FORM 1-SA FINANCIAL STATEMENTS
TERAPHYSICS CORPORATION
AS OF JUNE 30, 2017 AND DECEMBER 31, 2016 AND FOR THE SIX-MONTH PERIODS ENDING JUNE 30, 2017 AND 2016
1
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of our operations together with our unaudited financial statements and related notes appearing at the end of this semiannual report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled "Risk Factors" in our 1A Offering Circular and elsewhere in this document.
Since our incorporation in 2004, we have been engaged primarily in the reinvention and miniaturization of high frequency vacuum electronic devices (VEDs) and the raising of funds from government agencies and investors to support those efforts. We are considered to be a developmental stage company, since we are devoting substantially all of our efforts to establish our technology and business relationships, and planned principal operations have not commenced. We successfully tested VED prototypes in October 2014 and since then have continued the advancement of VED technology through R & D efforts and additional developmental contracts with several U.S. governmental agencies.
Our cash inflow since inception has been $21,563,100 from two primary sources:
· Government Agency Contracts $ 6,744,600
· Independent Investors $ 14,818,500
· Total: $21,563,100
Operating Results & Trend Information
We have not generated commercial revenues to date and do not anticipate doing so until mid-2018 (our original estimate was late 2017); as anticipated funding has been delayed by approximately one year. Over the past several years we have developed breakthrough wireless technology that operates at high millimeter wave (mmw) frequencies generating power levels not previously attainable by other wireless technologies. The industry recently recognized the potential for mmw devices to meet 5G data transmission requirements expected to come on stream in 2020 and beyond. 5G standards will not be promulgated until 2019 allowing the Company sufficient time for commercialization.
Next Generation Mobile Networks Alliance (NGMN) published a 5G roadmap for the launch of first commercial systems in 2020. At the same time, it defined a reasonable period for all of the industry to carry out the required activities (such as standardization, testing, trials) ensuring availability of mature technology solutions for the operators and attractive services for the customers at launch date. The key milestones are:
-
Detailed requirements ready end of 2016
-
Initial system design in 2018
-
Trials start in 2019
-
Standards ready end of 2019
-
First commercial systems ready in 2020
2
Future Growth Plan
As bandwidth requirements continue to grow exponentially a massive densification of "micro cells" is underway in wireless backhaul to increase data transmission capacities between the fiber optic Internet backbone and smart device users. This space is readily adaptable to the implementation of our high bandwidth mmw technology to substantially enhance spectrum reuse:
To gain industry acceptance of our transformational technology we will construct a prototype high mmw frequency data transmission backhaul system to demonstrate our high data transmission capabilities. This initial phase of commercialization will require the construction of a pilot manufacturing facility that we plan on bringing on stream in late-2018 to begin demonstrations in the first half of 2019.
On July 2, 2015 we initiated a new $750,000 contract with the Air Force Research Laboratory (AFRL) that was completed in September 2017. This contract resulted in $170,799 in revenue during 2015, $557,279 during 2016, and $35,618 in revenue during the first six-month period ended June 30, 2017. In January 2016 we were selected by DARPA for a $1.57 million, four-year award from the INVEST program which began in April 2016. Revenues recognized in 2016 were $189,735 for this program, and $272,134 in the first six months of 2017. All of these contracts support the development of technology that parallels our interest in commercial telecommunications.
Liquidity and Capital Resources
As of June 30, 2017, we had cash of $508 and current assets of $530,289. At that date we had liabilities totaling $5,494,101, with almost 95% payable to:
·
Founders and key employees deferred compensation - $2,524,741
·
A law firm and patent counsel
- $1,120,677
·
Professional service firms
- $ 319,264
·
Individuals
- $ 973,036
·
Affiliates
- $ 326,189
The majority of the above individuals and organizations have agreed to forgo payment of obligations due to them until the Company experiences a monetization event in excess of $50 million. The Company intends to settle all or a portion of these obligations from proceeds of that monetization event or the hypothecation of 1 million shares of Teraphysics Founder common shares at market price that have been reserved for this purpose. We do not intend to pay any of these obligations from the proceeds from this offering.
Plan of Operations
For the immediate twelve months following the contemplated equity funding reflected in this offering circular, the Company will undertake the first phase of its commercialization plan to build a micro backhaul system, equip a test laboratory. In following years funds will be used to develop a pilot plant, acquire production capacity, inaugural steps in developing our stratospheric technology platform, and the enhancement of our intellectual property in the higher frequency millimeter wave wireless transmission frequencies.
A major focus and goal of our strategy will be the inclusion in 2019 of our unique mmw technology in the 5G standards that will be established and promulgated in accordance with the roadmap established at the March 2015 Barcelona Mobile World Congress.
3
The Company has also engaged an experienced consultant, with a long and successful career in the communications industry, to develop a global wireless strategy to maximize the commercial and enterprise values of the Company’s unique high frequency wireless technology. In order to identify a global leader of this consultants’ caliber the Company engaged a top tier executive search firm. The Company has paid this executive search firm a fee of 352,000 shares of its common stock for completing this successful engagement. The Company has further engaged this executive search firm on a pay for services basis to identify and recruit world class directors that will add stature to its board of directors as it implements its commercialization plan through the use of proceeds from its planned Reg A+ offering as a means to an initial public offering (IPO) on the NASDAQ Exchange sometime in the next 18-24 months following the closing of the offering.
4
TERAPHYSICS CORPORATION | ||||||||||
BALANCE SHEETS | ||||||||||
As of June 30, 2017 and December 31, 2016 | ||||||||||
2017 | 2016 | |||||||||
ASSETS | ||||||||||
Current Assets: | ||||||||||
Cash and cash equivalents | $ 508 | $ 13,960 | ||||||||
Accounts receivable - government contracts | 71,591 | 79,505 | ||||||||
Accounts receivable - MM Link | 38,763 | |||||||||
Accrued interest receivable | 53,100 | 47,200 | ||||||||
Shareholder loans | 35,000 | 35,000 | ||||||||
Deferred offering costs | 300,670 | 129,944 | ||||||||
Prepaid expenses | 30,657 | 635 | ||||||||
Total Current Assets | 530,289 | 306,245 | ||||||||
Property and Equipment | ||||||||||
Property and equipment, at cost | 33,503 | 33,503 | ||||||||
Less: Accumulated depreciation | (30,719) | (30,493) | ||||||||
Total Property and Equipment | 2,784 | 3,010 | ||||||||
Other Assets: | ||||||||||
Note receivable from affiliate | 807,739 | 595,842 | ||||||||
Total Other Assets | 807,739 | 595,842 | ||||||||
TOTAL ASSETS | $ 1,340,811 | $ 905,097 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) | ||||||||||
Liabilities: | ||||||||||
Current Liabilities: | ||||||||||
Accounts payable | $ 1,312,953 | $ 1,175,461 | ||||||||
Accrued payroll | 33,087 | 29,847 | ||||||||
Accrued expenses | 63,694 | 63,694 | ||||||||
Notes payable - current portion | 498,648 | 477,485 | ||||||||
Total Current Liabilities | 1,908,382 | 1,746,487 | ||||||||
Long-Term Liabilities: | ||||||||||
Notes payable - net of current portion | 3,585,718 | 3,419,653 | ||||||||
Total Liabilities | 5,494,101 | 5,166,140 | ||||||||
Stockholders' Equity (Deficiency): | ||||||||||
Series A convertible preferred stock; $0.0001 par, 5,000,000 | ||||||||||
shares authorized, 0 and 213,000 shares issued and outstanding | ||||||||||
at June 30, 2017 and December 31, 2016 respectively. | ||||||||||
Convertible into two shares of common stock | 129 | 129 | ||||||||
Common stock, $0.0001 par, 95,000,000 shares authorized, | ||||||||||
65,275,958 and 63,634,648 shares issued and outstanding | ||||||||||
at June 30, 2017 and December 31, 2016, respectively. | 6,228 | 6,113 | ||||||||
Additional paid-in capital | 18,363,148 | 17,226,952 | ||||||||
Note receivable for capital contribution in exchange for stock | (590,000) | (590,000) | ||||||||
Accumulated deficit | (21,590,294) | (20,561,738) | ||||||||
(3,810,790) | (3,918,544) | |||||||||
Less: Treasury stock - 336,500 shares as of June 30, 2017 and | ||||||||||
December 31, 2016, at cost | (342,500) | (342,500) | ||||||||
Total Stockholders' Equity (Deficiency) | (4,153,290) | (4,261,044) | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS" EQUITY (DEFICIENCY) | $ 1,340,811 | $ 905,097 |
5
TERAPHYSICS CORPORATION | ||||||||
STATEMENTS OF OPERATIONS | ||||||||
For the six months ended June 30, 2017 and 2016 | ||||||||
2017 | 2016 | |||||||
Government grant revenue | $ 307,752 | $ 329,518 | ||||||
Technology royalties - related party | 46,197 | 52,294 | ||||||
Net revenues | 353,950 | 381,812 | ||||||
Cost of net revenues | - | - | ||||||
Gross Profit (Loss) | 353,950 | 381,812 | ||||||
Operating Expenses: | ||||||||
General & administrative | 1,077,267 | 885,502 | ||||||
Research & development | 282,279 | 282,456 | ||||||
Marketing | 892 | 4,760 | ||||||
Total Operating Expenses | 1,360,437 | 1,172,718 | ||||||
Loss from operations | (1,006,488) | (790,906) | ||||||
Other Income (Expense) | ||||||||
Management fee income | 24,000 | 24,000 | ||||||
Interest income | 5,900 | 5,900 | ||||||
Interest income - related party | 15,962 | 6,635 | ||||||
Interest expense | (67,930) | (76,463) | ||||||
Total Other Income (Expense) | (22,068) | (39,928) | ||||||
Provision for Income Taxes | - | - | ||||||
Net Loss | $ (1,028,556) | $ (830,834) | ||||||
Weighted average common shares outstanding | ||||||||
-Basic and Diluted | 62,343,148 | |||||||
Net loss per common share | ||||||||
-Basic and Diluted | $ (0.02) | |||||||
|
6
TERAPHYSICS CORPORATION | |||||||||
STATEMENTS OF CASH FLOWS | |||||||||
For the six months ended June 30, 2017 and 2016 | |||||||||
2017 | 2016 | ||||||||
Cash Flows From Operating Activities | |||||||||
Net Loss | $ (1,028,556) | $ (830,834) | |||||||
Adjustments to reconcile net loss to net cash used | |||||||||
in operating activities: | |||||||||
Depreciation and amortization | 226 | ||||||||
Deferred Compensation | 109,798 | 184,755 | |||||||
Services paid in common stock | 307,810 | 372,750 | |||||||
Changes in operating assets and liabilities: | |||||||||
(Increase)/Decrease in accounts receivable | (30,849) | (54,550) | |||||||
(Increase)/Decrease in prepaid expenses | (30,000) | 42,927 | |||||||
(Increase)/Decrease in employee advances | (22) | (188,417) | |||||||
(Increase)/Decrease in deferred offering costs | (170,726) | (95,707) | |||||||
(Increase)/Decrease in accrued interest receivable | (5,900) | (5,900) | |||||||
Increase/(Decrease) in accounts payable | 137,492 | 42,002 | |||||||
Increase/(Decrease) in accrued expenses | 3,240 | 24,923 | |||||||
Increase/(Decrease) in accrued interest on notes payable | 88,255 | 74,876 | |||||||
Net Cash Used In Operating Activities | (619,232) | (433,175) | |||||||
Cash Flows From Investing Activities | |||||||||
Issuance of note receivable from affiliate | (211,896) | (157,898) | |||||||
Net Cash Used In Investing Activities | (211,896) | (157,898) | |||||||
Cash Flows From Financing Activities | |||||||||
Proceeds from issuance of common stock | 807,500 | 851,000 | |||||||
Net repayments on notes payable | (30,825) | (10,524) | |||||||
Proceeds from issuance of notes payable | 20,000 | 65,000 | |||||||
Proceeds from shareholder loan | 50,000 | ||||||||
Proceeds from warrants exercised | 37,500 | ||||||||
Proceeds from stock options exercised | 21,000 | 20,000 | |||||||
Net Cash Provided By Financing Activities | 817,675 | 1,012,976 | |||||||
Net Change In Cash | (13,453) | 421,904 | |||||||
Cash at Beginning of Period | 13,960 | 14,937 | |||||||
Cash at End of Period | $ 508 | $ 436,841 | |||||||
Supplemental Disclosure of Cash Flow Information | |||||||||
Cash paid for interest | 1,500 | 1,586 | |||||||
Supplemental Disclosure of Non-Cash Financing Activities | |||||||||
Compensation earned and expensed, paid by note payable | 109,798 | 184,755 | |||||||
Services paid through issuance of common stock | 318,310 | 372,750 |
7
8
NOTES TO FINANCIAL STATEMENTS FOR PERIOD ENDING JUNE 30, 2017
NOTE 1: NATURE OF OPERATIONS
Teraphysics Corporation (the “Company”), formerly Teravac Corporation, was incorporated on November 16, 2004 under the laws of the State of Delaware and is licensed to do business in the State of Ohio, where its principal offices are located. The Company is developing high frequency amplifiers to enable Terahertz (THz) and millimeter wave (mmw) devices in order to bring them to commercial viability for implementation in the Communications, Aerospace, Food Safety, Medical, Pharmaceutical, Security, Solar, Energy and Automotive markets.
As of June 30, 2017, the Company has not commenced commercialization activities. Since inception, the Company has devoted substantially all of its efforts to research and development of a unique and powerful high frequency amplifier. Once the Company commences planned principal operations of producing and selling its products, it will incur significant additional expenses in conjunction with producing and selling products commercially. The Company is dependent upon additional capital resources for the commencement of its planned principal operations and is subject to significant risks and uncertainties; including failing to secure additional funding to operationalize the Company’s planned operations or failing to profitably produce and sell its products.
NOTE 2: GOING CONCERN
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced negative cash flows from operations and net losses since inception, including a net loss of $1,028,556 for the six-month period that ended June 30, 2017, and an accumulated deficit of $21,590,294 as of June 30, 2017, and has not yet realized any commercial revenues from the sale of its products. The Company’s ability to continue as a going concern for the next twelve months is dependent upon its ability to raise additional capital to finance its operations. The Company’s failure to raise capital could have a negative impact on the financial condition and the ability to pursue certain business strategies.
The Company is seeking funding through interim financing, which could be a combination of equity and/or loan funds. In the event the Company does not complete its interim funding, it may seek additional funding through private financings. No assurance can be given that the Company will be successful in these efforts, as the Company may not be able to obtain financing on acceptable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP). All of the Company's operations are considered one operating segment. In the opinion of management all adjustments necessary in order to make the interim financial statements not misleading have been included.
Related Party Transactions
The Company’s significant accounting policies are disclosed in the audited financial statements for the year ended December 31, 2016 included in the Form 1-A filing with the Securities and Exchange Commission (SEC). Except as noted below, there have been no changes to the Company’s significant accounting policies as discussed in the Form 1-A filing.
9
Technology Royalties
The Company has a royalty arrangement for an unrelated technology with Genvac AeroSpace, Inc., a related party under common control. The Company receives a percentage of its gross revenues on a monthly basis which expires on December 31, 2026 and is automatically renewable for two-year terms until the agreement is otherwise terminated in accordance with the terms of the agreement. The Company recognized royalty fee income in the amount of $46,197 and $52,294 during the six-month periods ended June 30, 2017 and 2016, respectively.
Government Grant Revenue
The Company has been awarded certain federally funded research grants through DARPA and the United States Air Force. The Company has recognized revenue of $307,752 and $329,518 related to these grants during the six-month periods ended June 30, 2017 and 2016, respectively. The direct expenses associated with these grants were charged to research and development expenses as no products or services were produced under these arrangements, and amounted to $192,587 and $213,307 for the six-month periods ended June 30, 2017 and 2016, respectively.
Research and Development
Research and development costs are expensed as incurred. Total expense related to research and development was $282,279 and $282,456 for the six-month periods ended June 30, 2017 and 2016, respectively.
Marketing Costs
The Company participates in various advertising and marketing programs. All costs related to marketing and advertising the Company are expensed in the period incurred. Marketing costs charged to operations were $892 and $4,760, for the six-month periods ended June 30, 2017 and 2016, respectively.
Offering Costs
The Company complies with the requirements of FASB ASC 340-10-S99-1 with regards to offering costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed. $300,670 and $129,944 of offering costs were capitalized to the balance sheet as of June 30, 2017 and December 31, 2016, respectively.
Net Earnings or Loss per Share
Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Basic and diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period. Potentially dilutive securities are excluded from the computation of the diluted net earnings or loss per share if their inclusion would be anti-dilutive, and consist of the following items on the basis of common shares upon full conversion reflected below:
June 30, 2017 | December 31, 2016 | |||
Preferred Stock | 0 | 426,000 | ||
Stock Options | 2,798,000 | 1,753,000 | ||
Common Stock Warrants | 1,546,000 | 1,526,000 |
As all potentially dilutive securities are anti-dilutive, diluted net loss per share is the same as basic net loss per share for each period.
10
NOTE 4: NOTES PAYABLE
Notes payable as of June 30, 2017and December 31, 2016, respectively, are as follows:
Current Portion June 30, 2017 |
| Total Obligation June 30, 2017 | Total Obligation December 31, 2016 | ||
* Unsecured notes payable to employees for unpaid compensation, due six months after IPO or qualifying financing of greater than $50,000,000, including accrued interest at prime plus 1.0% (5.25% as of June 30, 2017 and 4.75% as of December 31, 2016 respectively.) of $267,284 and $217,248 as of June 30, 2017 and December 31, 2016, respectively. These notes can be repaid early with no penalty. | $ - | $ 2,524,751 | $ 2,364,917 | ||
* Unsecured notes payable to related party legal firm for unpaid legal fees, due six months after IPO or qualifying financing of greater than $50,000,000, including accrued interest at prime plus 1.0% (5.25% as of June 30, 2017 and 4.75% as of December 31, 2016 respectively.) These loans can be repaid early with no penalty. Includes accrued interest of $87,832 and $80,026 as of June 30, 2017 and December 31, 2016, respectively. | - | 408,064 | 400,259 | ||
* Unsecured note payable to related party, GenVac Holdings, due six months after IPO or qualifying financing of greater than $50,000,000, including accrued interest at 6% of $119,088 and $113,826 as of June 30, 2017 and December 31, 2016, respectively. | - | 292,134 | 286,872 | ||
* Unsecured note payable to related party, GenVac Holdings, due six months after IPO or qualifying financing of greater than $50,000,000, including accrued interest at 6% of $61,984 and $58,338 as of June 30, 2017 and December 31, 2016, respectively. | - | 183,521 | 179,875 | ||
* Unsecured note payable to FH Partners, guaranteed by related parties, due upon presentation, including accrued interest at 6% of $0 and $25,876 as of June 30, 2017 and December 31, 2016, respectively. | - | - | 161,035 | ||
Unsecured note payable to Radiance Capital Receivables Seventeen, LLC; this amends and restates previous note payable to FH Partners, effective January 31, 2017. Amount due is $135,646.78, plus interest at 6% per annum, payable in six monthly installments of $1,500.00 through June 30, 2017, followed by 35 monthly installments of $3,977.55 through June 30, 2020, and one final installment of $3,352.98. | 41,034 | 130,210 | - | ||
* Unsecured note payable to a shareholder due and renewable every 90 days with interest at 6% payable quarterly. This loan included provisions which required the Company to award 25,000 warrants for common stock (see Note 6) each quarter through 11/30/2012. | 50,000 | 50,000 | 50,000 | ||
* Unsecured note payable to a shareholder, due six months after IPO or qualifying financing of greater than $50,000,000, including accrued interest at 6% of $15,892 and $15,652 as of June 30, 2017 and December 31, 2016, respectively. | - | 26,540 | 26,300 | ||
*Unsecured note payable to related party, GanzCorp, the note is past its maturity and due upon presentation, including accrued interest at 6% of $19,063 and $18,313 as of June 30, 2017 and December 31, 2016, respectively. The note is secured by a patent security agreement which includes two patents held by the Company. | 44,063 | 44,063 | 43,313 | ||
Unsecured promissory notes payable to 16 investors for principal amounts ranging from $10,000 to $50,000. The notes mature two years from each issuance, including interest at 10% per annum. Each note includes a common stock warrant, for common shares ranging from 10,000 to 50,000 at on a cashless basis, exercisable at the maturity date of the notes. | 363,551 | 425,083 | 384,567 | ||
$ 498,648 | 4,084,366 | 3,897,138 | |||
Less: current portion | 498,648 | 477,485 | |||
Long-term portion of notes payable | 3,585,718 | 3,419,653 | |||
* - denotes related party |
11
$3,172,010 of the long-term notes payable are due six months following an initial public offering by the Company, or another monetization event providing proceeds in excess of $50,000,000. Accordingly, these notes have been included in the following schedule of future maturities to June 30, 2018, which is the Company’s best estimate of when a qualifying event will cause these notes to come due. The following schedule presents the notes payable by maturity year as of June 30:
June 30, 2018 | $ 498,648 | |
June 30, 2018 | 3,585,718 | |
Total | $ 4,084,366 |
NOTE 5: STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue 5,000,000 shares of $0.0001 par preferred stock. The Company authorized the issuance of 1,500,000 shares of $0.0001 par preferred stock, designed at Series A Preferred Stock, at $1.00 per share to shareholders of record as of February 1, 2014. Each preferred share has the option to convert into two common
12
shares at any time. During the year ended December 31, 2014, the company received proceeds of $1,288,000 from the sale of 1,288,000 shares of Preferred Stock under this arrangement. During the year ended December 31, 2016, 305,000 of those preferred shares were converted to 610,000 of common shares. During the period ended June 30, 2017, and 213,000 of those preferred shares were converted to 426,000 of common shares. All preferred shares issued have now been converted to common shares.
Common Stock
The Company is authorized to issue 95,000,000 shares of common stock at $0.0001 par value. As of June 30, 2017, and December 31, 2016, 65,275,958 and 63,634,648 shares of common stock are outstanding, respectively.
Common Stock Issuances for the Six-Months Ended June 30, 2017
The Company issued 807,500 shares of $0.0001 par common stock during the six-month period ended June 30, 2017 at $1.00 per share, providing proceeds of $807,500. A common stock option was exercised for 100,000 shares of common stock at $0.21 per share, providing proceeds of $21,000. 307,810 shares of common stock were issued to employees for services rendered to the Company. As discussed above, the remaining 213,000 issued preferred shares were converted to 426,000 shares of common stock.
Common Stock Issuances for the Year Ended December 31, 2016
The Company issued 901,000 shares of $0.0001 par common stock during the year ended December 31, 2016 at $1.00 per share, providing proceeds of $901,000. A common stock warrant for 75,000 shares of common stock was issued at its exercise price of $0.50 per share, providing proceeds of $37,500 and a cashless warrant was also exercised in the amount of 25,000 common shares. 235,000 shares of common stock were issued for exercise of options, at prices ranging from $0.20 to $1.00 equaling proceeds of $147,100, of which $20,000 were exercised by cash payment and $127,100 were exercised by services provided to the Company. 422,750 shares of common stock were granted in exchange for services, valued and recorded at $1.00 per share. 610,000 shares of common stock were issued during 2016 in the conversion of preferred stock, as discussed above
Stock Reservations
The Company has reserved 6,000,000 shares of its common stock pursuant to the 2008 Stock Plan, of which 617,000 and 1,762,000 were available for issuance as of each June 30, 2017 and December 31, 2016 respectively.
Capital Contribution Receivable
During 2012, two notes receivable totaling $590,000 were exchanged for the exercise of stock options from two shareholders. One note for $500,000 was exchanged for 500,000 shares of common stock and the other for $90,000 in exchange for 750,000 shares of common stock. These notes bear interest at 2% per annum and are secured by the shareholders’ common shares. These notes are due upon sale of the shares as specified in the agreement with the shareholders. The notes are secured by the shares issued in exchange for the respective notes. The principal of these notes remain outstanding as capital contributions receivable (a contra equity account) as the proceeds have not yet been funded by the stockholders as of the issuance date of these financial statements, in accordance with the asset recognition criteria for capital contributions under FASB ASC 505-10-45-2. Accrued interest receivable of $53,100 and $47,200 were accrued and receivable as of June 30, 2017 and December 31, 2016, respectively.
Treasury Stock
The Company is authorized to repurchase shares at its discretion from shareholders. For the six-month period ended June 30, 2017, and the year ended December 31, 2016 the Company did not repurchase any of its own shares. These shares are presented in the balance sheets as treasury stock.
13
NOTE 6: SHARE-BASED PAYMENTS
Stock Plan
The Company has adopted the Teravac Corporation 2008 Stock Incentive Plan, as amended and restated (the “Plan”), which provides for the grant of shares of stock options, stock appreciation rights, and stock awards (performance shares) to employees, non-employee directors, and non-employee consultants. Under the Plan, the number of shares available to be granted during the life of the plan is 6,000,000 shares. The option exercise price generally may not be less than the underlying stock’s fair market value at the date of the grant, and the maximum term of an option is ten years. The amounts granted each calendar year to an employee or non-employee is limited depending on the type of award. Stock options comprise all of the awards granted since the Plan’s inception. Shares available for grant under the Plan amounted to 617,000 as of each June 30, 2017 and 1,762,000 December 31, 2016 respectively. As of June 30, 2017 and December 31, 2016, 1,964,665 and 1,753,000 of outstanding stock options were vested, respectively. There are 833,335 unvested stock options outstanding at June 30, 2017 and no unvested stock options outstanding at December 31, 2016. Since the Plan’s adoption, a total of 5,720,000 stock options have been awarded to employees and non-employee directors and consultants. These options were awarded at the fair market value at the time of the grant and generally have a ten-year term.
Vesting generally occurs over a period of immediately to one year for employees and immediately to one year for non-employee directors and consultants. A summary of information related to stock options for the six-month period ended June 30, 2016 and the year ended December 31, 2016 is as follows:
June 30, 2017 | December 31, 2016 | |||
Options | Options | |||
Outstanding - beginning of year | 1,753,000 | 2,778,000 | ||
Granted | 1,145,000 | 185,000 | ||
Exercised | (100,000) | (235,000) | ||
Forfeited | - | (975,000) | ||
Outstanding - end of year | 2,798,000 | 1,753,000 | ||
Exercisable at end of year | 1,964,665 | 1,753,000 | ||
The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award. Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for stock options, the expected life of the option, and expected stock price volatility. The Company used the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.
The expected life of stock options was estimated using the “simplified method,” which is the midpoint between the vesting date and the end of the contractual term, as the Company has limited historical information to develop reasonable expectations about future exercise patterns and employment duration for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the
14
fair value of options grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option. The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts are recognized as an adjustment in the period in which estimates are revised.
No stock-based compensation expense was recognized under FASB ASC 718 for the six-month period ended June 30, 2017 or for the year ended December 31, 2016. Total unrecognized compensation cost related to non-vested stock option awards amounted to $-0- for both the periods as all options had fully vested and therefore were fully expensed.
Warrants
In December of 2013, the Company commenced certain fundraising activities through the sale of units, at a price of $100,000 per unit, with each unit consisting of 100,000 shares of common stock and one warrant to convert into 100,000 shares of common stock at warrant price of $0.01 per share exercisable immediately upon request. A total of 2 units were sold during 2013 for total proceeds of $200,000. The proceeds were recorded to additional paid-in capital and common stock for the issuance of the common stock, and the warrants were recorded at fair value to general and administrative expenses and additional paid-in capital. The fair value at the grant date was determined to be $0.99 per common share on the warrants, providing $198,000 total fair value for the 2013 issuances, which was recognized immediately in accordance with the immediate vesting. The warrants have a ten-year term and become exercisable upon request. At December 31, 2013, all outstanding warrants relating to this fundraising were exercisable. These warrants to purchase 200,000 shares of common stock were exercised in January of 2014, providing proceeds of $2,000.
In January of 2014, the Company commenced certain fundraising activities through the sale of units, at a price of $100,000 per unit, with each unit consisting of 100,000 shares of common stock and one warrant to convert into 100,000 shares of common stock at warrant price of $0.01 per share exercisable immediately upon request. A total of 2 units were sold during 2014 for total proceeds of $200,000. The proceeds were recorded to additional paid-in capital and common stock for the issuance of the common stock, and the warrants were recorded at fair value to general and administrative expenses and additional paid-in capital. The fair value at the grant date was determined to be $0.99 per common share on the warrants, providing $198,000 total fair value for the 2014 issuances, which was recognized immediately in accordance with the immediate vesting. The warrants have a three-year term and become exercisable upon request. At December 31, 2014, all outstanding warrants relating to this fundraising were exercisable and outstanding. Subsequent to December 31, 2014, these warrants were exercised in December of 2015 providing proceeds of $2,000.
Common stock warrants were issued in 2010 which carried exercise terms contingent upon and automatically exercisable at an initial public offering. The warrants were also exercisable into a minimum of 10,000 shares per unit if an initial public offering was not completed prior to expiration after a term of five years. The Company determined that as of December 31, 2014 an initial public offering prior to the 2015 expiration of these warrants was unlikely and therefore considered these warrants at the aforementioned minimum per unit in the proceeding table of warrants by expiration date. During 2015, the Company extended these warrants for an additional five years to provide the remaining warrant holders under this arrangement with common stock warrants exercisable into 80,000 shares of common stock in a cashless exercise upon the completion of a liquidity event providing over $100,000,000. The Company considered these issuances to be contingent upon a future event of minimal likelihood and therefore deemed the 2015 extension issuance to be of trivial value, which would be recognized upon the occurrence of the contingent event. The company issued 80,000 shares of common stock in 2015 to these warrant holders under the minimum issuance terms of the original 2010 warrant issuances.
In 2012, warrants were issued in conjunction with an equity offering which provided certain investors with warrants providing the right to a cashless exercise into common shares upon an initial public offering or other liquidity event with proceeds in excess of $250 million. The number of shares exercisable at such event is dependent upon the amount of the initial public offering or other liquidity event, where the base of 135,000 units is exercisable at warrant coverage rates of 60%, 40%, and 30% for offerings in the ranges of $250 million to $500 million, $500
15
million to $1 billion, and over $1 billion, respectively. The warrants carry a five-year term and expire in 2017. The Company provided for the maximum number of shares exercisable under these terms (81,000 shares of common stock) in the proceeding table of warrants by expiration date.
In October 2015 through March 2016, the Company issued cashless common stock warrants in conjunction with the issuance of $200,000 of promissory notes in 2015 and $115,000 of promissory notes during the six-month period ended June 30, 2016, as discussed in Note 4. For each $25,000 promissory note, the note agreements provided for the issuance of 25,000 common stock warrants, resulting in the issuance of 200,000 shares of cashless common stock warrants during 2015 and 90,000 during the six-month period ended June 30, 2016, respectively. The common stock warrants are exercisable at the earlier of the maturity date of the related promissory notes (two years from the date of the issuance of each promissory note) or upon the repayment of the principal and interest on the promissory notes. As described below, the Company estimated the fair value of these warrants using the Black-Scholes pricing model. As the estimated fair value of the warrants issued was determined to be de minimus to these financial statements, a discount to the related promissory notes was not recorded for 2015 or the period ended June 30, 2016.
In June 30, 2016 through June 30, 2017, the Company issued four cashless warrants totaling 100,000 shares in conjunction with promissory notes of $100,000.
The following table sets forth the changes in the number of warrants outstanding for the periods presented:
Warrants - Common Shares Exercisable | Weighted Average Exercisable Price Per Common Share | |
Outstanding December 31, 2015 | 1,356,000 | $ 0.51 |
2016 Warrants Granted | 170,000 | - |
Outstanding December 31, 2016 | 1,526,000 | $ 0.45 |
2017 Warrants Granted | 20,000 | - |
Outstanding June 30, 2017 | 1,546,000 | $ 0.45 |
As discussed above and in Note 4, no expense was recognized related to the issuance of warrants during the six-month period ended June 30, 2017 or the year ended December 31, 2016.
Restricted Stock Unit Awards
In January 2014, the Company issued a contractor 1,500,000 restricted stock unit awards, subject to certain vesting terms whereby portions of the awards become earned, issued, and released from vesting restrictions upon completion of defined milestones. As of June 30, 2017, and December 31, 2016, none of these milestones had been achieved and therefore none of the restricted stock unit awards under this arrangement have been earned or issued. The Company will record the fair value of the restricted stock unit awards to additional paid-in capital and expense upon vesting of the restricted stock unit awards. The restricted stock unit awards received no rights as a stockholder, including voting rights and dividend rights, until vesting occurs.
In January 2016, the Company issued a contractor 500,000 restricted stock unit awards, subject to certain vesting terms whereby portions of the awards become earned, issued, and released from vesting restrictions upon completion of defined milestones. As of June 30, 2017, none of these milestones had been achieved and therefore none of the restricted stock unit awards under this arrangement have been earned or issued.
16
The Company will record the fair value of these restricted stock unit awards to additional paid-in capital and expense upon vesting of the restricted stock unit awards. The restricted stock unit awards noted above received no rights as a stockholder, including voting rights and dividend rights, until vesting occurs.
In May 2016, the Company issued a service provider 352,000 restricted stock unit awards, subject to certain vesting terms whereby portions of the awards become earned, issued, and released from vesting restrictions upon completion of defined milestones. As of June 30, 2016, shares have been vested and issued.
NOTE 7: INCOME TAXES
The Company recorded a full valuation allowance against its net deferred tax assets for the six month period ended June 30, 2017 and the year ended December 31, 2016, and therefore has not recognized a benefit for income taxes. The Company’s effective tax rate differed from the statuary rate primarily as a result of the valuation allowance. The Company had deferred tax assets of $6,799,025 as of June 30, 2017 and $6,445,746 as of December 31, 2016, respectively, related to net operating loss carryforwards, capital loss carryforwards, research and development (R&D) Credits, and other temporary differences from deferred compensation, and other deferred fees, which were fully reserved at June 30, 2017 and December 31, 2016. The Company did not have any deferred tax liabilities at June 30, 2017 and December 31, 2016.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, or the availability of refunds of previously paid taxes. As management does not expect to realize a benefit, they have recorded valuation allowances of $6,799,025 and $6,445,746 as of June 30, 2017 and December 31, 2016, respectively, against their net deferred tax assets. Management’s assessment is based on the available evidence both positive and negative including the Company’s historical and projected future taxable income.
The Company had federal net operating loss (“NOL”) carryforwards of approximately $12,602,108 and $11,813,052 at June 30, 2016 and December 31, 2016, respectively. These NOL carryforwards expire at various dates starting December 31, 2026 for federal returns. The Company had approximately $200,000 of R&D Credits, which have a twenty-year carryover period and will start to expire December 31, 2026. Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an "ownership change" will occur if there is a cumulative change in our ownership by "5-percent shareholders" that exceeds 50 percentage points over a rolling three-year period. Utilization of the Company’s net operating loss and tax credit carryforwards may be subject to annual limitations due to ownership changes. Such annual limitations could result in the expiration of our net operating loss and tax credit carryforwards before utilized. The Company is subject to U.S. federal income tax examination for calendar tax years ending 2013 through 2015. The company does not have a reserve for any uncertain tax positions, and management is unaware of any anticipated event in the next 12 months that could change this. The Company has not been subject to any penalties or interest by a taxing jurisdiction for income taxes. The Company operates exclusively out of Ohio which does not impose a corporate income tax.
NOTE 8: RETIREMENT PLAN
The Company has a 401(k) Profit Sharing Plan covering substantially all employees. Company contributions to the Plan, including the matching of employee contributions, are at the discretion of the Company. The Company currently matches an amount equal to 25% of each employee contribution up to 6% of each employee's contribution.
Company contributions to this plan amounted to $1,464 and $4,464 for the six-month period June 30, 2017 and year ended December 31, 2016, respectively.
17
NOTE 9: RELATED PARTY TRANSACTIONS
Operating Lease
The Company sub-leases office space under a month-to-month operating lease with a related party under common control, Genvac Aerospace, Inc. Monthly rent payments were $1,863 for the six-month period ended June 30, 2017 and the year ended December 31, 2016. This agreement is cancellable with 90-day notice. Rent expense was $11,178 for the six-month period ended June 30, 2017.
Expense Allocation
The Company shares its facility and certain office expenses with Genvac Aerospace, Inc., a related party under common control. There is an expense allocation agreement in place, originally dated June 1, 2006, which requires the Company to reimburse Genvac Aerospace, Inc. for certain shared expenses. For the six-month period ended June 30, 2017, the Company reimbursed Genvac Aerospace, Inc. 20% of utility and occupancy costs and 50% of office operating expenses. This agreement is valid as long as the Company occupies the facility space and is cancellable with 90 days’ notice.
The expense allocations have been determined on the basis that the Company and Genvac Aerospace, Inc. considered to be reasonable reflections of the utilization of services provided or the benefit received by the Company. Management believes that the expenses allocated to the Company are representative of the operating expenses it would have incurred had the Company been operated on a standalone basis. The Company believes that the assumptions underlying the financial statements are reasonable; however, the resulting financial information does not necessarily reflect what the Company’s results of operations, financial position, and cash flows would have been had the Company operated independently.
Total expense recognized under this agreement was $4,708 for the six-month period ended June 30, 2017.
Notes Receivable from Affiliate
The Company is subject to a subordinated loan agreement with a related party under common control, Genvac AeroSpace, Inc. (Genvac) entered on January 1, 2015, as amended. Under this arrangement, the Company has agreed to lend up to $900,000 with interest at prime plus 1% (5.25% at June 30, 2017). This agreement expires after five years, when all principal and interest comes due if the agreement is not renewed. The note is unsecured and fully and irrevocably subordinate in right of payment of all other present and future creditors of Genvac, including Genvac trade and other accounts payable and deferred compensation. In the event of the appointment of a receiver or trustee of Genvac or in the event of its insolvency, liquidation, bankruptcy, assignment for the benefit of creditors, reorganization, or any other marshaling of the assets and liabilities of Genvac, the Company shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of Genvac until all claims of all or other present and future creditors of Genvac, whose claims are senior, have been fully satisfied, or adequate provision has been made. As of June 30, 2017 and December 31, 2016, $807,739 and $595,842, respectively, were due to the Company under this arrangement, inclusive of accrued interest. Related party interest income recognized under this arrangement during the six-month period ended June 30, 2017 was $15,962.
Management Fee Income
As discussed in Note 3, the Company receives a management fee from Genvac AeroSpace, Inc., a related party under common control, for certain administrative functions performed by the Company. Management fee income of $24,000 was recognized under this arrangement for the six-month period ended June 30, 2017.
Technology Royalties
The Company has a royalty arrangement for an unrelated technology with Genvac AeroSpace, Inc., a related party under common control. The Company receives a percentage of gross revenues under this agreement. Technology royalty revenues of $46,197 were recognized under this arrangement for the six-month period ended June 30, 2017.
18
Notes Payable
The Company has various notes payable outstanding with related parties as identified in Note 4 to these financial statements.
NOTE 10: RECENT ACCOUNTING PRONOUNCEMENTS
In June 2014, the FASB issued Accounting Standards Update (ASU) 2014-10 which eliminated the requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flows, and stockholders’ equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. This ASU is effective for annual reporting periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. Early application is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. Upon adoption, entities will no longer present or disclose any information required by Topic 915. The Company has early adopted the new standard effective immediately.
In August 2014, the FASB issued ASU 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this update provide such guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for public and nonpublic entities for annual periods ending after December 15, 2016. Early adoption is permitted. The Company has not elected to early adopt this pronouncement.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) ("ASU 2015-05"). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The Company believes the adoption of ASU 2015-02 will not have a material effect on its financial statements.
Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
19
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1-A and has duly caused this offering statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, on September 27, 2017.
| TERAPHYSICS CORPORATION. |
| |
|
|
|
|
| By: | /s/ Louis Fisi |
|
|
| Louis Fisi, Chief Executive Officer |
|
This offering statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE | TITLE | DATE |
/s/ Louis Fisi ___________________________________ Louis Fisi | Chief Executive Officer and Director (Principal Executive Officer) | September 29, 2017 |
/s/ Gerald Mearini ___________________________________ Gerald Mearini | President | September 29, 2017 |
/s/ James Dayton ___________________________________ James Dayton | Chief Technology Officer | September 29, 2017 |
/s/ Gerald Cowden ___________________________________ Gerald Cowden | Director | September 29, 2017 |
/s/ Jerry Cuomo _______________________________ Jerry Cuomo | Director | September 29, 2017 |
/s/ Thomas Honeywill ___________________________________ Thomas Honeywill |
Director |
September 29, 2017 |
/s/ Alan Williams ___________________________________ Alan Williams | Director | September 29, 2017 |
21