Notes to the Condensed Consolidated Financial Statements
June 30, 2016
(Unaudited)
1.
NATURE OF OPERATIONS
Viatar CTC Solutions Inc., formerly known as Vizio Medical Devices LLC (Vizio), and Subsidiary (as defined below) is a pre-clinical stage company focused on medical devices for oncology applications which remove circulating tumor cells for diagnostic and therapeutic purposes.
Vizio was a Delaware limited liability company with perpetual duration that was formed on December 18, 2007. On February 25, 2014, Vizio converted to a Delaware C corporation and changed its name to Viatar CTC Solutions Inc. (Viatar CTC Solutions).
Viatar CTC Solutions conducts all of its operations through its subsidiary, Viatar LLC (the Subsidiary). The Subsidiary was formed on September 23, 2010 as a Delaware limited liability company with perpetual duration.
Viatar CTC Solutions and Vizio are together referred to as the Company.
Since inception, the Company has not generated significant revenues. As a result, we have incurred significant net losses and significant negative cash flows from operations.
As reflected in the accompanying condensed consolidated financial statements, the Company incurred a net loss and net cash used in operations of $4,966,113 and $2,683,087, respectively, for the six months ended June 30, 2016. As of June 30, 2016 the Company had working capital of $1,005,900 and an accumulated deficit of $27,318,867. These conditions raise substantial doubt about the Companys ability to continue as a going concern. The Companys continued existence is dependent upon several factors, including (a) obtaining funding, whether in the form of equity, or debt investments, licensing revenues, strategic collaboration payments or grants from government or other sources, (b) success in achieving its research and development goals, (c) obtaining regulatory approvals, and (d) gaining market acceptance and/or distribution or strategic partners for its products. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company has raised approximately $21.7 million of capital since its inception, including $20.3 million from the sale of common and Series B Preferred stock, $1.4 million from convertible notes and $100,000 of demand notes. Management is continually pursuing additional funding sources.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-6
The financial statements contained herein have been prepared by the Company in accordance with GAAP for interim financial information. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. The balance sheet at December 31, 2015 was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management, the interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results of the periods presented. The results of operations for the six and three months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2015.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Viatar CTC Solutions, the Subsidiary and amounts related to a noncontrolling interest in the Subsidiary. The noncontrolling interest represents a 0.001% ownership interest in the Subsidiary at June 30, 2016 and December 31, 2015. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Significant estimates subject to such estimates and assumptions include the valuation of debt and equity instruments issued for services and in connection with agreements and contracts entered in to by the Company. Actual results could differ from those estimates.
Cash
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company held no cash equivalents at June 30, 2016 or December 31, 2015.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash, accounts payable and accrued expenses. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. As of June 30, 2016 and December 31, 2015, the carrying amount of cash and cash equivalents, accounts payable and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense is computed using straight-line methods over the estimated useful lives.
F-7
Asset lives for financial statement reporting of depreciation are:
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Machinery and equipment
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5 years
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Cost-
Method Investment
The Companys cost-method investment in a non-publicly traded company is included in the condensed consolidated balance sheets and is carried at cost, adjusted for any impairment, because the Company does not have a controlling interest and does not have the ability to exercise significant influence over this company. The Company monitors any such investment for impairment on a quarterly basis, and adjusts carrying value for any impairment charges recognized. Realized gains and losses on this investment are reported in other income (expense), net in the condensed consolidated statements of operations. As of June 30, 2016 the Company does not have any investment in any non-publicly traded company.
As of June 30, 2016 the Company does not have any investment in any non-publicly traded company. See Note 4.
Revenue Recognition
The Company records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is delivered, (3) the sales price to the customer is fixed or determinable, and (4) collectability of the related customer receivable is reasonably assured. There is no stated right of return for products. The Company generally meets these criteria upon shipment.
Cost of Sales
Cost of sales represents costs directly related to the production and manufacturing of the Companys products for commercial sale to customers. Costs include product cost, freight, packaging, and labor costs.
Research and Development
Research and development costs consist of ongoing testing (including pre-clinical and clinical), research and development, and are expensed as incurred.
Derivatives
The Company evaluated its options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815,
Derivatives and Hedging
. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassed to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liability at the fair value of the instrument on the reclassification date.
F-8
Income Taxes
In the ordinary course of business, there is inherent uncertainty in quantifying income tax positions. The Company assesses its income tax positions and records tax assets or liabilities for all years subject to examination based upon managements evaluation of the facts and circumstances and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense or benefit.
The Company files income tax returns with the U.S. federal government and various state and local jurisdictions. The Company is no longer subject to tax examinations by tax authorities for years prior to 2012.
The Company is currently under audit by New York City tax authorities for the 2011, 2012, and 2013 tax years. The Company applied for New York City biotechnology tax credits and received certificates of eligibility from the NYC Department of Finance in the amounts of $147,997, $242,016, and $236,874 for tax years 2013, 2012, and 2011, respectively. The Company received refunds for these amounts in previous years. The City of New York subsequently ruled that the Company does not qualify for the tax credits. As of June 30, 2016, the Company accrued $626,887 on the condensed consolidated balance sheets, as well as $179,736 of interest at the statutory rate which is included in accounts payable and accrued expenses on the condensed consolidated balance sheets. The Company appealed the decision made by the City of New York. While settlement discussions have been held, as of the date of this report no decision has been made regarding the appeal or settlement.
Commitments and Contingencies
The Company follows subtopic 450-20 of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) to report accounting for contingencies. Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Companys condensed consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
F-9
Stock-Based Compensation
In December 2004, the FASB issued ASC 718,
Compensation Stock Compensation
,
or
ASC 718. Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include options, restricted stock, restricted stock units, performance-based awards, share appreciation rights, and employee share purchase plans. As such, compensation cost is measured on the date of grant at fair value. The Company amortizes such compensation amounts, if any, over the respective vesting periods of the award. The Company uses the Black-Scholes-Merton option pricing model, or the Black-Scholes Model, an acceptable model in accordance with ASC 718, that requires the input of highly complex and subjective variables, including the expected life of the award and the expected stock price volatility over a period equal to or greater than the expected life of the award.
Equity instruments (Instruments) issued to anyone other than employees are recorded on the basis of the fair value of the Instruments, as required by ASC 718. ASC 505,
Equity Based Payments to Non-Employees
, or ASC 505, defines the measurement date and recognition period for such Instruments. In general, the measurement date is when either (a) a performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the Instruments are vested. The measured value related to the Instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in ASC 505.
The Company recognizes the compensation expense for all share-based compensation granted based on the grant date fair value estimated in accordance with ASC 718. The Company generally recognizes the compensation expense on a straight-line basis over the employees requisite service period.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss), adjusted for changes in income or loss that resulted from the assumed conversion of convertible shares, by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
The Company had the following potential common stock equivalents as of June 30, 2016 and 2015:
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As of
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June 30, 2016
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June 30, 2015
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Common stock warrants, exercise price range of $1.00-$2.00
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777,981
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-
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Conversion feature on convertible notes, exercise price of $2.50
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920,000
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40,000
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Conversion feature on Series B preferred stock, exercise price of $2.50
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1,693,686
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535,000
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Total common stock equivalents
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3,991,667
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575,000
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Since the Company reflected a net loss during the six and three months ended June 30, 2016 and 2015, the effect of considering any common stock equivalents would have been anti-dilutive. Therefore, a separate computation of diluted earnings (loss) per share is not presented.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation. The reclassifications did not have an impact on net loss as previously reported
.
F-10
Recent Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standards core principle (issued as ASU 2014-09 by the FASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 by one year, and would allow entities the option to early adopt the new revenue standard as of the original effective date. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating its adoption method and the impact of the standard on its condensed consolidated financial statements.
In March 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company adopted ASU 2015-03 during the quarter ended April 30, 2016.
In July 2015, the FASB issued ASU No.
2015-
11,
Inventory (Topic 330): Simplifying the Measurement of Inventory,
which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under current inventory standards, the market value requires consideration of replacement cost, net realizable value and net realizable value less an approximately normal profit margin. The new guidance replaces market with net realizable value defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within that annual period. The amendment is to be applied prospectively with early adoption permitted. The Company is in the process of evaluating the effect of the new guidance on its condensed consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entitys leasing activities. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its condensed consolidated financial statements and disclosures.
F-11
In April 2016, the FASB issued ASU No. 2016-09,
Compensation Stock Compensation
(topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
(topic 606). In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net) (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts with Customers. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity's promise to grant a license provides a customer with either a right to use an entity's intellectual property or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new standard.
In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating the impact of the new standard.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.
3.
PROPERTY AND EQUIPMENT
Property and equipment on June 30, 2016 and December 31, 2015 are as follows:
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June 30, 2016
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December 31, 2015
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Machinery and Equipment
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$
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646,328
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$
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175,583
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Less: Accumulated Depreciation
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48,675
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2,790
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$
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597,653
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$
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172,793
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Depreciation expense charged to income for the six months ended June 30, 2016 and 2015 amounted to $45,885 and $0, respectively. Depreciation expense charged to income for the three months ended June 30, 2016 and 2015 amounted to $32,228 and $0, respectively.
F-12
4.
INVESTMENT IN NON-PUBLICLY TRADED COMPANY
During the fourth quarter of 2015, the Company issued convertible promissory notes to an accredited investor for an aggregate total of 60,000 shares of stock in a non-publicly traded company which it valued at $720,000 based on the subsequent sale of a portion of those shares during the period for $12 per share. The Company sold 20,000 and 40,000 shares in November 2015 and February 2016, respectively, for approximately $240,000 and $480,000, respectively, resulting in a reduction of the investment. As of June 30, 2016, the balance of the investment was $0.
The following table summarizes the activity for the investment in non-publicly traded company: