Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies

v3.5.0.2
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2016
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

  4) Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Reclassifications

 

Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation.

 

Use of Estimates

 

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

 

Concentrations

 

Credit Risk

 

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

 

The following table illustrates the level of concentration as a percentage of total revenues during the three months and nine months ended September 30, 2016 and 2015.

 

    For the Three Months Ended  
    September 30,  
    2016     2015  
Top Five Customers     60 %     43 %
Federal Agencies     9 %     2 %

 

    For the Nine Months Ended  
    September 30,  
    2016     2015  
Top Five Customers     31 %     34 %
Federal Agencies     3 %     14 %

 

The following table illustrates the level of concentration as a percentage of net accounts receivable balance as of September 30, 2016 and December 31, 2015:

 

    September 30, 2016     December, 31, 2015  
Top Five Customers     55 %     93 %
Federal Agencies     9 %     1 %

 

Product Supply

 

A Massachusetts-based contract manufacturer started building the new NEP2320 Extreme Barocycler instrument in May 2016. We plan to have this manufacturer build all instruments in the future.

 

Investment in Available-For-Sale Equity Securities

 

As of September 30, 2016, we held 601,500 shares of common stock of Everest Investments Holdings S.A. (“Everest”), a Polish publicly traded company listed on the Warsaw Stock Exchange. We account for this investment in accordance with ASC 320 “Investments — Debt and Equity Securities” as securities available for sale. On September 30, 2016, our condensed consolidated balance sheet reflected the fair value of our investment in Everest to be $59,550, based on the closing price of Everest shares of $0.10 per share on that day. The carrying value of our investment in Everest common stock held will change from period to period based on the closing price of the common stock of Everest as of the balance sheet date. This change in market value will be recorded by us on a quarterly basis as an unrealized gain or loss in Comprehensive Income or Loss.

 

Inventories

 

Inventories are valued at the lower of cost (average cost) or market (sales price). The cost of Barocyclers consists of the cost charged by the contract manufacturer. The cost of manufactured goods includes material, freight-in, direct labor, and applicable overhead. The composition of inventory is as follows:

 

    September 30, 2016     December 31, 2015  
Raw materials   $ 491,254     $ 310,367  
Finished goods     566,884       778,004  
Inventory Reserve     (50,000 )     (50,000 )
Total   $ 1,008,138     $ 1,038,371  

 

Debt Issuance Costs

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as deferred charge assets, separate from the related debt liability. ASU 2015-03 does not change the recognition and measurement requirements for debt issuance costs. The Company early-adopted ASU 2015-03 as of the end of its Fiscal 2015, and applied its provisions retrospectively.

 

Computation of Loss per Share

 

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

 

The following table illustrates our computation of loss per share for the three months and nine months ended September 30, 2016 and 2015:

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2016     2015     2016     2015  
Numerator:                                
Net loss   $ (945,207 )   $ (657,928 )   $ (5,933,768 )   $ (3,430,160 )
Preferred dividends accrued     —         1,711       —         (21,768 )
Net loss applicable to common shareholders   $ (945,207 )   $ (656,217 )   $ (5,933,768 )   $ (3,451,928 )
                                 
Denominator for basic and diluted loss per share:                                
Weighted average common stock shares outstanding     29,425,362       20,737,827       26,139,740       19,771,323  
                                 
Income (loss) per common share – basic and diluted   $ (0.03 )   $ (0.03 )   $ (0.23 )   $ (0.17 )

 

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

 

    As of September 30,  
    2016     2015  
Stock options     5,269,250       3,201,250  
Convertible debt     26,971,732       26,015,029  
Common stock warrants     24,824,695       26,125,127  
Convertible preferred stock:                
Series D Convertible Preferred Stock     750,000       750,000  
Series G Convertible Preferred Stock     865,700       865,700  
Series H Convertible Preferred Stock     1,000,000       1,000,000  
Series H2 Convertible Preferred Stock     2,100,000       2,100,000  
Series J Convertible Preferred Stock     3,521,000       3,546,000  
Series K Convertible Preferred Stock     6,816,000       11,399,000  
      72,118,377       75,002,106  

 

Accounting for Stock-Based Compensation Expense

 

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

 

Determining Fair Value of Stock Option Grants

 

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

 

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

 

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

 

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

 

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

 

The Company recognized stock-based compensation expense of $90,500 and $74,864 for the three months ended September 30, 2016 and 2015, respectively. The following table summarizes the effect of this stock-based compensation expense within each of the line items of our costs and expenses within our Condensed Consolidated Statements of Operations:

 

    For the Three Months Ended September 30,  
    2016     2015  
Research and development   $ 14,735     $ 18,307  
Selling and marketing     9,911       13,310  
General and administrative     65,854       43,247  
Total stock-based compensation expense   $ 90,500     $ 74,864  

 

The Company recognized stock-based compensation expense of $282,811 and $185,370 for the nine months ended September 30, 2016 and 2015, respectively. The following table summarizes the effect of this stock-based compensation expense within each of the line items of our costs and expenses within our Condensed Consolidated Statements of Operations:

 

    For the Nine Months Ended September 30  
    2016     2015  
Research and development   $ 50,766     41,172  
Selling and marketing     32,404       27,386  
General and administrative     199,641       116,812  
Total stock-based compensation expense   $ 282,811     $ 185,370  

 

Fair Value of Financial Instruments

 

Due to their short maturities, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair value. Long-term liabilities are primarily related to convertible debentures and deferred revenue with carrying values that approximate fair value.

 

Fair Value Measurements

 

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

 

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

 

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

 

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2016:

 

          Fair value measurements at September 30, 2016 using:  
    September 30, 2016     Quoted
prices in
active
markets
(Level 1)
    Significant
other
observable
inputs (Level 2)
    Significant
unobservable
inputs (Level 3)
 
Available-For-Sale Equity Securities   $ 59,550     $ 59,550     $ -     $ -  
Total Financial Assets   $ 59,550     $ 59,550     $ -     $ -  

 

    September 30, 2016     Quoted
prices in
active
markets
(Level 1)
    Significant
other
observable
inputs
(Level 2)
    Significant
unobservable
inputs (Level 3)
 
Series D Preferred Stock Purchase Warrants   $ 189,884     $ —       $ —       $ 189,884  
Warrants Issued with Convertible Debt     4,135,980       —         —         4,135,980  
Conversion Option Derivative Liabilities     4,627,452       —         —         4,627,452  
Total Derivatives   $ 8,953,316     $ —       $ —       $ 8,953,316  

 

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs for the nine months ended September 30, 2016:

 

    December 31,2015     Issuance
fair value
    Change
in fair
value
    Gain on
extinguishment
of derivative
liabilities
    September 30, 2016  
Available-For-Sale Equity Securities   $ 294,522     $     $ (234,972 )   $ —       $ 59,550  
Total Financial Assets   $ 294,522     $ —       $ (234,972 )   $ —       $ 59,550  

 

    December 31, 2015     Issuance
fair value
    Change in
fair value
    September 30, 2016  
Series D Preferred Stock Purchase Warrants   $ 173,526     $ —       $ 16,358     $ 189,884  
Convertible Debt Warrants     3,122,450       1,094,432       (80,902 )     4,135,980  
Conversion Option Liabilities     3,940,791       1,547,127       (860,466 )     4,627,452  
Total Derivatives   $ 7,236,767     $ 2,641,559     $ (925,010 )   $ 8,953,316  

 

The amounts above valued at issuance includes $1,337,510 that was charged directly to “change in fair value of derivative liabilities” at issuance.

 

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2015:

 

          Fair value measurements at December 31, 2015 using:  
    December 31, 2015     Quoted
prices in
active
markets
(Level 1)
   

Significant
other
observable
inputs

(Level 2)

    Significant
unobservable
inputs
(Level 3)
 
Available-For-Sale Equity Securities   $ 294,522     $ 294,522     $ —       $ —    
Total Financial Assets   $ 294,522     $ 294,522     $ —       $ —    

 

    December 31, 2015     Quoted
prices in
active
markets
(Level 1)
    Significant
other
observable
inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
 
Series D Preferred Stock Purchase Warrants   $ 173,526     $ —       $ —       $ 173,526  
Warrants Issued with Convertible Debt     3,122,450       —         —         3,122,450  
Conversion Option Derivative Liabilities     3,940,791       —         —         3,940,791  
Total Derivatives   $ 7,236,767     $ —       $ —       $ 7,236,767  

 

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

 

Assumptions   November 10, 2011     Warrants
revalued at
December 31, 2015
    Warrants
revalued at
September 30, 2016
 
Expected life (in months)     60.0       11.0       8.0  
Expected volatility     104.5 %     104.9 %     92.4 %
Risk-free interest rate     0.875 %     0.65 %     0.45 %
Exercise price   $ 0.81     $ 0.25     $ 0.25  
Fair value per warrant   $ 0.54     $ 0.16     $ 0.18  

 

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

 

Assumptions     At Issuance
Fair value
  Warrants revalued at  December 31, 2015     Warrants  revalued at September 30, 2016  
Expected life (in months)     36.0-60.0       55.0-60.0       46.0-54.0  
Expected volatility     114.3 - 138.3 %     136.3-141.6 %       116.2 -137.4 %
Risk-free interest rate     0.86-1.69 %     1.29-1.76  %     1.01 %
Exercise price $ 00.40-$0.42     0.40     $ 0.40  
Fair value per warrant $ 0.19-$0.40     0.30     $ 0.30-$1.35  

 

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

 

Assumptions   At Issuance
fair value
    Conversion
options
revalued at
December 31, 2015
    Conversion
options
revalued at
September 30, 2016
 
Expected life (in months)     3-24       18-24       10-18  
Expected volatility     97.6-153.8 %     112.2-114.7 %     94.3%-96.6 %
Risk-free interest rate     0.37-0.99 %     1.06 %     0.59-0.77 %
Exercise price   $ 0.24-$0.45     $ 0.28     $ 0.28  
Fair value per conversion option   $ 0.07-$0.30     $ 0.14-$0.33     $ 0.17-$0.21