ENDRA Life Sciences Inc. - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER 001-37969

 

ENDRA LIFE SCIENCES INC.

 (Exact name of registrant as specified in its charter)

 

Delaware		26-0579295
(State of incorporation)		(I.R.S. Employer Identification No.)

 

3600 Green Court, Suite 350, Ann Arbor, MI 48105-1570

(Address of principal executive office) ( Zip code )

 

(734) 335-0468

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	NDRA	The Nasdaq Stock Market LLC
Warrants, each to purchase one share of Common Stock	NDRAW	The Nasdaq Stock Market LLC

 

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. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth 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 Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of August 13, 2020, there were 20,960,993 shares of our common stock, par value $0.0001 per share, outstanding.

 

TABLE OF CONTENTS

 

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets – June 30, 2020 (unaudited) and December 31, 2019	4
	Condensed Consolidated Statements of Operations – Three and six months ended June 30, 2020 and 2019 (unaudited)	5
	Condensed Consolidated Statements of Equity (Deficit) as of June 30, 2020 and 2019 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2020 and 2019 (unaudited)	8
	Notes to the Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosure	30
Item 5.	Other Information	30
Item 6.	Exhibits	31
	Signatures	32

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

ENDRA Life Sciences Inc.

Condensed Consolidated Balance Sheets

 

	June 30,	December 31,
Assets	2020	2019
Assets	(unaudited)
Cash	$748,561	$6,174,207
Prepaid expenses	1,064,146	116,749
Inventory	340,687	113,442
Other current assets	121,951	130,701
Total Current Assets	2,275,345	6,535,099
Other Assets
Fixed assets, net	214,587	236,251
Right of use assets	372,720	404,919
Total Assets	$2,862,652	$7,176,269
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable and accrued liabilities	$1,169,237	$1,708,525
Convertible notes payable, net of discount	-	298,069
Lease liabilities, current portion	71,085	66,193
Total Current Liabilities	1240,322	2,072,787
Long Term Debt
Loans	337,084	-
Lease liabilities	308,366	342,812
Total Long Term Debt	645,450	342,812
Total Liabilities	1,885,772	2,415,599
Stockholders’ Equity
Series A Preferred Stock , $0.0001 par value; 10,000 shares authorized; 896.225 and 6,338.490 shares issued and outstanding	1	1
Series B Preferred Stock, $0.0001 par value; 1,000 shares authorized; 0 and 351.711 shares issued and outstanding	-	-
Common stock, $0.0001 par value; 80,000,000 shares authorized; 16,437,491 and 8,421,401 shares issued and outstanding	1,644	842
Additional paid in capital	52,227,904	49,933,736
Stock payable	181,437	43,528
Accumulated deficit	(51,434,106)	(45,217,437)
Total Stockholders’ Equity	976,880	4,760,670
Total Liabilities and Stockholders’ Equity	$2,862,652	$7,176,269

 

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

 

 

ENDRA Life Sciences Inc.

Condensed Consolidated Statements of Operations

 (Unaudited)

 

	Three Months Ended	Three Months Ended	Six Months Ended	Six Months Ended
	June 30,	June 30,	June 30,	June 30,
	2020	2019	2020	2019
Operating Expenses
Research and development	$1,487,049	$1,304,808	$3,005,195	$3,078,306
Sales and marketing	134,763	88,343	249,718	145,161
General and administrative	1,269,467	932,021	2,737,212	1,848,924
Total operating expenses	2,891,279	2,325,172	5,992,125	5,072,391
Operating loss	(2,891,279)	(2,325,172)	(5,992,125)	(5,072,391)
Other Expenses
Amortization of debt discount	(3,858)	-	(232,426)	-
Other income (expense)	1,265	(9,199)	7,882	(10,716)
Total other expenses	(2,593)	(9,199)	(224,544)	(10,716)
Loss from operations before income taxes	(2,893,872)	(2,334,371)	(6,216,669)	(5,083,107)
Provision for income taxes	-	-	-	-
Net Loss	$(2,893,872)	$(2,334,371)	$(6,216,669)	$(5,083,107)
Net loss per share – basic and diluted	$(0.20)	$(0.31)	$(0.45)	$(0.68)
Weighted average common shares – basic and diluted	14,735,662	7,422,642	13,803,215	7,422,642

 

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

 

 

ENDRA Life Sciences Inc.

Condensed Consolidated Statements of Stockholders’ Equity

 (Unaudited)

 

 

Three Months Ended June 30, 2019	Series A Convertible		Series B Convertible							Total
	Preferred Stock		Preferred Stock		Common stock		Additional		Accumulated	Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Paid in Capital	Stock Payable	Deficit	Equity
Balance as of March 31, 2019	-	$-	-	$-	7,422,642	$742	$34,241,430	$-	$(30,440,432)	$3,801,740
Fair value of vested stock options	-	-	-	-	-	-	356,949	-	-	356,949
Net loss	-	-	-	-	-	-	-	-	(2,334,372)	(2,334,372)
Balance as of June 30, 2019	-	$-	-	$-	7,422,642	$742	$34,598,379	$-	$(32,774,804)	$1,824,317

Three Months Ended June 30, 2020	Series A Convertible		Series B Convertible							Total
	Preferred Stock		Preferred Stock		Common stock		Additional		Accumulated	Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Paid in Capital	Stock Payable	Deficit	Equity
Balance as of March 31, 2020	2,442.920	$1	121.578	$-	13,553,005	$1,355	$50,982,080	$78,836	$(48,540,234)	$2,522,038
Series A Convertible Preferred Stock converted to common stock	(1,545.695)	-	-	-	1,840,821	184	37,817	(38,001)	-	-
Series B Convertible Preferred Stock converted to common stock	-	-	(121.578)	-	126,199	13	822	(835)	-	-
Common stock issued for cash	-	-	-	-	882,493	88	791,386	-	-	791,474
Common stock issued for warrant exercise	-	-	-	-	12,874	2	11,198	-	-	11,200
Common stock issued for services	-	-	-	-	22,099	2	39,998	(40,000)	-	-
Fair value of vested stock options	-	-	-	-	-	-	402,946	-	-	402,946
Stock Payable towards -
- Preference Dividend	-	-	-	-	-	-	(11,043)	11,043	-	-
- Consultants	-	-	-	-	-	-	(27,300)	27,300	-	-
- RSUs to board and management	-	-	-	-	-	-	-	143,094	-	143,094
Net loss	-	-	-	-	-	-	-	-	(2,893,872)	(2,893,872)
Balance as of June 30, 2020	896.225	$1	-	$-	16,437,491	$1,644	$52,227,904	$181,437	$(51,434,106)	$976,880

 

 

Six Months Ended June 30, 2019	Series A Convertible		Series B Convertible							Total
	Preferred Stock		Preferred Stock		Common stock		Additional		Accumulated	Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Paid in Capital	Stock Payable	Deficit	Equity
Balance as of December 31, 2018	-	$-	-	$-	7,422,642	$742	$33,939,162	$-	$(27,691,696)	$6,248,208
Fair value of vested stock options	-	-	-	-	-	-	659,217	-	-	659,217
Net loss	-	-	-	-	-	-	-	-	(5,083,107)	(5,083,107)
Balance as of June 30, 2019	-	$-	-	$-	7,422,642	$742	$34,598,379	$-	$(32,774,803)	$1,824,318

Six Months Ended June 30, 2020	Series A Convertible		Series B Convertible							Total
	Preferred Stock		Preferred Stock		Common stock		Additional		Accumulated	Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Paid in Capital	Stock Payable	Deficit	Equity
Balance as of December 31, 2019	6,338.490	$1	351.711	$-	8,421,401	$842	$49,933,736	$43,528	$(45,217,437)	$4,760,670
Series A Convertible Preferred Stock converted to common stock	(5,442.265)	-	-	-	6,361,803	636	75,288	(75,924)	-	-
Series B Convertible Preferred Stock converted to common stock	-	-	351.711	-	360,279	36	1,634	(1,670)	-	-
Common stock issued for cash	-	-	-	-	882,493	88	791,386	-	-	791,474
Common stock issued for note conversions	-	-	-	-	331,441	33	493,814	-	-	493,847
Common stock issued for warrant exercise	-	-	-	-	57,975	7	50,431	-	-	50,438
Common stock issued for services	-	-	-	-	22,099	2	39,998	-	-	40,000
Fair value of vested stock options	-	-	-	-	-	-	914,026	-	-	914,026
Stock Payable towards -
- Preference Dividend	-	-	-	-	-	-	(45,109)	45,109	-	-
- Consultants	-	-	-	-	-	-	(27,300)	27,300	-	-
- RSU to board and management	-	-	-	-	-	-	-	143,094	-	143,094
Net loss	-	-	-	-	-	-	-	-	(6,216,669)	(6,216,669)
Balance as of June 30, 2020	896.225	$1	-	$-	16,437,491	$1,644	$52,227,904	$181,437	$(51,434,106)	$976,880

 

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

 

 

ENDRA Life Sciences Inc.

Condensed Consolidated Statements of Cash Flows

 (Unaudited) 

  

	Six Months Ended	Six Months Ended
	June 30,	June 30,
	2020	2019
Cash Flows from Operating Activities
Net loss	$(6,216,669)	$(5,083,107)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	44,014	39,744
Common stock, options and warrants issued for services	1,057,120	659,217
Amortization of debt discount	232,426
Amortization of right of use assets	32,199
Changes in operating assets and liabilities:
Prepaid expenses	(947,397)	(98,358)
Lease liability	(29,554)
Inventory	(227,245)	(14,837)
Other assets	8,750	(93,075)
Accounts payable and accrued liabilities	(493,676)	391,809
Net cash used in operating activities	(6,540,032)	(4,198,607)
Cash Flows from Investing Activities
Purchases of fixed assets	(22,350)	(5,238)
Net cash used in investing activities	(22,350)	(5,238)
Cash Flows from Financing Activities
Proceeds from warrant exercise	50,438	-
Proceeds from loans	337,084	-
Proceeds from issuance of common stock	791,474	-
Payment for settlement of notestock	(42,260)	-
Net cash provided by financing activities	1,136,736	-
Net decrease in cash	(5,425,646)	(4,203,845)
Cash, beginning of period	6,174,207	6,471,375
Cash, end of period	$748,561	$2,267,530
Supplemental disclosures of cash items
Interest paid	$1,920	$-
Supplemental disclosures of non-cash items
Conversion of convertible notes and accrued interest	$493,814	$-
Conversion of Series A Convertible Preferred Stock	$636	$-
Conversion of Series B Convertible Preferred Stock	$36	$-
Stock dividend payable	$(137,909)	$-
Stock paid and payable for services	$40,000	$-
Lease liability for right of use asset at inception	$-	$439,355

 

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

 

 

ENDRA Life Sciences Inc.

Notes to Condensed Consolidated Financial Statements

For the six months ended June 30, 2020 and 2019

(Unaudited)

 

Note 1 – Nature of the Business

 

ENDRA Life Sciences Inc. (“ENDRA” or the “Company”) has developed and is continuing to develop technology for increasing the capabilities of clinical diagnostic ultrasound, to broaden patient access to the safe diagnosis and treatment of a number of significant medical conditions in circumstances where expensive X-ray computed tomography (“CT”) and magnetic resonance imaging (“MRI”) technology is unavailable or impractical.

 

ENDRA was incorporated on July 18, 2007 as a Delaware corporation.

 

ENDRA Life Sciences Canada Inc. was organized under the laws of Ontario, Canada on July 6, 2017, and is wholly owned by the Company.

 

Note 2 – Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

 

Management makes estimates that affect certain accounts including deferred income tax assets, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied to estimates are recognized in the period in which such adjustments are determined.

 

The COVID-19 outbreak, which the World Health Organization has classified as a pandemic, has prompted governments and regulatory bodies throughout the world to issue “stay-at-home” or similar orders, and enact restrictions on the performance of “non-essential” services, public gatherings and travel.

 

The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions, the speed of the anticipated recovery, access to capital markets, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of June 30, 2020 and through the date of the filing of this Quarterly Report on Form 10-Q. The accounting matters assessed included, but were not limited to estimates related to the accounting for potential liabilities and accrued expenses, the assumptions utilized in valuing stock-based compensation issued for services, the realization of deferred tax assets, and assessments of impairment related to long-lived assets. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods.

 

Despite the Company’s efforts, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is unable to estimate the extent to which COVID-19 will negatively impact its financial results or liquidity.

 

Principles of Consolidation

 

The Company’s consolidated financial statements include all accounts of the Company and its consolidated subsidiary and/or entities as of reporting period ending date(s) and for the reporting period(s) then ended. All inter-company balances and transactions have been eliminated.

 

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020. The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date. For further information, refer to the financial statements and footnotes thereto included in ENDRA Life Sciences Inc. annual financial statements for the twelve months ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 26, 2020.

 

Cash and Cash Equivalents

 

The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of one year or less, when purchased, to be cash. As of June 30, 2020 and December 31, 2019, the Company had no cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.

 

Inventory

 

The Company’s inventory is stated at the lower of cost or estimated net realizable value, with cost primarily determined on a weighted-average cost basis on the first-in, first-out method. The Company periodically determines whether a reserve should be taken for devaluation or obsolescence of inventory.

 

Capitalization of Fixed Assets

 

The Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended; or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are expensed as incurred.

 

Leases

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases.” ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest period presented in the financial statements. At June 30, 2020 and December 31, 2019 the Company recorded a liability of $379,451 and $409,005, respectively.

 

Revenue Recognition

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASC Topic 606”). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the updated guidance effective January 1, 2018 using the full retrospective method. The new standard did not have a material impact on its financial position and results of operations, as it did not change the manner or timing of recognizing revenue.

 

Under ASC Topic 606, in order to recognize revenue, the Company is required to identify an approved contract with commitments to perform respective obligations, identify rights of each party in the transaction regarding goods to be transferred, identify the payment terms for the goods transferred, verify that the contract has commercial substance and verify that collection of substantially all consideration is probable. The adoption of ASC Topic 606 did not have an impact on the Company’s operations or cash flows.

 

Research and Development Costs

 

The Company follows FASB Accounting Standards Codification (“ASC”) Subtopic 730-10, “Research and Development”. Research and development costs are charged to the statement of operations as incurred. During the six months ended June 30, 2020 and 2019, the Company incurred $3,005,195 and $3,078,306 of expenses related to research and development costs, respectively.

 

 

Net Earnings (Loss) Per Common Share

 

The Company computes earnings per share under ASC Subtopic 260-10, “Earnings Per Share”. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive. There were 1,030,144 and 24,949,725 potentially dilutive shares, which include shares of common stock issuable upon the exercise or conversion of outstanding preferred stock, stock options, warrants, and convertible notes, as of June 30, 2020 and December 31, 2019, respectively.

 

The potentially dilutive shares, which are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive, are as follows:

 

	June 30, 2020	December 31, 2019
Options to purchase common stock	3,575,775	3,449,319
Warrants to purchase common stock	13,323,699	13,496,924
Shares issuable upon conversion of notes	-	362,568
Shares issuable upon conversion of Series A Preferred Stock	1,030,144	7,285,651
Shares issuable upon conversion of Series B Preferred Stock	-	355,263
Potentially dilutive shares excluded	17,929,618	24,949,725

 

Fair Value Measurements

 

Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value.

 

In accordance with ASC Topic 820, “Fair Value Measurements and Disclosures,” the Company measures certain financial instruments at fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.

 

Fair value is defined 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. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). 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 such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

 

● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The carrying amounts of the Company’s financial assets and liabilities, including cash, accounts receivable, prepaid expenses, accounts payable, accrued expenses, and other current liabilities, approximate their fair values because of the short maturity of these instruments. The fair value of notes payable and convertible notes approximates their fair values since the current interest rates and terms on these obligations are the same as prevailing market rates.

 

 

Share-based Compensation

 

The Company’s 2016 Omnibus Incentive Plan (the “Omnibus Plan”) permits the grant of stock options and other share-based awards to its employees, consultants and non-employee members of the board of directors. Each January 1 the pool of shares available for issuance under the Omnibus Plan automatically increases by an amount equal to the lesser of (i) the number of shares necessary such that the aggregate number of shares available under the Omnibus Plan equals 25% of the number of fully-diluted outstanding shares on the increase date (assuming the conversion of all outstanding shares of preferred stock and other outstanding convertible securities and exercise of all outstanding options and warrants to purchase shares) and (ii) if the board of directors takes action to set a lower amount, the amount determined by the board. On January 1, 2020, the pool of shares issuable under the Omnibus Plan automatically increased by 3,202,280 shares from 2,649,378 shares to 5,861,658. As of June 30, 2020, there were 2,285,883 shares of common stock remaining available for issuance under the Omnibus Plan.

 

The Company records share-based compensation in accordance with the provisions of the Share-based Compensation Topic of the FASB Codification. The guidance requires the use of option-pricing models that require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model, and the resulting charge is expensed using the straight-line attribution method over the vesting period.

 

Stock compensation expense recognized during the period is based on the value of share-based awards that were expected to vest during the period adjusted for estimated forfeitures. The estimated fair value of grants of stock options and warrants to non-employees of the Company is charged to expense, if applicable, in the financial statements. These options vest in the same manner as the employee options granted under the stock incentive plan as described above.

 

Debt Discount

 

The Company determines if its outstanding convertible promissory notes should be accounted for as liability or equity under ASC Topic 480, “Liabilities — Distinguishing Liabilities from Equity.” ASC Topic 480 applies to certain contracts involving a company’s own equity, and requires that issuers classify the following freestanding financial instruments as liabilities: mandatorily redeemable financial instruments, obligations that require or may require repurchase of the issuer’s equity shares by transferring assets (e.g., written put options and forward purchase contracts), and certain obligations where at inception the monetary value of the obligation is based solely or predominantly on:

 

● A fixed monetary amount known at inception (for example, a payable settleable with a variable number of the issuer’s equity shares with an issuance date fair value equal to a fixed dollar amount);

 

● Variations in something other than the fair value of the issuer’s equity shares (for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of the issuer’s equity shares); or

 

● Variations inversely related to changes in the fair value of the issuer’s equity shares (for example, a written put that could be net share settled).

 

Beneficial Conversion Feature

 

If the conversion feature of conventional convertible debt provides for a rate of conversion that is below market value on the date of issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.

 

If the Company determines the instrument meets the guidance under ASC Topic 480, the instrument is accounted for as a liability with a respective debt discount. The Company has previously recorded debt discounts in connection with raising funds through the issuance of promissory notes. These costs are amortized to noncash interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed. See Note 6, Convertible Notes, for further discussion on the Company’s accounting treatment for the convertible notes.

 

Going Concern

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has limited commercial experience and had a cumulative net loss from inception to June 30, 2020 of $51,434,106. The Company had working capital of $1,035,023 as of June 30, 2020. The Company has not established an ongoing source of revenue sufficient to cover its operating costs and to allow it to continue as a going concern. The accompanying financial statements for the period ended June 30, 2020 have been prepared assuming the Company will continue as a going concern. The Company’s cash resources will likely be insufficient to meet its anticipated needs during the next twelve months. The Company will require additional financing to fund its future planned operations, including research and development and commercialization of its products.

 

 

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it establishes a revenue stream and becomes profitable. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. As described further below under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” the COVID-19 pandemic has impacted our business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, these impacts may include reduced access to capital. If the Company is not able to obtain the necessary additional financing on a timely basis, the Company will be required to delay, reduce the scope of or eliminate one or more of the Company’s research and development activities or commercialization efforts or perhaps even cease the operation of its business. The ability of the Company to continue as a going concern is dependent upon its ability to successfully secure other sources of financing and attain profitable operations. There is substantial doubt about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Recent Accounting Pronouncements

 

 

Note 3 – Inventory

 

As of June 30, 2020 and December 31, 2019, inventory consisted of raw materials and subassemblies to be used in the assembly of a TAEUS system. As of June 30, 2020, the Company had no orders pending for the sale of a TAEUS system. As of June 30, 2020 and December 31, 2019, the Company had inventory valued at $340,687 and $113,442, respectively.

 

Note 4 – Fixed Assets

 

As of June 30, 2020 and December 31, 2019, fixed assets consisted of the following:

 

	June 30, 2020	December 31, 2019
Property, leasehold and capitalized software	$684,418	$679,179
TAEUS development and testing	60,708	43,596
Accumulated depreciation	(530,539)	(486,524)
Fixed assets, net	$214,587	$236,251

 

Depreciation expense for the six months ended June 30, 2020 and 2019 was $44,014 and $39,744, respectively.

 

 

Note 5 – Accounts Payable and Accrued Liabilities

 

As of June 30, 2020 and December 31, 2019, current liabilities consisted of the following:

 

	June 30, 2020	December 31, 2019
Accounts payable	$495,319	$1,278,431
Accrued payroll	159,435	94,862
Accrued bonuses	194,227	295,794
Accrued employee benefits	5,750	5,750
Accrued interest	-	9,738
Insurance premium financing	314,506	23,950
Total	$1,169,237	$1,708,525

 

Note 6 – Convertible Notes

 

July 2019 Notes

 

On July 26, 2019 the Company conducted a private placement offering in which the Company sold senior secured convertible promissory notes (the “July 2019 Notes”) and warrants exercisable for shares of the Company’s common stock (the “July 2019 Warrants”) to accredited investors for a purchase price approximately $2.8 million. The purchase price covered the purchase of $2,587,895 aggregate principal amount of July 2019 Notes and July 2019 Warrants exercisable for an aggregate of 1,736,843 shares of common stock. The net proceeds to the Company were approximately $2.5 million, after deducting placement agent fees and other offering expenses.

 

The Company sold the July 2019 Notes and July 2019 Warrants pursuant to a Securities Purchase Agreement, dated July 26, 2019, between the Company and each purchaser. The July 2019 Notes bore interest at a rate of 10% per annum until maturity on April 26, 2020. Interest was paid in arrears on the outstanding principal amount on the three month anniversary of the issuance of the July 2019 Notes, and each three month period thereafter, and finally on the maturity date. Holders of July 2019 Notes were entitled to convert principal and accrued, unpaid interest on the July 2019 Notes into shares of common stock. The July 2019 Notes were convertible into common stock at a conversion price per share equal to $1.49 and were initially convertible into 1,736,843 shares of common stock.

 

Each July 2019 Warrant entitles the holder to purchase one share of common stock for an exercise price per share equal to $1.49. The July 2019 Warrants are exercisable for an aggregate of 1,736,843 shares of common stock commencing immediately upon issuance and expire July 26, 2022. The July 2019 Warrants provide for cashless exercise and customary anti-dilution protection. The terms of the Placement Agent Warrant (as defined below) are the same as those of the July 2019 Warrants.

 

National Securities Corporation (the “Placement Agent”) acted as placement agent in the offering pursuant to a Placement Agent Agreement, dated July 9, 2019 (the “Placement Agent Agreement”). Pursuant to the Placement Agent Agreement, the Company paid to the Placement Agent a commission of 10% of the gross proceeds from the offering, reimbursed $30,000 of the Placement Agent’s expenses and issued to the Placement Agent a warrant exercisable for 173,685 shares of common stock (the “Placement Agent Warrant”). 

  

On December 11, 2019, the Company completed an offering of its Series A Convertible Preferred Stock (“Series A Preferred Stock”), described below under Note 8. In connection with the offering, the Company retired $1,919,008 aggregate principal amount of the July 2019 Notes and $24,184 in accrued interest, which amounts were used by the noteholders to purchase an aggregate of 1,690.58 shares of Series A Preferred Stock.

 

As of June 30, 2020, the Company had converted or repaid all of the July 2019 Notes.

 

 

Note 7 – Bank Loans

 

U.S. SBA Paycheck Protection Program

 

During the six months ended June 30, 2020, the Company issued a U.S. Small Business Administration (“SBA”) Paycheck Protection Program Note (the “SBA Note”) to First Republic Bank (the “Lender”) for a loan in the amount of $308,600.00 (the “SBA Loan”) under the Paycheck Protection Program (“PPP”) promulgated under the Coronavirus Aid, Relief and Economic Security Act of 2020, as modified by the Paycheck Protection Program Flexibility Act of 2020. The SBA Loan bears interest at a rate per annum of 1.00%. The term of the SBA Loan is two years, ending April 22, 2022 (the “Maturity Date”). No payments will be due on the SBA Loan until the Company’s application for forgiveness of the SBA Loan has been processed and completed (the “Deferment Period”), but interest will accrue during the Deferment Period. Following the Deferment Period, if the SBA Loan is not entirely forgiven, the Company must pay monthly principal and interest payments on the outstanding principal balance of the SBA Loan amortized over the term of the SBA Loan (the “SBA Loan Payments”), unless forgiven in whole or in part in accordance with the PPP regulations. These repayments will begin following the Deferment Period and until the Maturity Date.

 

The Company may apply to the Lender for the SBA Loan to be forgiven partially or fully if the funding received is used during the 24-week period following disbursement for payroll costs, covered rent, and covered utilities, provided that at least 60% of the forgiven amount has been used for payroll costs. We believe that we qualify for forgiveness of the SBA Loan under the PPP guidelines, but should we be audited or reviewed as a result of applying for forgiveness or otherwise, such audit or review could result in the diversion of management’s time and attention, and legal and reputational costs. If we were to be audited and receive an adverse finding in such audit, we could be required to repay the full amount of the SBA Loan, which could reduce our liquidity, and potentially subject us to additional fines and penalties.

 

The Company may prepay the principal of the SBA Loan at any time without incurring any prepayment charges. The Company may prepay 20% or less of the unpaid principal balance at any time without notice. If the Company prepays more than 20% and the SBA Loan has been sold on the secondary market, the Company must provide the Lender with written notice, pay all accrued interest and comply with the other requirements described in the SBA Note for such repayment.

 

The Company did not provide any collateral or personal guarantees for the SBA Loan, nor did the Company pay any facility charge to the government or to the Lender.

 

The SBA Note also provides for customary events of default, including, among others, events of default relating to failure to make payment or comply with the covenants contained in the SBA Note and related loan documents, defaults on any other loan with the Lender, defaults on any loan or agreement with another creditor (if the Lender believes the default may materially affect the Company’s ability pay the SBA Note), failure to pay any taxes when due, bankruptcy, breaches of representations, judgment, reorganization, merger, consolidation or other changes in ownership or business structure without the Lender’s prior written consent, and material adverse changes in financial condition or business operation. Upon an event of default the Lender may require immediate payment of all amounts owing under the SBA Note, collect all amounts owing from the Company, or file suit and obtain judgment.

 

Toronto-Dominion Bank Loan

 

On April 27, 2020, we entered into a commitment loan with TD Bank under the Canadian Emergency Business Account (“CEBA”), in the principal aggregate amount of CAD40,000, which is due and payable on December 31, 2022. This note bears interest on the unpaid balance at the rate of zero percent (0%) per annum during the initial term. Under this note no interest or principal payments are due until January 1, 2023. Under the conditions of the loan, twenty-five percent (25%) of the loan will be forgiven if seventy-five percent (75%) is repaid prior to the initial term date.

 

Note 8 – Capital Stock

 

On June 17, 2020, the Company filed a Certificate of Amendment to its Fourth Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware effecting an amendment to increase the number of authorized shares of the Company’s common stock from 50,000,000 shares to 80,000,000 shares. The Certificate of Amendment was approved by the Company’s stockholders at the Company’s annual meeting of stockholders on June 16, 2020.

 

At June 30, 2020, the authorized capital of the Company consisted of 90,000,000 shares of capital stock, consisting of 80,000,000 shares of common stock with a par value of $0.0001 per share and 10,000,000 shares of preferred stock with a par value of $0.0001 per share. The Company has designated 10,000 shares of its preferred stock as Series A Preferred Stock and 1,000 shares of its preferred stock as Series B Preferred Stock, and the remainder of 9,989,000 shares remain authorized but undesignated.

 

As of June 30, 2020, there were 16,437,491 shares of common stock, 896.225 shares of Series A Preferred Stock, and no shares of Series B Preferred Stock issued and outstanding, and a stock payable balance of $181,437.

 

During the six months ended June 30, 2020, the Company issued 6,361,803 shares of its common stock upon the conversion of 5,442.265 shares of its Series A Preferred Stock, and 360,279 shares of its common stock upon the conversion of 351.711 shares of its Series B Preferred Stock.

 

During the six months ended June 30, 2020, the Company issued 331,441 shares of its common stock upon the conversion of $493,847 principal amount of, and in respect of accrued interest on, July 2019 Notes.

 

During the six months ended June 30, 2020, the Company issued 57,975 shares of its common stock upon warrant exercises valued at $50,438.

 

During the six months ended June 30, 2020, the Company issued or agreed to issue a total 52,099 shares of its common stock to consultants pursuant to services agreements with these consultants.

 

 

December 2019 Offering of Series A Preferred Stock, Common Stock and Warrants

 

On December 11, 2019, the Company completed a private placement offering in which it sold 6,338.490 shares of its Series A Preferred Stock and 904,526 shares of its common stock, along with warrants (the “December 11, 2019 Warrants”) exercisable for an aggregate of 8,190,225 shares of common stock, for approximately $7.9 million of gross proceeds. The offering was made pursuant to a Securities Purchase Agreement (the “Purchase Agreement”), dated as of December 5, 2019, between the Company and the investors. Pursuant to the Purchase Agreement, each investor elected whether to receive shares of Series A Preferred Stock or shares of common stock in the offering. The Company used approximately $1.9 million of the net proceeds from the offering to repay debt represented by July 2019 Notes and plans to use the remaining net proceeds for working capital and general corporate purposes.

 

The simple average of the Daily VWAP (as defined in the Series A Certificate of Designations) for the 10 consecutive trading days from January 8, 2020 to January 22, 2020, inclusive, was $1.82, satisfying the first Forced Conversion Condition. On January 27, 2020, the SEC declared effective the Company’s Registration Statement on Form S-3 (File No. 333-235883) registering under the Securities Act the resale of the shares of common stock issuable upon the conversion of Series A Preferred Stock, shares of common stock issued in the offering, and shares of common stock issuable upon the exercise of December 11, 2019 Warrants and December 11, 2019 Warrants.

 

Each December 11, 2019 Warrant entitles the holder to purchase a share of common stock for an exercise price equal to $0.87. The December 11, 2019 Warrants are exercisable commencing immediately upon issuance and expire on the date five years after the date of issuance, unless earlier terminated pursuant to the terms of the December 11, 2019 Warrant. If, during the term of the December 11, 2019 Warrants, the Series A Forced Conversion Conditions are met, the Company may deliver notice thereof to the holders of the December 11, 2019 Warrants and, after a 30-day period following such notice, any unexercised December 11, 2019 Warrants will be forfeited. The December 11, 2019 Warrants provide for cashless exercise only if there is no effective registration statement registering under the Securities Act the resale of the shares of Common Stock issuable upon exercise of the December 11, 2019 Warrants. As described in the preceding paragraph, the Series A Forced Conversion Conditions have been met with respect to the December 11, 2019 Warrants.

 

The Securities Purchase Agreement, dated December 5, 2019, includes customary representations, warranties and covenants. In connection with the offering, the Company paid to the placement agent a commission of 8.0% of the gross proceeds from the offering, will reimburse up to $35,000 of the placement agent’s documented expenses and issued to the placement agent and its designees warrants exercisable for an aggregate of 327,606 shares of Common Stock (the “Series A Placement Agent Warrant”). The terms of the Series A Placement Agent Warrant are the same as those of the December 11, 2019 Warrants.

 

Series A Preferred Stock Deemed Dividend, Beneficial Conversion Calculation

 

After factoring in the relative fair value of the warrants issued in conjunction with the Series A Preferred Stock, the effective conversion price is $0.45 per share, compared to the market price of $0.90 per share on the date of issuance. As a result, a $4,208,612 beneficial conversion feature was recorded as a deemed dividend in the consolidated statement of operations because the Series A Preferred Stock is immediately convertible, with a credit to additional paid-in capital. The relative fair value of the warrants issued with the Series A Preferred Stock of $2,766,941 was recorded as a reduction to the carrying amount of the preferred stock in the consolidated balance sheet. The value of the warrants was determined utilizing the binomial option pricing model using a term of 5 years, a volatility of 114%, a risk-free interest rate of 1.64%, a 6% rate of dividends, and a call multiple of 2.

 

December 2019 Offering of Series B Preferred Stock and Warrants

 

On December 19, 2019, the Company completed a private placement offering in which the Company sold 351.711 shares of its Series B Preferred Stock and warrants (the “December 19, 2019 Warrants”) exercisable for an aggregate of 426,316 shares of the Company’s common stock to the investors for approximately $405,000 of gross proceeds. The Company plans to use the net proceeds from the offering for working capital and general corporate purposes.

 

The average daily VWAP requirement of the Series B Forced Conversion Conditions relating to daily volume-weighted average price of our Common Stock has not yet been satisfied. On January 27, 2020, the SEC declared effective the Company’s Registration Statement on Form S-3 (File No. 333-235883) registering under the Securities Act the resale of the shares of common stock issuable upon the conversion of Series B Preferred Stock and upon the exercise of December 19, 2019 Warrants.

 

Each December 19, 2019 Warrant entitles the holder to purchase a share of common stock for an exercise price equal to $0.99. The December 19, 2019 Warrants are exercisable commencing immediately upon issuance and expire on the date five years after the date of issuance, unless earlier terminated pursuant to the terms of the December 19, 2019 Warrant. If, during the term of the December 19, 2019 Warrants, the Series B Forced Conversion Conditions are met, the Company may deliver notice thereof to the holders of the December 19, 2019 Warrants and, after a 30-day period following such notice, any unexercised December 19, 2019 Warrants will be forfeited. The December 19, 2019 Warrants provide for cashless exercise in the event there is no effective registration statement registering under the Securities Act the resale of the shares of common stock issuable upon exercise of such December 19, 2019 Warrants.

 

The Securities Purchase Agreement, dated December 19, 2019, includes customary representations, warranties and covenants. In connection with the closing of the offering, the Company paid to the placement agent in the offering a commission of approximately 8.0% of the gross proceeds from the offering and issued to the placement agent and its designees warrants exercisable for an aggregate of 14,211 shares of common stock (the “Series B Placement Agent Warrant”). The terms of the Series B Placement Agent Warrant are the same as those of the Warrants.

 

 

Series B Preferred Stock Deemed Dividend, Beneficial Conversion Calculation

 

After factoring in the relative fair value of the warrants issued in conjunction with the Series B Preferred Stock, the effective conversion price is $0.03 per share, compared to the market price of $1.36 per share on the date of issuance. As a result, a $11,165 beneficial conversion feature was recorded as a deemed dividend in the consolidated statement of operations because the Series B Preferred Stock is immediately convertible, with a credit to additional paid-in capital. The relative fair value of the warrants issued with the Series B Preferred Stock of $364,355 was recorded as a reduction to the carrying amount of the preferred stock in the consolidated balance sheet. The value of the warrants was determined utilizing the binomial option pricing model using a term of 5 years, a volatility of 118%, a risk-free interest rate of 1.75%, a 0% rate of dividends, and a call multiple of 2.

 

Note 9 – Common Stock Options and Restricted Stock Units (RSU’s)

 

Common Stock Options

 

Stock options are awarded to the Company’s employees, consultants and non-employee members of the board of directors under the 2016 Omnibus Incentive Plan (the “Omnibus Plan”) and are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The aggregate fair value of these stock options granted by the Company during the six months ended June 30, 2020 was determined to be $185,602 using the Black-Scholes-Merton option-pricing model based on the following assumptions: (i) volatility rate of 116% to 119%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 10 years. A summary of option activity under the Company’s Omnibus Plan as of June 30, 2020, and changes during the year then ended, is presented below:

 

	Number of Options	Weighted Average Exercise Price	Weighted AverageRemaining Contractual Term (Years)
Balance outstanding at December 31, 2019	3,449,319	$2.32	8.26
Granted	130,418	0.24	9.60
Exercised	-	-	-
Forfeited	-	-	-
Cancelled or expired	(3,962)	-	-
Balance outstanding at June 30, 2020	3,575,775	$2.28	7.84
Exercisable at June 30, 2020	852,210	$4.75	4.98

 

Restricted Stock Units

 

A restricted stock unit grants a participant the right to receive one share of common stock, following the completion of the requisite service period. Restricted stock units are classified as equity. Compensation cost is based on the Company’s stock price on the grant date and is recognized on a straight-line basis over the vesting period for the entire award.

 

As a cash-conserving measure taken in light of the adverse economic conditions caused by the COVID-19 pandemic, the Company reduced the cash salaries of members of management by 33% for the remainder of 2020, including the salaries of its named executive officers. In lieu of cash, the Company is paying this portion of management salaries in the form of restricted stock units (the “RSU’s”) that vest over the remainder of the year. Additionally, the Company amended its Non-Employee Director Compensation Policy to provide that its non-employee directors’ annual retainers for the second, third and fourth fiscal quarters of 2020 will also be paid in in the form of RSU’s rather than cash.

 

On April 9, 2020, the Company granted 674,019 RSU’s to non-employee directors and certain members of management. The 461,146 RSU’s granted to management vest daily over the term through December 31, 2020. The 212,873 RSU’s granted to directors’ vest in three equal quarterly installments on the last date of the second, third and fourth fiscal quarters of 2020. The total fair value of the RSU’s granted on April 9, 2020 was $471,813, based on the grant date closing price of $0.70 per share.

 

 

As of June 30, 2020 the Company had issued and vested the following RSU’s:

 

	Restricted Stock Units Outstanding	Weighted Average Grant Date Fair Value
Balance Outstanding at December 31, 2019	-	$-
Granted	674,019	0.70
Vested / Released	(217,293)	-
Forfeited	-	-
Cancelled or expired	-	-
Balance outstanding at June 30, 2020	456,726	$0.70

 

Note 10 – Common Stock Warrants

 

During the six months ended June 30, 2020, the Company issued an aggregate of 57,975 shares of its common stock upon warrant exercises valued at $50,438.

 

The following table summarizes all stock warrant activity of the Company for the six months ended June 30, 2020:

 

	Number of Warrants	Weighted AverageExercise Price	Weighted AverageContractual Term (Years)
Balance outstanding at December 31, 2019	13,496,924	$2.02	4.07
Granted	-	-	-
Exercised	(57,975)	0.87	4.45
Forfeited	-	-	-
Expired	(115,250)	-	-
Balance outstanding at June 30, 2020	13,323,699	$1.88	3.60
Exercisable at June 30, 2020	13,323,699	$1.88	3.60

 

 

 

Note 11 – Commitments & Contingencies

 

Office Lease

 

Effective January 1, 2015, the Company entered into an office lease agreement with Green Court, LLC, a Michigan limited liability company, for approximately 3,657 rentable square feet of space, for the initial monthly rent of $5,986, which commenced on January 1, 2015 for an initial term of 60 months. On October 10, 2017 this lease was amended increasing the rentable square feet of space to 3,950 and the monthly rent to $7,798. On July 16, 2019, the Company exercised its option to extend the lease for an additional 5 years past the initial term originally expiring on December 31, 2019, such that the lease now expires on December 31, 2024.

 

The Company records the lease asset and lease liability at the present value of lease payments over the lease term. The lease typically does not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount the present value of lease payments. The Company’s discount rate for operating leases at June 30, 2020 was 10%. Lease expense is recognized on a straight-line basis over the lease term to the extent that collection is considered probable. As a result, the Company has been recognizing rents as they become payable based on the adoption of ASC Topic 842. The weighted-average remaining lease term is 4.67 years.

 

As of June 30, 2020, the maturities of operating lease liabilities are as follows:

 

	Operating Lease
2020	$49,395
2021	101,752
2022	104,793
2023	107,954
2024 and beyond	111,192
Total	$475,086
Less: amount representing interest	(95,635)
Present value of future minimum lease payments	379,451
Less: current obligations under leases	71,085
Long-term lease obligations	$308,366

 

For the three months ended June 30, 2020 and 2019, the Company incurred rent expenses of $30,615 and $29,319, respectively.

For the six months ended June 30, 2020 and 2019, the Company incurred rent expenses of $60,903 and $52,507, respectively.

 

Employment and Consulting Agreements

 

Francois Michelon – Effective May 12, 2017, the Company entered into an amended and restated employment agreement with Francois Michelon, the Company’s Chief Executive Officer and Chairman of the board of directors. The term of the employment agreement runs through December 31, 2019 and continues on a year-to-year basis thereafter. The employment agreement provides for an annual base salary that is subject to adjustment at the board of directors’ discretion. The annual base salary in effect during the period covered by this Form 10-Q was $355,350. Under the employment agreement, Mr. Michelon is eligible for an annual cash bonus based upon achievement of performance-based objectives established by the board of directors. Pursuant to Mr. Michelon’s employment agreement, in connection with the closing of the Company’s initial public offering he was granted options to purchase an aggregate 339,270 shares of common stock. The options have a weighted average exercise price of $4.96 per share of common stock and vest in three equal annual installments beginning on May 12, 2018. Upon termination without cause, any portion of Mr. Michelon’s option award scheduled to vest within 12 months will automatically vest, and upon termination without cause within 12 months following a change of control, the entire unvested portion of the option award will automatically vest. Upon termination for any other reason, the entire unvested portion of the option award will terminate.

 

If Mr. Michelon’s employment is terminated by the Company without cause, Mr. Michelon will be entitled to receive 12 months’ continuation of his current base salary and a lump sum payment equal to 12 months of continued healthcare coverage (or 24 months’ continuation of his current base salary and a lump sum payment equal to 24 months of continued healthcare coverage if such termination occurs within one year following a change in control).

 

Under his employment agreement, Mr. Michelon is eligible to receive benefits that are substantially similar to those of the Company’s other senior executive officers.

 

On December 27, 2019, the Company entered into an amendment to Mr. Michelon’s employment agreement to provide that (i) Mr. Michelon’s employment with the Company will continue until terminated under the terms the employment agreements, and (ii) Mr. Michelon will each receive certain payments if he is terminated by the Company without Cause (as defined in the employment agreement amendment) or he resigns for Good Reason (as defined in the employment agreement amendment).

 

On April 9, 2020, the Company granted Mr. Michelon 123,064 restricted stock units in lieu of $86,145 of his cash salary. Subject to continued employment, the restricted stock units vest each day, pro rata based on the number of days between the grant date and December 31, 2020.