,059
Total Derivatives	$	2,636,167	$	-	$	-	$	2,636,167