ITEM 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read together with our unaudited condensed
consolidated financial statements and related notes thereto set forth in this Quarterly Report on Form 10-Q as well as our Annual
Report on Form 10-K for the year ended December 31, 2019.
This Form 10-Q contains “forward-looking statements” that indicate certain risks
and uncertainties, many of which are beyond our control. Actual results could differ materially and adversely from those anticipated
in such forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this report.
Important factors that may cause actual results to differ from projections include:
|
·
|
We may not be able to continue operating without additional financing;
|
|
·
|
Current negative operating cash flows;
|
|
·
|
Our capital needs to accomplish our goals, including any further financing, which may be highly dilutive and may include onerous terms;
|
|
·
|
Significant debt repayments due in less than one year, which the Company may need to extend or restructure, with no assurance that this will be possible;
|
|
·
|
Risks related to recent and future acquisitions, including the possibility of further impairment of goodwill and risks related to the benefits and costs of acquisition;
|
|
·
|
Risks related to our partnerships with other companies, including the need to negotiate the definitive agreements; possible failure to realize anticipated benefits of these partnerships; and costs of providing funding to our partner companies, which may never be repaid or provide anticipated returns;
|
|
·
|
Risk related to the protection of our intellectual property or any future legal claims relating to intellectual property;
|
|
·
|
The impact of competition;
|
|
·
|
Acquisition and maintenance of any necessary regulatory clearances applicable to applications of our technology;
|
|
·
|
Inability to attract or retain qualified senior management personnel, including sales and marketing personnel;
|
|
·
|
Risk that we never become profitable if our product is not accepted by potential customers;
|
|
·
|
Possible impact of government regulation and scrutiny;
|
|
·
|
Unexpected costs and operating deficits, and lower than expected sales and revenues, if any;
|
|
·
|
Adverse results of any legal proceedings;
|
|
·
|
The volatility of our operating results and financial condition,
|
|
·
|
Management of growth;
|
|
·
|
Risk that our business and operations will continue to be materially and adversely affected by the COVID-19 pandemic, which has impacted on a significant supplier; has resulted in delayed production and less efficiency; and has impacted on our sales efforts, accounts receivable, and terms demanded by suppliers; and may impact financing transactions; and
|
|
·
|
Other specific risks that may be alluded to in this report.
|
All statements, other than statements of historical facts, included in this report regarding
our growth strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans,
and objectives of management are forward-looking statements. When used in this report, the words “will,” “may,”
“believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,”
“plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking
statements contain such identifying words. All forward-looking statements speak only as of the date of this report. We
do not undertake any obligation to update any forward-looking statements or other information contained herein. Potential
investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions,
and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, we cannot assure potential
investors that these plans, intentions or expectations will be achieved. We disclose important factors that could cause actual
results to differ materially from expectations in the “Risk Factors” section and elsewhere in our Annual Report on
Form 10-K for the year ended December 31, 2019 and in item 1A of Part II below. These cautionary statements qualify all forward-looking
statements attributable to us or persons acting on our behalf.
Information regarding market and industry statistics contained in this report is included
based on information available to us that we believe is accurate. It is generally based on academic and other publications
that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from
all sources, and we cannot assure potential investors of the accuracy or completeness of the data included in this report. Forecasts
and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties
accompanying any estimates of future market size, revenue, and market acceptance of products and services. We have no obligation
to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those
statements.
Overview
We operate in two primary business areas: first, application of artificial intelligence (“AI”)
in our precision medicine business, to provide AI-driven predictive models of tumor drug response to improve clinical outcomes
for patients and to assist pharmaceutical, diagnostic, and biotech industries in the development of new personalized drugs and
diagnostics; and second, production of the United States Food and Drug Administration (“FDA”)-cleared STREAMWAY®
System for automated, direct-to-drain medical fluid disposal and associated products.
We have three operating segments: Skyline, Helomics and Soluble. Skyline consist of the STREAMWAY
System product sales. The Helomics segment consists of clinical testing and contract research. Soluble segment consists of contract
services and research focused on solubility improvements, stability studies, and protein production. Our TumorGenesis subsidiary
is included within corporate. Going forward, we have determined that we will focus our resources on the Helomics segment and our
primary mission of applying AI to precision medicine and drug discovery.
Precision Medicine Business
Our precision medicine business, conducted primarily in our Helomics division, is committed
to improving the effectiveness of cancer therapy using our proprietary, multi-omic tumor profiling platform, one-of-a-kind database
of historical tumor data, and the power of AI to build predictive models of tumor drug response.
Helomics’ mission is to improve clinical outcomes for patients by partnering with pharmaceutical,
diagnostic, and academic organizations to bring innovative clinical products and technologies to the marketplace. In addition to
our proprietary patient-derived (“PDx”) tumor profiling platform for oncology, Helomics offers: 1) data and AI driven
contract research organization (“CRO”) services for clinical and translational research that leverage PDx tumor models,
2) a wide range of multi-omics assays (genomics, proteomics, and biochemical), and 3) AI driven predictive models to drive the
discovery of targeted therapies.
Contract Research Organization (CRO) and AI-Driven Business
We believe leveraging our unique, historical database of the drug responses of over 149,000
patient tumors to build AI and data-driven multi-omic predictive models of tumor drug response and outcome will provide actionable
insights critical to both new drug development and individualizing patient treatment. Our large historical database of tumors and
related data, plus our ability to obtain the associated patient outcome data is a significant competitive advantage. Cancer treatments
require at least 5 years of testing to provide sufficient information on progression-free survival rates. While competitors must
wait for this data, we can leverage it today. These AI-driven predictive models, coupled with the PDx platform will create a unique
service to drive revenue generating projects with pharma, diagnostic and biotech companies in areas such as biomarker discovery,
drug screening, drug repurposing, and clinical trials. The AI-driven models will, once validated, also provide clinical decision
support to help oncologists individualize treatment.
Our CRO/AI business is committed to improving the process of targeted therapy discovery.
Our proprietary, TruTumor multi-omic PDx profiling and AI platform coupled to our vast multi-omic database of biochemical and clinical
information on patients with cancer, uses deep learning to understand the association between the mutational profile of a patient’s
tumor and the drug response profile of the tumor that is grown in the lab. This approach is used to build an AI-driven predictive
model that offers actionable insights of which mutations in the tumor are associated with drugs to which the tumor is sensitive
and which will lead to the optimal outcome for the patient.
Our CRO services business applies these AI-driven predictive models coupled with our
unique proprietary TruTumor PDx model to address a range of needs from discovery through clinical and translational research, to
clinical trials and diagnostic development and validation as noted below:
Research
Development
|
•
|
Patient enrichment & selection for trials
|
|
•
|
Clinical trial optimization
|
Clinical Decision Support
On July 1, 2020, the Company acquired the assets of Quantitative Medicine LLC including a
novel, computational drug discovery platform called CoRE. CoRE which is designed to dramatically reduce the time, cost, and financial
risk of discovering new therapeutic drugs by predicting the main effects of drugs on target molecules that mediate disease. By
coupling CoRE, with Helomics’ TruTumor™ PDx tumor platform, Helomics multi-omic database of biochemical and clinical
information on patients with cancer, and AI-driven predictive models, we will offer a novel, one-of-a-kind capability for discovery
of precision therapies that are expected to have considerable value to the industry.
Clinical Testing
Via our Helomics subsidiary, we offer a group of clinically relevant, cancer-related tumor
profiling and biomarker tests for gynecological cancers that determine how likely the patient is to respond to various types of
chemotherapy and which therapies might be indicated by relevant tumor biomarkers.
Clinical testing is comprised of ChemoFx and BioSpeciFx tests. The ChemoFx test determines
how a patient’s tumor specimen responds to a panel of various chemotherapy drugs, while the BioSpeciFx test evaluates the
expression of a specific genes, or biomarkers, in the patient’s tumor. Our proprietary TruTumor™ PDx tumor platform
provides us with the ability to work with actual live tumor cells to study the unique biology of the patient’s tumor in order
to understand how the patient responds to treatment.
Soluble Biotech
On May 27, 2020, the Company entered into an Asset Purchase Agreement with InventaBioTech,
Inc. (“InventaBioTech”) and two of its subsidiaries, Soluble Therapeutics, Inc. (“Soluble”), and BioDtech,
Inc. (“BioDtech”), and simultaneously completed the acquisition of substantially all of Soluble’s and BioDtech’s
assets. Soluble Biotech provides optimized FDA-approved formulations for vaccines, antibodies and other protein therapeutics in
a faster and lower cost basis to its customers. The Company focuses on solubility improvements, stability studies, and protein
production. In addition, the Company enables protein degradation studies which is a new and substantial line of business for the
company.
Our subsidiary, TumorGenesis, is pursuing a new rapid approach to growing tumors in the laboratory,
which essentially “fools” the cancer cells into thinking they are still growing inside the patient. We have also announced
a proposed joint venture with GLG Pharma focused on using their combined technologies to bring personalized medicines and testing
to ovarian and breast cancer patients, especially those who present with ascites fluid (over one-third of patients).
Skyline Medical – The STREAMWAY System
Sold through our subsidiary, Skyline Medical, Inc (“Skyline Medical”), the STREAMWAY
System virtually eliminates staff exposure to blood, irrigation fluid and other potentially infectious fluids found in the healthcare
environment. Antiquated manual fluid handling methods that require hand carrying and emptying filled fluid canisters present both
an exposure risk and potential liability. Skyline Medical’s STREAMWAY System fully automates the collection, measurement,
and disposal of waste fluids and is designed to: 1) reduce overhead costs to hospitals and surgical centers; 2) improve compliance
with the Occupational Safety and Health Administration and other regulatory agency safety guidelines; 3) improve efficiency in
the operating room and radiology and endoscopy departments, thereby leading to greater profitability; and 4) provide greater environmental
stewardship by helping to eliminate the approximately 50 million potentially disease-infected canisters that go into landfills
each year in the United States.
In December 2019, we announced that we had received indications of interest from several
parties for the possible acquisition of our Skyline Medical division, and we reaffirmed that we are focusing our resources on our
precision medicine business. We continue to operate the Skyline Medical business with a focus on maximizing our strategic opportunities
with respect to this division.
STREAMWAY System Product Sales
Our domestic and international segments consist primarily of sales of the STREAMWAY System,
as well as sales of the proprietary cleaning fluid and filters for use with the STREAMWAY System. We manufacture an environmentally
conscious system for the collection and disposal of infectious fluids resulting from surgical and other medical procedures. We
have been granted patents for the STREAMWAY System in the United States, Canada, and Europe. We distribute our products to medical
facilities where bodily and irrigation fluids produced during medical procedures must be contained, measured, documented, and disposed.
Our products minimize the exposure potential to the healthcare workers who handle such fluids. In addition to simplifying the handling
of these fluids, our goal is to create products that dramatically reduce staff exposure without significant changes to established
operative procedures, historically a major industry stumbling block to innovation and product introduction.
We sell our medical device products directly to hospitals and other medical facilities using
employed sales representatives, independent contractors and distributors.
Capital Requirements
Since inception, we have been unprofitable. We incurred net losses of $(6,307,726) and $(14,414,421)
for the three and nine months ended September 30, 2020, respectively and incurred net losses of $(4,008,512) and $(5,836,592) for
the three and nine months ended September 30, 2019. As of September 30, 2020, and December 31, 2019, we had an accumulated deficit
of $96,913,132 and $82,498,711, respectively.
We have never generated sufficient revenues to fund our capital requirements. From 2009 through
2018, we built the Skyline Medical business, building a national sales network and international sales. However, the Skyline Medical
business has never reached profitability. In 2017, we determined to diversify our business by investing in ventures in the precision
medicine business, including making significant loans and investments in early stage companies. These activities led to the acquisition
of Helomics in April 2019, which has accelerated our capital needs further. We have funded our operations through a variety of
debt and equity instruments. See “Liquidity and Capital Resources – Plan of Financing; Going Concern Qualification”
and “Liquidity and Capital Resources –Financing Transactions” below.
Our future cash requirements and the adequacy of available funds depend on our ability to
generate revenues from our Helomics segment; to continue to sell our Skyline Medical products and attempt to reach profitability
in the Skyline Medical business and the availability of future financing to fulfill our business plans. See “Plan of Financing;
Going Concern Qualification” below.
Our limited history of operations, especially in our precision medicine business, and our
change in the emphasis of our business, makes prediction of future operating results difficult. We believe that period to period
comparisons of our operating results should not be relied on as predictive of our future results.
Results of Operations
Comparison of three and nine months ended September 30, 2020 and September 30, 2019
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
Difference
|
|
2020
|
|
2019
|
|
Difference
|
Revenue
|
|
$
|
480,757
|
|
|
$
|
522,696
|
|
|
$
|
(41,939
|
)
|
|
$
|
958,484
|
|
|
$
|
1,064,088
|
|
|
$
|
(105,604
|
)
|
Cost of goods sold
|
|
|
175,206
|
|
|
|
208,096
|
|
|
|
(32,890
|
)
|
|
|
353,124
|
|
|
|
400,202
|
|
|
|
(47,078
|
)
|
General and administrative expense
|
|
|
2,226,634
|
|
|
|
2,616,991
|
|
|
|
(390,357
|
)
|
|
|
8,266,927
|
|
|
|
7,425,305
|
|
|
|
841,622
|
|
Operations expense
|
|
|
568,766
|
|
|
|
707,414
|
|
|
|
(138,648
|
)
|
|
|
1,638,635
|
|
|
|
2,445,238
|
|
|
|
(806,603
|
)
|
Sales and marketing expense
|
|
|
121,514
|
|
|
|
434,955
|
|
|
|
(313,441
|
)
|
|
|
518,938
|
|
|
|
1,674,200
|
|
|
|
(1,155,262
|
)
|
Revenue. We recorded revenue of $480,757 and $522,696 in the three months ended September
30, 2020 and 2019, respectively. We sold 15 and 19 STREAMWAY System units during the three months ended September 30, 2020
and 2019, respectively.
We recorded revenue of $958,484 and $1,064,088 in the nine months ended September 30, 2020
and 2019, respectively. All revenue was derived from the Skyline Medical business except for $33,879 and $52,416 in Helomics
revenues during the nine months ended September 30, 2020 and 2019, respectively. There were 21 and 33 sales of STREAMWAY units
in the nine months ended September 30, 2020 and 2019, respectively.
Cost of goods sold. Cost of sales was $175,206 and $353,124 in the three and nine
months ended September 30, 2020 and $208,096 and $400,202 in the three and nine months ended September 30, 2019, respectively.
The gross profit margin was approximately 64% and 63% in the three and nine months ended September 30, 2020, respectively, compared
to 60% and 62% in the prior year. Our margins increased in the current year as costs were lower, which more than offset the revenue
earned in the current period. Exclusive of Helomics, gross profit margin related to the Skyline Medical business was 72% in the
nine months ended September 30, 2020 and approximately 71% in the nine months ended September 30, 2019.
General and administrative expense. General and administrative (“G&A”) expense primarily consists of management
salaries, professional fees, consulting fees, travel expense, administrative fees and general office expenses.
General and administrative (G&A) expenses decreased by $390,357 for the three months
ended September 30, 2020 compared to 2019. The decrease was primarily due to a decrease of approximately $310,000 in penalties
related to short term notes incurred in 2019. Additional decreases in severance related expenses, decreases in audit related expenses
and a decrease of $94,185 related to share-based compensation for awards made in 2019, partially offset by increases in salary
and related expenses, investor relations expenses and depreciation.
General and administrative (G&A) expenses increased by $841,622 for the nine months ended
September 30, 2020 compared to 2019. The increase was primarily due to an increase in costs related to salaries and related costs
associated with increased headcount as compared to 2019 primarily in the Helomics division and approximately $400,000 increase
in severance and related expenses, offset by 53% decline in costs related to share-based compensation for awards made in 2019.
Further declines in legal fees, penalties and bad debt expense.
Operations expense. Operations expense primarily consists of expenses related to product
development and prototyping and testing.
Operations expense decreased by $138,648 to $568,766 in the three months ended September
30, 2020 compared to 2019 and decreased by $806,603 to $1,638,635 in the nine months ended September 30, 2020 compared to 2019.
The decrease was primarily due to lower costs related to staff including share-based compensation for awards made in 2019.
Sales and marketing expense. Sales and marketing expense consisted of expenses required
to sell products through independent reps, attendance at trade shows, product literature and other sales and marketing activities.
Sales and marketing expense decreased by $313,441 to $121,514 in the three months ended
September 30, 2020. Such expenses related almost exclusively to the Skyline Medical business. The decrease in 2020 was a direct
result of the strategic decision focus on the precision medicine business and reduce the emphasis on expenditures in the Skyline
Medical business. These factors decreased our expenses for public relations and salary and travel costs for sales staff.
Loss on goodwill impairment. We incurred an impairment charge of $2,997,000
on goodwill, during the nine months ended September 30, 2020. No impairment charges were incurred during the nine months
ended September 30, 2019. The Company performs a goodwill assessment using a qualitative approach to identify and consider
the significance of relevant key factors, events, and circumstances that affect the fair value of each of our reporting
units. The Company’s goodwill relates to the Helomics operating segment and none of the Company’s other operating
segments. The Company made its qualitative evaluation considering, among other things, general macroeconomic conditions,
industry and market considerations, cost factors, overall financial performance and other relevant entity-specific
events.
During the third quarter
of 2020, the Company’s share price experienced a sustained reduction in trading values. This was also reflective of broader
difficulties in the general economic conditions due to the COVID pandemic. Based on our examination of these and other qualitative
factors at September 30, 2020, the Company concluded that further testing of goodwill was required.
Goodwill is calculated as the difference between the acquisition date fair value of
the consideration transferred and the fair value of net assets acquired in the Helomics acquisition and represents the future
economic benefits that we expect to achieve as a result of the acquisition that are not individually identified and separately
recognized. Goodwill is tested for impairment annually at the reporting unit level, or whenever events or circumstances present
an indication of impairment. The primary items that generate goodwill include the value of the synergies between the acquired
company and the Company and the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset.
Based upon the goodwill
impairment test, the Company concluded that goodwill was impaired as of the testing date. Pursuant to Accounting Standards
Update No, 2017-04, Simplifying the Test for Goodwill Impairment, the single step is to determine the estimated fair
value of our reporting unit and compare it to the carrying value of the reporting unit, including goodwill. To the extent the
carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. The
quantitative review resulted in $2,997,000 of impairment charges related to our goodwill. Our goodwill at September 30, 2020
following the impairment was $12,693,290. The Company will continue to monitor our reporting unit in an effort to determine
whether events and circumstances warrant further impairment testing which may include interim periods.
Other income. We earned other income of $44,926 in the three months ended September
30, 2020 compared to $15,084 in the comparable period in 2019 and earned other income of $97,894 in the nine months ended September
30, 2020 compared to $65,293 in the comparable period in 2019. Other income included interest and dividend income.
Other expense. We incurred other expense of $2,147,057 in the three months ended
September 30, 2020 compared to $894,811 in the comparable period in 2019 and incurred other expense of $3,993,969 in the nine months
ended September 30, 2020 compared to $2,052,522 in the comparable period in 2019. Other expense consisted primarily of net interest
expense, payment penalties, amortization of original issue discounts, and loss on debt extinguishment related to our notes payable.
Gain (loss) on derivative instruments. We incurred a gain of $1,402,768 in the
three months ended September 30, 2020 compared to $315,975 in the comparable period in 2019 and incurred gains of $1,007,794 in
the nine months ended September 30, 2020 compared to $84,627 in the comparable period in 2019 related to the changes in fair market
value on derivatives.
Gain on notes receivable associated with asset purchase. We had a gain on notes
receivable associated with the acquisition of assets from Soluble and BioDtech of $1,290,000 in the nine months ended September
30, 2020, with no comparable amounts in 2019.
Liquidity and Capital Resources
Cash Flows
Net cash used in operating activities was $9,953,785 and $5,936,803 for the nine months
ended September 30, 2020 and September 30, 2019, respectively. Cash used in operating activities increased in the 2020 period primarily
because of the increase in cash used in working capital and the additional costs related to the Helomics business.
Cash flows used in investing activities were $26,192 for the nine months ended September
30, 2020 and cash flows used in investing activities was $591,754 for the nine months ended September 30, 2019, respectively.
Cash used in the nine months ended September 30, 2020 was from the acquisition of fixed assets and cash used to maintain our intangible
assets, partially offset by the sale of certain fixed assets from our Helomics. Cash used in the nine months ended September 30,
2019 was for cash advances made to Helomics prior to the acquisition but was partially offset by cash received from Helomics on
the acquisition date.
Net cash provided by financing activities was $12,303,458 and $6,465,004 for the nine months
ended September 30, 2020 and September 30, 2019, respectively. The cash provided in the nine months ended September 30, 2020 were
primarily due to proceeds from debt issuance, proceeds from issuance of common stock, prefunded warrants, warrant exercises and
issuances related to various transactions, and proceeds from the issuance common stock pursuant to the equity line agreement, each
discussed below in “Financing Transactions”.
Liquidity, Plan of Financing, and Going Concern Qualification
Since our inception, we have incurred significant losses, and our accumulated deficit was
$96,913,132 as of September 30, 2020. We have not achieved profitability and anticipate that we will continue to incur net losses
at least through the remainder of 2020. Our operations from inception have been funded with private placements of convertible debt
securities and equity securities, public offerings, and loan agreements.
During the first quarter of 2020, we entered into short-term borrowings with an investor
for cash proceeds of $1,020,000. On October 24, 2019, we entered into an equity purchase agreement with an investor, providing
for an equity financing facility. From January 1, 2020 through November 11, 2020, we issued an aggregate 3,638,073 shares of common
stock valued at $4,887,531. The Company used a portion of the net proceeds to repay $821,916 of the short-term borrowings. In February
2020, we entered into a sale of a secured promissory note to a private investor for $1,450,000 with total net proceeds of $1,200,000.
In March 2020, we received gross proceeds of $3,498,612 from the sale of common stock, common stock equivalents, and warrants.
In May 2020, we received gross proceeds of $2,200,001 from a registered direct offering of common stock and a concurrent private
placement of warrants. The Company used approximately $482,525 of the net proceeds from the offering to repay certain indebtedness
to Oasis Capital, LLC and agreed to use the remaining net proceeds from the offering for general corporate purposes. In June 2020,
we received gross proceeds of $2,130,701 for the exercise of warrants and the issuance of additional warrants.
As a result of the extension of Amendments to and Extensions of Promissory Notes described
under “Financing Transactions” below, our secured notes are now due on March 31, 2021, with a total amount payable
on that date of $8,192,370 (including current principal and assumed interest and premium payable upon repayment), unless
portions of certain notes are converted or unless notes are further extended
As a result of our capital needs for operations and debt repayment,
we need to raise significant capital. There is no assurance that we will be successful in raising sufficient capital. The terms
of any such financing will be dilutive to our stockholders. We may also acquire technologies or companies by issuing stock or other
equity securities in addition to payment of cash, which may have the result of diluting the investment of our stockholders.
We will attempt to raise these funds through equity or debt financing. We will attempt
to raise funds from other sources that may include public offerings, private placements, alternative offerings, or other means.
If we are successful in securing adequate funding, we plan to make significant capital or equipment investments, and we will also
continue to make human resource additions in Helomics. If such financing or adequate funds from operations are not available, we
will be forced to limit our business activities, which will have a material adverse effect on our results of operations and financial
condition.
As a result of the above factors, we have concluded that there is substantial doubt about
our ability to continue as a going concern. The condensed consolidated financial statements have been prepared assuming we will
continue as a going concern. Furthermore, our former independent registered public accounting firm has indicated in their audit
opinion, contained in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December
31, 2019, that there is substantial doubt about our ability to continue as a going concern.
Financing Transactions
We have funded our operations through a combination of debt and equity instruments including
short term borrowings, and a variety of debt and equity offerings.
February 2020 Convertible Note
On February 5, 2020, we entered into a securities purchase agreement with an investor,
pursuant to which we issued a convertible promissory note to the investor in the principal amount of $1,450,000 in exchange for
cash proceeds of $1,200,000. We granted to the investor a security interest in our assets to secure repayment of the note. The
principal amount of the note accrues interest at a rate of 8% per annum (with six months of interest guaranteed). Effective July
15, 2020, the Company entered into amendments to promissory notes under which the maturity of the notes was extended to September
30, 2020. Effective September 30, 2020, the investor and the Company agreed to extend the maturity date of the note to March 31,2021.
Unless previously converted, the note will mature and become due and payable on March 31, 2021. We will incur a 20% repayment charge
in connection with any repayment of principal under the note. Subject to certain limitations, the outstanding principal amount
of the note and interest thereon are convertible at the election of the investor into shares of our common stock at a conversion
price equal to $2.589. The conversion price was amended effective September 30, 2020 to a variable price equal to 70% of the lowest
VWAP (as defined in the note) of Common Stock during the twenty (20) Trading Day (as defined in the note) period ending on either
(i) the last complete Trading Day prior to the conversion date or (ii) the conversion date, as determined by the holder in its
sole discretion upon such conversion (subject to adjustment). Advances under the note were made in three tranches. Net proceeds
of $400,000 were received for the first, second and third tranches on February 5, 2020, March 5, 2020 and April 5, 2020, respectively.
We issued to the investor five-year warrants to purchase 94,631, 92,700 and 92,700 shares of our common stock at the closing of
the first, second and third tranches, respectively, and issued warrants to purchase 92,700 shares at the closing of the third tranche.
The warrants are exercisable beginning on the sixth month anniversary of the issuance date at an exercise price equal $2.992 per
share. As additional consideration for the investment, we issued 46,875 shares of our common stock as inducement shares to the
investor at the closing of the first tranche. As of September 30, 2020, the outstanding balance on the note was $1,967,500.
March 2020 Private Placement of Common Stock and Warrants
On March 19, 2020, we sold and issued (1) 260,000 shares of common stock, at a sale price
of $2.121 per share; (2) prefunded warrants to acquire 1,390,166 shares of common stock, sold at $2.12 per share and exercisable
at an exercise price of $0.001 per share; (3) warrants to acquire 1,650,166 shares of common stock at $1.88 per share, exercisable
immediately and terminating five and one-half years after the date of issuance; and (4) warrants to acquire 1,650,166 shares of
common stock at $1.88 per share, exercisable immediately and terminating two years after the date of issuance. The gross proceeds
were $3,498,612. In the securities purchase agreement with the investors dated March 13, 2020, until 90 days after the initial
registration statement required by the Registration Rights Agreement is declared effective by the SEC, neither us nor any of our
subsidiaries will issue, enter into any agreement to issue or announce the issuance or proposed issuance of any shares of common
stock or common stock equivalents. Notwithstanding the foregoing, if, at any time following 30 days after the effective date of
such registration statement, the last closing sale price for the common stock on the Nasdaq Capital Market is at least $6.30 (subject
to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the common
stock that occur after the date of the Purchase Agreement) for three consecutive trading days, then these issuance restrictions
no longer apply.
April 2020 Paycheck Protection Program
On April 20, 2020, the Company entered into a promissory note with Park State Bank, which
provides for an unsecured loan of $541,867 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus
Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”). The promissory note has a term
of 2 years with a 1% per annum interest rate. Payments are deferred for 6 months from the date of the promissory note and the Company
can apply for forgiveness of all or a portion of the promissory note after 60 days.
Pursuant to the terms of the PPP, the promissory note, or
a portion thereof, may be forgiven if proceeds are used for qualifying expenses as described in the CARES Act, such as payroll
costs, costs used to continue group health care benefits, mortgage interest payments, rent and utilities. The Company intends to
use all proceeds for qualifying expenses. The Company has requested forgiveness; however, there is no assurance that we will
be able to obtain forgiveness of this loan. The terms of the promissory note, including eligibility and forgiveness, may be subject
to further requirements in regulations and guidance adopted by the Small Business Administration.
May 2020 Registered Direct Offering of Common Stock and Concurrent Private Placement of
Warrants
During May 2020, the Company entered into a securities purchase agreement with certain accredited
investors for a registered direct offering of 1,396,826 shares of common stock, par value $0.01 per share. The shares were registered
pursuant to the Company’s registration statement on Form S-3 (File No. 333-234073) (the “Shelf Registration Statement”)
which was declared effective by the SEC on December 20, 2019. In a concurrent private placement, the Company also issued such investors
warrants to purchase up to an aggregate of 1,396,826 shares of our common stock. The Warrants were not registered pursuant to the
Shelf Registration Statement. The Company filed a registration statement providing for the resale of the shares of common stock
issuable upon the exercise of the Warrants, which was declared effective on July 21, 2020. The Shares and the Warrants were sold
at a combined offering price of $1.575 per Share and associated Warrant. Each Warrant is exercisable immediately upon issuance
at an exercise price of $1.45 per share and will expire five and one-half years from the issue date. The sale of the offering shares
and associated warrants resulted in gross proceeds of $2,200,001 and net proceeds of $1,930,101 after deducting the placement agent
fees and estimated offering expenses payable by the Company. The Company used approximately $482,525 of the net proceeds from the
offering to repay certain indebtedness and agreed to use the remaining net proceeds from the offering for general corporate purposes.
The offering closed on May 8, 2020.
June 2020 Warrant exercise and issuance
During June 2020, the Company entered into an agreement with certain accredited institutional
investors to immediately exercise in cash an aggregate of 1,396,826 of the warrants issued in connection with the May 2020 Registered
Direct Offering, exercisable immediately at $1.45 per share of common stock at the exercise price of $1.45 per share plus an additional
$0.125 for each new warrant to purchase up to a number of shares of common stock equal to 100% of the number of shares issued pursuant
to the exercise of the existing warrants. The new warrants are exercisable immediately and have a term of five and one-half years
and an exercise price per share equal to $1.80. The Company received $2,130,701 in gross proceeds and net proceeds of $1,865,800
after deducting the placement agent fees and estimated offering expenses payable by the Company. The Company expects to use the
net proceeds of these transactions for general corporate and working capital purposes.
Amendments to and Extensions of Promissory Notes
On March 19, 2020, we entered into a third amendment to the Amended and Restated Senior Secured
Promissory Note dated September 28, 2018 and amended and restated as of February 7, 2019 issued to L2 Capital, LLC (as amended
by that certain First Amendment dated September 27, 2019 and that certain Second Amendment dated December 12, 2019, the “L2
Note”). Under the third amendment, the maturity date of the L2 Note was extended from March 28, 2020 to June 28, 2020. The
Company and the investor further agreed to extend the due date to July 15, 2020 and then in July 2020 agreed to extend to September
30, 2020. Effective September 30, 2020, the investor and the Company agreed to extend to March 31, 2021.
On March 19, 2020, we entered into an amendment to the Senior Secured Promissory Note
dated September 27, 2019 issued to Oasis Capital, LLC (the “Oasis Note”). Under the amendment, the maturity date of
the Oasis Note was extended from March 27, 2020 to June 28, 2020. In exchange for such extension, the outstanding principal amount
of the Oasis Note was increased by $300,000, such that, as of the effective date of the amendment, the outstanding principal amount
owed under the Oasis Note was $980,833. Under the amendment, through March 26, 2020, the holder waived its rights under the Oasis
Note to have the Oasis Note repaid from the proceeds of any financing consummated by us. In exchange for such waiver, we issued
30,000 shares of common stock to the holder. The Company and the investor further agreed to extend the due date to July 15, 2020
and then agreed to extend to September 30, 2020. Effective September 30, 2020, the investor and the Company agreed to extend the
due date of the note to March 31, 2021.
During the three months ended September 30, 2020, the Company entered into two amendments
to the Amended and Restated Senior Secured Promissory Note dated September 28, 2018, issued to L2 Capital, LLC. Under the amendments,
the maturity date of the note was extended from July 15, 2020 to September 30, 2020 and then again extended the due date of the
note to March 31, 2021.
During the three months ended September 30, 2020, the Company entered into two amendments
to the Senior Secured Promissory Note dated September 27, 2019 issued to Oasis Capital, LLC. Under the amendments, the maturity
date of the note was extended from July 15, 2020 to September 30, 2020 and again to March 31, 2021. In exchange for such extensions,
the outstanding principal amount of the note was increased by a total of $1,035,000. As of September 30, 2020, the outstanding
principal amount owed under the note was $2,015,833. Further, the parties agreed that effective September 30, 2020, the note shall
be convertible into shares of the Company’s common stock, at a price equal to 70% of the lowest VWAP (as defined in the note)
of the Company’s common stock during the twenty (20) Trading Day (as defined in the note) period ending on either (i) the
last complete Trading Day prior to the conversion date or (ii) the conversion date, as determined by the holder in its sole discretion
upon such conversion (subject to adjustment).
During the three months ended September 30, 2020, the Company entered into two amendments
to the Senior Secured Promissory Note dated February 5, 2020 issued to Oasis Capital, LLC. Under the amendments, the maturity date
of the note was amended to September 30, 2020 and then extended to March 31, 2021. In exchange for such extensions, the outstanding
principal amount of the note was increased by a total of $517,500, such that, as of the effective date of the amendment, the outstanding
principal amount owed under the note was $1,967,500. Further, the parties agreed that the note shall be convertible into shares
of the Company’s common stock at a price equal to 70% of the lowest VWAP (as defined in the note) of the Company’s
common stock during the twenty (20) Trading Day (as defined in the note) period ending on either (i) the last complete Trading
Day prior to the conversion date or (ii) the conversion date, as determined by the holder in its sole discretion upon such conversion
(subject to adjustment).
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation
S-K.
Accounting Standards and Recent Accounting Developments
See Note 1 - Summary of Significant Accounting Policies to the unaudited, Condensed
Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a discussion of recent accounting developments.