The accompanying Notes to Consolidated Financial
Statements are an integral part of these consolidated financial statements
The accompanying Notes to Consolidated Financial
Statements are an integral part of these consolidated financial statements
The accompanying Notes to Consolidated Financial
Statements are an integral part of these consolidated financial statements
The accompanying Notes to Consolidated Financial
Statements are an integral part of these consolidated financial statements
Notes to Consolidated Financial Statements
(unaudited)
|
1.
|
Organization and Significant
Accounting Policies
|
Business
BioLife Solutions, Inc. (“BioLife,”
“us,” “we,” “our,” or the “Company”) is a developer, manufacturer and marketer
of proprietary clinical grade cell and tissue hypothermic storage and cryopreservation freeze media. Our proprietary HypoThermosol®
and CryoStor® platform of solutions are highly valued in the biobanking, drug discovery, and regenerative medicine markets.
Our biopreservation media products are serum-free and protein-free, fully defined, and are formulated to reduce preservation-induced
cell damage and death. Our enabling technology provides commercial companies and clinical researchers significant improvement in
shelf life and post-preservation viability and function of cells, tissues, and organs. Additionally, for our direct, distributor,
and contract customers, we perform custom formulation, fill, and finish services.
Basis of Presentation
We have prepared the accompanying unaudited
consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally
include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in
the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only
of normal, recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows. Our
interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for
the full year. These consolidated financial statements and accompanying notes should be read in conjunction with the financial
statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2016 on file with the SEC.
There have been no material changes to
our significant accounting policies as compared to the significant accounting policies described in the financial statements in
our Annual Report on Form 10-K for the year ended December 31, 2016.
Principles of Consolidation
The consolidated financial statements for
the three and six months ended June 30, 2016 include the accounts of the Company and its majority-owned subsidiary. All intercompany
balances and transactions have been eliminated in consolidation. The subsidiary was deconsolidated as of December 31, 2016 and
thus the financial statements for the three and six months ended June 30, 2017 only include accounts of the Company.
Equity Method Investments
We account for our 45% ownership in SAVSU
using the equity method of accounting. This method states that if the investment provides us the ability to exercise significant
influence, but not control, over the investee, we account for the investment under the equity method. Significant influence is
generally deemed to exist if the Company’s ownership interest in the voting stock of the investee ranges between 20% and
50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether
the equity method of accounting is appropriate. Under the equity method of accounting, the investment is recorded at its initial
carrying value in the consolidated balance sheet and is periodically adjusted for capital contributions, dividends received and
our share of the investee’s earnings or losses together with other-than-temporary impairments which are recorded as a component
of other income (expense), net in the consolidated statements of operations. For the three and six months ended June 30, 2017,
SAVSU’s net loss totaled $578,012 and $1,087,718 of which our 45% ownership resulted in a $260,105 and $489,473 loss, respectively,
which was recorded as “Loss from equity-method investment in SAVSU.”
Concentrations of credit risk and
business risk
In the three and six months ended June
30, 2017, no customer accounted for more than 10% of revenue. In each of the three and six months ended June 30, 2016, we derived
approximately 12% of our product revenue from one customer. No other customer accounted for more than 10% of revenue in the three
and six months ended June 30, 2016. At June 30, 2017, three customers accounted for approximately 41% of total gross accounts receivable.
At December 31, 2016, three customers accounted for approximately 45% of total gross accounts receivable.
Revenue from customers located in foreign
countries represented 14% and 18% of total revenue during the three and six months ended June 30, 2017, respectively, and 17% and
20% during the three and six months ended June 30, 2016, respectively. All revenue from foreign customers are denominated in United
States dollars.
Recent Accounting Pronouncements
In August 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments (ASU 2016-15). The updated guidance clarifies how companies present and classify certain
cash receipts and cash payments in the statement of cash flows. Adoption of ASU 2016-15 is required for fiscal reporting periods
beginning after December 15, 2017, including interim reporting periods within those fiscal years with early adoption being permitted.
We do not expect the adoption of ASU 2016-15 to have a material impact on our financial statements.
In March 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting (ASU-2016-09). The updated guidance simplifies and changes how companies
account for certain aspects of share-based payment awards to employees, including accounting for income taxes, forfeitures, and
statutory tax withholding requirements, as well as classification of certain items in the statement of cash flows. The Company
adopted ASU-2016-09 at the beginning of the first quarter of 2017. Due to the adoption of ASU 2016-09 an accounting policy change
was made to account for forfeitures as they occur and not estimated. No other material changes resulted from adopting ASU 2016-09.
We used the modified retrospective method for this adoption.
The table below shows the accumulated deficit
activity for the six months ended June 30, 2017:
|
|
Accumulative
deficit
|
|
BALANCE, December 31, 2016
|
|
$
|
(71,202,369
|
)
|
Cumulative-effect adjustment resulting from adoption of ASU 2016-09
|
|
|
(27,908
|
)
|
Net loss
|
|
|
(1,638,502
|
)
|
BALANCE, June 30, 2017
|
|
$
|
(72,868,779
|
)
|
In February 2016, FASB issued Accounting
Standards Update No. 2016-02, Leases: Topic 842 (ASU 2016-02) that replaces existing lease guidance. The new standard is intended
to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities
on the balance sheet. Under the new guidance, leases will continue to be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the Consolidated Statements of Operations. Lessor accounting is largely unchanged
under ASU 2016-02. Adoption of ASU 2016-02 is required for fiscal reporting periods beginning after December 15, 2018, including
interim reporting periods within those fiscal years with early adoption being permitted. The new standard is required to be applied
with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The
Company is currently evaluating the potential impact of the pending adoption of ASU 2016-02 on its financial statements.
In January 2016, the FASB issued Accounting
Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities: Topic 825 (ASU 2016-01).
The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition,
measurement, presentation and disclosure. Adoption of ASU 2016-01 is required for fiscal reporting periods beginning after December
15, 2017, including interim reporting periods within those fiscal years. The Company does not expect adoption of ASU 2016-01
to have a material impact on its financial statements.
In November 2015, FASB issued Accounting
Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes: Topic 740 (ASU 2015-17). Current GAAP requires the
deferred taxes for each jurisdiction to be presented as a net current asset or liability and net noncurrent asset or liability.
This requires a jurisdiction-by-jurisdiction analysis based on the classification of the assets and liabilities to which the underlying
temporary differences relate, or, in the case of loss or credit carryforwards, based on the period in which the attribute is expected
to be realized. Any valuation allowance is then required to be allocated on a pro rata basis, by jurisdiction, between current
and noncurrent deferred tax assets. The new guidance requires that all deferred tax assets and liabilities, along with any related
valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net
noncurrent deferred tax asset or liability. The guidance does not change the existing requirement that only permits offsetting
within a jurisdiction. The Company adopted ASU-2015-17 at the beginning of the first quarter of 2017 which had no significant impact
on the financial statements as the net deferred tax assets are fully reserved.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory: Topic 330 (ASU 2015-11). Topic 330 currently requires an entity to measure inventory
at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately
normal profit margin. ASU 2015-11 requires that inventory measured using either the first-in, first-out (FIFO) or average cost
method be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted ASU-2015-11
at the beginning of the first quarter of 2017 which had no significant impact on the financial statements.
On May 28, 2014, FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers, Topic 606, requiring an entity to recognize the amount of revenue to which it expects to
be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect
transition method. Early adoption is not permitted. The updated standard becomes effective for us in the first quarter of fiscal
2018. Based on our analysis thus far, we believe the impact of adopting the new guidance will be immaterial to our annual and interim
financial statements. The Company will also be required to make additional disclosures under the new guidance. We continue to assess
the impact on all areas of our revenue recognition, disclosure requirements, and changes that may be necessary to our internal
controls over financial reporting. We will adopt this standard in the first quarter of 2018.
With the exception of the new standards
discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance,
to our financial statements.
|
2.
|
Fair Value Measurement
|
In accordance with FASB ASC Topic 820,
“Fair Value Measurements and Disclosures,” (“ASC Topic 820”), the Company measures its cash and cash equivalents
and short term investments at fair value on a recurring basis. ASC Topic 820 clarifies that fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 – Observable inputs that
reflect quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Observable inputs other
than quoted prices included in Level 1 for similar assets or liabilities, quoted prices in markets that are not active or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets
or liabilities.
Level 3 – Unobservable data points
for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
As of June 30, 2017 and December 31, 2016,
the Company does not have liabilities that are measured at fair value.
The following tables set forth the Company’s
financial assets measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, based on
the three-tier fair value hierarchy:
As of June 30, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Bank deposits
|
|
$
|
2,261,474
|
|
|
$
|
—
|
|
|
$
|
2,261,474
|
|
Money market funds
|
|
|
53,159
|
|
|
|
—
|
|
|
|
53,159
|
|
Cash and cash equivalents
|
|
|
2,314,633
|
|
|
|
—
|
|
|
|
2,314,633
|
|
Total
|
|
$
|
2,314,633
|
|
|
$
|
—
|
|
|
$
|
2,314,633
|
|
As of December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Bank deposits
|
|
$
|
1,352,541
|
|
|
$
|
—
|
|
|
$
|
1,352,541
|
|
Money market funds
|
|
|
53,285
|
|
|
|
—
|
|
|
|
53,285
|
|
Cash and cash equivalents
|
|
|
1,405,826
|
|
|
|
—
|
|
|
|
1,405,826
|
|
Total
|
|
$
|
1,405,826
|
|
|
$
|
—
|
|
|
$
|
1,405,826
|
|
The fair values of bank deposits and money
market funds classified as Level 1 were derived from quoted market prices as active markets for these instruments exist. The Company
has no level 2 or level 3 financial assets. The Company did not have any transfers between Level 1 and Level 2 of the fair value
hierarchy during the six months ended June 30, 2017 and the twelve months ended December 31, 2016.
Inventory consists of the following at June 30, 2017 and December 31,
2016:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
298,337
|
|
|
$
|
531,053
|
|
Work in progress
|
|
|
337,635
|
|
|
|
370,740
|
|
Finished goods
|
|
|
1,133,098
|
|
|
|
855,991
|
|
Total
|
|
$
|
1,769,070
|
|
|
$
|
1,757,784
|
|
Deferred rent consists of the following
at June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Landlord-funded leasehold improvements
|
|
$
|
1,124,790
|
|
|
$
|
1,124,790
|
|
Less accumulated amortization
|
|
|
(566,026
|
)
|
|
|
(502,527
|
)
|
Total
|
|
|
558,764
|
|
|
|
622,263
|
|
Straight line rent adjustment
|
|
|
130,984
|
|
|
|
193,403
|
|
Total deferred rent
|
|
$
|
689,748
|
|
|
$
|
815,666
|
|
During the three and six month periods
ended June 30, 2017, the Company recorded $31,750 and $63,499, respectively, in deferred rent amortization of these landlord funded
leasehold improvements. During the three and six month periods ended June 30, 2016, the Company recorded $31,749 and $63,499, respectively,
in deferred rent amortization of these landlord funded leasehold improvements.
Straight line rent adjustment represents
the difference between cash rent payments and the recognition of rent expense on a straight-line basis over the terms of the lease.
5.
|
Share-based Compensation
|
Service Vesting Based Stock Options
The following is a summary of service vesting
based related stock option activity for the six month period ended June 30, 2017, and the status of stock options outstanding at
June 30, 2017:
|
|
Six Month Period Ended
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
Outstanding at beginning of year
|
|
|
2,513,861
|
|
|
$
|
1.78
|
|
Granted
|
|
|
110,000
|
|
|
$
|
1.79
|
|
Exercised
|
|
|
(131,427
|
)
|
|
$
|
1.17
|
|
Forfeited
|
|
|
(47,783
|
)
|
|
$
|
3.59
|
|
Expired
|
|
|
(91,068
|
)
|
|
$
|
1.45
|
|
Outstanding at June 30, 2017
|
|
|
2,353,583
|
|
|
$
|
1.79
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at June 30, 2017
|
|
|
1,402,185
|
|
|
$
|
1.71
|
|
Performance-based Stock Options
The Company’s Board of Directors
has implemented a Management Performance Bonus Plan for 2017. Based on achieving varying levels of specified revenue for the year
ending December 31, 2017, up to 1,000,000 options to purchase shares of the Company’s common stock may be vested. The options
have an exercise price of $1.64, and if revenue levels are met, vest 50% on the release of the Company’s audited financial
statements for 2017, and 50% one year thereafter. If the minimum performance targets are not achieved, no options will vest. The
Company currently deems it probable that the 1,000,000 options will vest and is recognizing stock compensation for these options
over the requisite service period.
As of June 30, 2017, there was $2,280,077
of aggregate intrinsic value of outstanding stock options, including $1,063,392 of aggregate intrinsic value of exercisable stock
options. Intrinsic value is the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between
the Company’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number
of shares) that would have been received by the option holders had all option holders exercised their options on June 30, 2017.
This amount will change based on the fair market value of the Company’s stock. During the three and six months ended June
30, 2017 intrinsic value of awards exercised was $21,104 and $91,817, respectively. Weighted average grant date fair value for
options granted during the six months ended June 30, 2017 was $1.13 per share and $1.24 and $1.25 for the three and six months
ended June 30, 2016, respectively. There were no options granted in the three months ended June 30, 2017.
The fair value of share-based payments
made with stock options to employees and non-employee directors was estimated on the measurement date using the Black-Scholes model
using the following weighted average assumptions.
|
|
Three Month Period Ended
|
|
|
Six Month Period Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Risk free interest rate
|
|
|
N/A
|
|
|
|
1.45
|
%
|
|
|
2.07
|
%
|
|
|
1.52
|
%
|
Dividend yield
|
|
|
N/A
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected term (in years)
|
|
|
N/A
|
|
|
|
7.00
|
|
|
|
5.18
|
|
|
|
7.00
|
|
Volatility
|
|
|
N/A
|
|
|
|
75
|
%
|
|
|
75
|
%
|
|
|
75
|
%
|
We recognized stock compensation expense
of $273,442 and $232,602, related to stock options for the three months ended June 30, 2017 and June 30, 2016, respectively and
$569,273 and $280,412, related to stock options for the six months ended June 30, 2017 and June 30, 2016, respectively. As of June
30, 2017, we had approximately $2,070,255 of unrecognized compensation expense related to unvested stock options. We expect to
recognize this compensation expense over a weighted average period of approximately 2.0 years.
Restricted Stock
The following is a summary of restricted
stock activity for the six month period ended June 30, 2017, and the status of unvested restricted stock outstanding at June 30,
2017:
|
|
Six Month Period Ended
|
|
|
|
June 30, 2017
|
|
|
|
Number of
Restricted
Shares
|
|
|
Grant-Date
Fair Value
|
|
Outstanding at beginning of year
|
|
|
98,439
|
|
|
$
|
1.90
|
|
Granted
|
|
|
207,350
|
|
|
$
|
1.76
|
|
Vested
|
|
|
(32,813
|
)
|
|
$
|
1.90
|
|
Outstanding at June 30, 2017
|
|
|
272,976
|
|
|
$
|
1.79
|
|
The aggregate fair value of the awards
granted during the three and six months ended June 30, 2017 was $0 and $364,936, respectively, and during the three and six months
ended June 30, 2016 was $0 and $380,000, respectively, which represents the market value of our common stock on the date that the
restricted stock awards were granted. The aggregate fair value of the restricted stock awards that vested for the three months
ended June 30, 2017 and 2016 was $20,123 and $21,704, respectively and for the six months ended June 30, 2017 and 2016 was $61,157
and $116,704, respectively.
We recognized stock compensation expense
of $40,432 and $23,633 related to restricted stock awards for the three months ended June 30, 2017 and 2016, respectively and $74,496
and $122,351 related to restricted stock awards for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017,
there was $447,965 in unrecognized compensation costs related to restricted stock awards. We expect to recognize those costs over
3.1 years.
We recorded stock compensation expense
for the three and six month periods ended June 30, 2017 and 2016, as follows:
|
|
Three Month Period Ended
|
|
|
Six Month Period Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Research and development costs
|
|
$
|
58,815
|
|
|
$
|
47,366
|
|
|
$
|
118,080
|
|
|
$
|
84,835
|
|
Sales and marketing costs
|
|
|
58,051
|
|
|
|
54,748
|
|
|
|
117,670
|
|
|
|
118,247
|
|
General and administrative costs
|
|
|
154,983
|
|
|
|
142,367
|
|
|
|
323,181
|
|
|
|
219,878
|
|
Cost of product sales
|
|
|
42,024
|
|
|
|
11,754
|
|
|
|
84,837
|
|
|
|
(20,197
|
)
|
Total
|
|
$
|
313,873
|
|
|
$
|
256,235
|
|
|
$
|
643,768
|
|
|
$
|
402,763
|
|
Management adopted ASU 2016-09 on January
1, 2017 and no longer applies an estimated forfeiture rate. As a result, we had a cumulative-effect adjustment to retained earnings
and additional paid in capital of $27,908 resulting from adoption. The estimated forfeiture rate derived from historical employee
termination data applied for the three and six months ended June 30, 2016 was approximately 8.1%.
At June 30, 2017 and December 31, 2016,
we had 7,460,283 and 7,603,141 warrants outstanding, respectively and exercisable with a weighted average exercise price of $4.53
and $4.46, respectively. The outstanding warrants have expiration dates between March 2021 and May 2021. During the three
month period ended June 30, 2017, 142,858 warrants were exercised with a weighted average exercise price of $1.12.
|
7.
|
Net Loss per Common Share
|
Basic net loss per common share is calculated
by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share
is calculated using the weighted average number of common shares outstanding plus dilutive common stock equivalents outstanding
during the period. Common stock equivalents are excluded for the three and six month periods ended June 30, 2017 and 2016, since
the effect is anti-dilutive due to the Company’s net losses. Common stock equivalents include stock options and warrants.
Basic weighted average common shares outstanding,
and the potentially dilutive securities excluded from loss per share computations because they are anti-dilutive, are as follows
as of June 30, 2017 and 2016, respectively:
|
|
Three Month Period Ended
|
|
|
Six Month Period Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic and diluted weighted average common stock shares outstanding
|
|
|
13,100,820
|
|
|
|
12,568,041
|
|
|
|
13,033,106
|
|
|
|
12,512,949
|
|
Potentially dilutive securities excluded from loss per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
3,353,583
|
|
|
|
2,731,613
|
|
|
|
3,353,583
|
|
|
|
2,731,613
|
|
Common stock purchase warrants
|
|
|
7,460,283
|
|
|
|
7,745,997
|
|
|
|
7,460,283
|
|
|
|
7,745,997
|
|
Restricted stock unvested
|
|
|
272,976
|
|
|
|
137,502
|
|
|
|
272,976
|
|
|
|
137,502
|
|
|
8.
|
Commitments & Contingencies
|
Leases
We lease approximately 30,000 square feet
in our Bothell, Washington headquarters. The term of our lease continues until July 31, 2021 with two options to extend the term
of the lease, each of which is for an additional period of five years, with the first extension term commencing, if at all, on
August 1, 2021, and the second extension term commencing, if at all, immediately following the expiration of the first extension
term. In accordance with the amended lease agreement, our monthly base rent is approximately $57,000 at June 30, 2017, with scheduled
annual increases each August and again in October for the most recent amendment. We are also required to pay an amount equal to
the Company’s proportionate share of certain taxes and operating expenses.
Employment agreements
We have employment agreements with the
Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, Vice President of Operations, Vice President of Marketing
and Vice President of Sales. None of these employment agreements is for a definitive period, but rather each will continue indefinitely
until terminated in accordance with its terms. The agreements provide for a base annual salary, payable in monthly (or shorter)
installments. In addition, the agreement with the Chief Executive Officer provides for incentive bonuses at the discretion of the
Board of Directors. Under certain conditions and for certain of these officers, we may be required to pay additional amounts upon
terminating the officer or upon the officer resigning for good reason.
Litigation
From time to time, the Company is subject
to various legal proceedings that arise in the ordinary course of business, none of which are currently material to the Company’s
business.
On June 30,
2017, we modified our existing credit facility with
WAVI Holding AG, ("WAVI"), a
principal stockholder of the Company. Pursuant to the modification, WAVI agreed to exchange its existing credit facility,
including $4.25 million of principal and accrued interest outstanding as of June 1, 2017, for 4,250 shares of the Company's Series
A Preferred Stock, which has a fixed, aggregate stated value of $4.25 million. The preferred shares being issued to WAVI are not
convertible into any other form of equity and can only be redeemed at the stated value of $4.25 million at times and in amounts
solely determined by the Company. The preferred shares also carry an annual cash dividend of 10% of the outstanding stated value,
calculated and payable in arrears on a quarterly basis. The preferred shares have a liquidation preference over the common shareholders.
No additional consideration was provided to WAVI for entering into this agreement. The exchange resulted in no gain or loss on
the transaction. In both the three and six months ended June 30, 2017 we did not pay or accrue any dividends on the preferred stock.