The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. ORGANIZATION, BACKGROUND, AND BASIS OF PRESENTATION
Organization and Background
A 1:800 reverse stock
split of all of the Company’s issued and outstanding common stock was implemented on November 7, 2016. As a result of the
reverse stock split, every 800 shares of issued and outstanding common stock was converted into 1 share of common stock. All fractional
shares created by the reverse stock split were rounded to the nearest whole share. The number of authorized shares of common stock
did not change. The reverse stock split decreased the Company’s issued and outstanding shares of common stock from 453,694,400
shares to 570,707 shares as of that date. See Note 4, Stockholders’ Deficit. Unless otherwise specified, all per share amounts
are reported on a post-stock split basis, as of March 31, 2017. On February 24, 2016, the Company had also implemented a 1:100
reverse stock split of its issued and outstanding common stock.
The Company’s prospects
must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device
industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate.
The Company has experienced net losses since its inception and, as of March 31, 2017, it had an accumulated deficit of approximately
$128.0 million. To date, the Company has engaged primarily in research and development efforts and the early stages of marketing
its products. The Company may not be successful in growing sales for its products. Moreover, required regulatory clearances or
approvals may not be obtained in a timely manner, or at all. The Company’s products may not ever gain market acceptance and
the Company may not ever generate significant revenues or achieve profitability. The development and commercialization of the Company’s
products requires substantial development, regulatory, sales and marketing, manufacturing and other expenditures. The Company expects
operating losses to continue through at least the end of 2017 as it continues to expend substantial resources to complete development
of its products, obtain regulatory clearances or approvals, build its marketing, sales, manufacturing and finance capabilities,
and conduct further research and development.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements included herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”)
for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all information and footnotes required by GAAP for complete financial statements. These statements reflect adjustments,
all of which are of a normal, recurring nature, and which are, in the opinion of management, necessary to present fairly the Company’s
financial position as of March 31, 2017, results of operations for the three months ended March 31, 2017 and 2016, and cash flows
for the three months ended March 31, 2017 and 2016. The results of operations for the three months ended March 31, 2017 are not
necessarily indicative of the results for a full fiscal year. Preparing financial statements requires the Company’s management
to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure
of contingent assets and liabilities. Actual results could differ from those estimates. These financial statements should be read
in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the
year ended December 31, 2016.
All information and footnote
disclosures included in the consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States.
Going Concern
The Company’s consolidated
financial statements have been prepared and presented on a basis assuming it will continue as a going concern. The factors below
raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include
any adjustments that might be necessary from the outcome of this uncertainty.
At March 31, 2017, the
Company had a negative working capital of approximately $8.6 million, accumulated deficit of $128.0 million, and incurred a net
loss of $107,000 for the quarter then ended. Stockholders’ deficit totaled approximately $9.1 million at March 31, 2017,
primarily due to recurring net losses from operations and deemed dividends on warrants and preferred stock, offset by proceeds
from the exercise of warrants and proceeds from sales of stock.
The Company’s capital-raising
efforts are ongoing. If sufficient capital cannot be raised during the second quarter of 2017, the Company will continue its plans
of curtailing operations by reducing discretionary spending and staffing levels, and attempting to operate by only pursuing activities
for which it has external financial support. However, there can be no assurance that such external financial support will be sufficient
to maintain even limited operations or that the Company will be able to raise additional funds on acceptable terms, or at all.
In such a case, the Company might be required to enter into unfavorable agreements or, if that is not possible, be unable to continue
operations, and to the extent practicable, liquidate and/or file for bankruptcy protection.
The Company had warrants exercisable for approximately
5.1 million shares of its common stock outstanding at March 31, 2017, with exercise prices ranging between $0.31 and $40,000 per
share. Exercises of these warrants would generate a total of approximately $5.2 million in cash, assuming full exercise, although
the Company cannot be assured that holders will exercise any warrants. Management may obtain additional funds through the public
or private sale of debt or equity, and grants, if available.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting
policies were set forth in the audited financial statements and notes thereto for the year ended December 31, 2016 included in
its annual report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”).
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent 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. Significant areas where estimates are used include the allowance for doubtful accounts, inventory valuation
and input variables for Black-Scholes, Monte Carlo simulations and binomial calculations.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of Guided Therapeutics, Inc. and its wholly owned subsidiary. All intercompany transactions are eliminated.
Accounting Standard Updates
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”).
ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition
model provides a five-step analysis in determining when and how revenue is recognized. The new model requires revenue recognition
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects
to receive. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs
incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Deferral of the Effective Date”,
which amends ASU 2014-09. As a result, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted
in the first quarter of fiscal year 2017. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU
2016-08, “Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross
versus Net),” (“ASU 2016-08”); ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying
Performance Obligations and Licensing,” (“ASU 2016-10”); ASU 2016-12, “Revenue from Contracts with Customers
(Topic 606) Narrow-Scope Improvements and Practical Expedients,” (“ASU 2016-12”); and ASU 2016-20, “Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” (“ASU 2016-20”), which are
intended to provide additional guidance and clarity to ASU 2014-09. The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12
and ASU 2016-20 along with ASU 2014-09 (collectively, the “New Revenue Standards”). The New Revenue Standards may be
applied using one of two retrospective application methods: (1) a full retrospective approach for all periods presented, or (2)
a modified retrospective approach that presents a cumulative effect as of the adoption date and additional required disclosures.
The Company is evaluating the impact that adoption of this guidance will have on the determination or reporting of its financial
results.
In July 2015, the FASB issued ASU 2015-11,
“Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 requires inventory be measured
at the lower of cost and net realizable value and options that currently exist for market value be eliminated. ASU 2015-11 defines
net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim
periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. The Company has adopted
this guidance during the quarter ended March 31, 2017 on a prospective basis. The adoption of this guidance did not have a significant
impact on the operating results for the three months ended March 31, 2017.
In February 2016, the FASB issued ASU
2016-02, “Leases (Topic 842)” that requires lessees to recognize on the balance sheet the assets and liabilities associated
with the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets
and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement,
and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance
or operating lease. The update is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted.
The Company is evaluating the impact adoption of this guidance will have on determination or reporting of its financial results.
In March 2016, the FASB issued ASU 2016-05,
“Derivatives and Hedging (Topic 815),” (“ASU 2016-05”). ASU 2016-05 provides guidance clarifying that novation
of a derivative contract (i.e., a change in counterparty) in a hedge accounting relationship does not, in and of itself, require
dedesignation of that hedge accounting relationship. The effective date will be the first quarter of fiscal year 2017, with early
adoption permitted. The Company has adopted this guidance during the quarter ended March 31, 2017 on a prospective basis. The adoption
of this guidance did not have a significant impact on the operating results for the three months ended March 31, 2017.
In March 2016, the FASB issued ASU 2016-06,
“Derivatives and Hedging (Topic 815),” (“ASU 2016-06”). ASU 2016-06 simplifies the embedded derivative
analysis for debt instruments containing contingent call or put options by clarifying that an exercise contingency does not need
to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. The effective
date will be the first quarter of fiscal year 2017, with early adoption permitted. The Company has adopted this guidance during
the quarter ended March 31, 2017 on a prospective basis. The adoption of this guidance did not have a significant impact on the
operating results for the three months ended March 31, 2017.
In March 2016, the FASB issued ASU 2016-09,
“Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” (“ASU
2016-09”). ASU 2016-09 is intended to simplify several aspects related to how share-based payments are accounted for and
presented in the financial statements, such as requiring all income tax effects of awards to be recognized in the income statement
when the awards vest or are settled and allowing a policy election to account for forfeitures as they occur. In addition, all related
cash flows resulting from share-based payments will be reported as operating activities on the statement of cash flows. ASU 2016-09
could result in increased volatility of the Company’s provision for income taxes and earnings per share, depending on the
Company’s share price at exercise or vesting of share-based awards compared to grant date. The effective date will be the
first quarter of fiscal year 2017, with early adoption permitted. The Company has adopted this guidance during the quarter ended
March 31, 2017 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results
for the three months ended March 31, 2017.
In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments - Credit Losses,” (“ASU 2016-13”). ASU 2016-13 sets forth a “current expected
credit loss” model which requires the Company to measure all expected credit losses for financial instruments held at the
reporting date based on historical experience, current conditions and reasonable supportable forecasts. The guidance in this new
standard replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured
at amortized cost and applies to some off-balance sheet credit exposures. The effective date will be the first quarter of fiscal
year 2020. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments,” (“ASU 2016-15”).
ASU 2016-15 reduces the existing diversity in practice in financial reporting by clarifying existing principles in ASC 230, “Statement
of Cash Flows,” and provides specific guidance on certain cash flow classification issues. The effective date for ASU 2016-15
will be the first quarter of fiscal year 2018, with early adoption permitted. The Company is evaluating the impact adoption of
this guidance will have on determination or reporting of its financial results.
In November 2016, the FASB issued ASU
2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” (“ASU 2016-18”). ASU 2016-18 requires
a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The Company is evaluating the impact adoption of this guidance will have on determination
or reporting of its financial results.
In January 2017, the FASB issued ASU 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”).
ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects
from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment. The effective
date will be the first quarter of fiscal year 2020, with early adoption permitted in 2017. Adoption is not expected to have a material
effect on the Company’s consolidated financial statements.
Except as noted above, the guidance
issued by the FASB during the current year is not expected to have a material effect on the Company’s consolidated financial
statements.
Cash Equivalents
The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be a cash equivalent.
Accounts Receivable
The Company performs periodic credit evaluations
of its customers’ financial conditions and generally does not require collateral. The Company reviews all outstanding accounts
receivable for collectability on a quarterly basis. An allowance for doubtful accounts is recorded for any amounts deemed uncollectable.
The Company does not accrue interest receivable on past due accounts receivable.
Concentrations of Credit Risk
The Company, from time to time during the years
covered by these consolidated financial statements, may have bank balances in excess of its insured limits. Management has deemed
this a normal business risk.
Revenue Recognition
Revenue from the sale of the Company’s
products is recognized upon shipment of such products to its customers. The Company recognizes revenue from contracts on a straight
line basis, over the terms of the contract. The Company recognizes revenue from grants based on the grant agreement, at the time
the expenses are incurred.
During the three months ended March 31, 2017,
all of the Company’s revenues were from one customer. Revenue from this customer totaled approximately $21,000 for the period
ended March 31, 2017. Accounts receivable due from this customer represents 0% for the period ended March 31, 2017. At March 31,
2016, there were revenues from four customers, revenue from those customers totaled approximately $262,000.
Inventory Valuation
All inventories are stated at lower of cost
or net realizable value, with cost determined substantially on a “first-in, first-out” basis. Selling, general,
and administrative expenses are not inventoried, but are charged to expense when incurred. At March 31, 2017 and December 31, 2016,
our inventories were as follows (in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Raw materials
|
|
$
|
795
|
|
|
$
|
795
|
|
Work in process
|
|
|
115
|
|
|
|
115
|
|
Finished goods
|
|
|
245
|
|
|
|
141
|
|
Inventory reserve
|
|
|
(279
|
)
|
|
|
(278
|
)
|
Total
|
|
$
|
836
|
|
|
$
|
773
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements
are amortized at the shorter of the useful life of the asset or the remaining lease term. Depreciation and amortization expense
is included in general and administrative expense on the statement of operations. Expenditures for repairs and maintenance are
expensed as incurred. Property and equipment are summarized as follows at March 31, 2017 and December 31, 2016 (in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Equipment
|
|
$
|
1,378
|
|
|
$
|
1,378
|
|
Software
|
|
|
740
|
|
|
|
740
|
|
Furniture and fixtures
|
|
|
124
|
|
|
|
124
|
|
Leasehold Improvement
|
|
|
199
|
|
|
|
199
|
|
|
|
|
2,441
|
|
|
|
2,441
|
|
Less accumulated depreciation and amortization
|
|
|
(2,352
|
)
|
|
|
(2,315
|
)
|
Total
|
|
$
|
89
|
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
Debt issuance costs are capitalized as described in ASU 2015-03
and adopted retrospectively.
Other Assets
Other assets primarily consist of short, and
long-term deposits for various tooling inventory that are being constructed for the Company and deferred financing costs.
Patent Costs (Principally Legal Fees)
Costs incurred in filing, prosecuting, and
maintaining patents are recurring, and expensed as incurred. Maintaining patents are expensed as incurred as the Company has not
yet received FDA approval and recovery of these costs is uncertain. Such costs aggregated approximately $5,000 and $23,000 as of
March 31, 2017 and December 31, 2016, respectively.
Accrued Liabilities
Accrued liabilities are summarized as follows (in thousands):
|
|
March 31,
2017
|
|
December 31,
2016
|
Accrued compensation
|
|
$
|
1,805
|
|
|
$
|
1,656
|
|
Accrued professional fees
|
|
|
71
|
|
|
|
161
|
|
Deferred rent
|
|
|
6
|
|
|
|
13
|
|
Accrued warranty
|
|
|
53
|
|
|
|
58
|
|
Accrued vacation
|
|
|
172
|
|
|
|
175
|
|
Accrued interest
|
|
|
160
|
|
|
|
—
|
|
Accrued dividends
|
|
|
295
|
|
|
|
296
|
|
Other accrued expenses
|
|
|
159
|
|
|
|
311
|
|
Total
|
|
$
|
2,721
|
|
|
$
|
2,670
|
|
Deferred Revenue
The Company defers payments received
as revenue until earned based on the related contracts on a straight-line basis, over the terms of the contract.
Research and Development
Research and development expenses consist of
expenditures for research conducted by the Company and payments made under contracts with consultants or other outside parties
and costs associated with internal and contracted clinical trials. All research and development costs are expensed as incurred.
Income Taxes
The
Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. Management provides valuation allowances
against the deferred tax assets for amounts that are not considered more likely than not to be realized.
The
Company is currently delinquent with its federal and applicable state tax returns filings. Some of the federal income tax returns
are currently under examination by the IRS. None of the Company’s state income tax returns are currently under review by
state authorities. Although we have been experiencing recurring losses, its is obligated to file tax returns for compliance with
Internal Revenue Service (“IRS”) regulations and that of applicable state jurisdictions. At March 31, 2017and December
31, 2016, the Company has approximately $33 million of net operating losses. This net operating loss will be eligible to be carried
forward for tax purposes at federal and applicable states level. A full valuation allowance has been recorded related the deferred
tax assets generated from the net operating losses.
Uncertain Tax Positions
The Company
assesses each income tax position is assessed using a two-step process. A determination is first made as to whether it is more
likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities.
If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements
equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At March 31, 2017 and December
31, 2016 there were no uncertain tax positions.
Warrants
The Company has issued warrants, which allow
the warrant holder to purchase one share of stock at a specified price for a specified period of time. The Company records equity
instruments including warrants issued to non-employees based on the fair value at the date of issue. The fair value of warrants
classified as equity instruments at the date of issuance is estimated using the Black-Scholes Model. The fair value of warrants
classified as liabilities at the date of issuance is estimated using the Monte Carlo Simulation or Binomial model.
Stock Based Compensation
The Company records compensation expense related
to options granted to non-employees based on the fair value of the award.
Compensation cost is recorded as earned for
all unvested stock options outstanding at the beginning of the first year based upon the grant date fair value estimates, and for
compensation cost for all share-based payments granted or modified subsequently based on fair value estimates.
For the three ended March 31, 2017 and 2016
share-based compensation for options attributable to employees, officers and Board members were approximately $19,000 and $30,000.
These amounts have been included in the Company’s statements of operations. Compensation costs for stock options which vest
over time are recognized over the vesting period. As of March 31, 2017, the Company had approximately $90,000 of unrecognized compensation
costs related to granted stock options that will be recognized over the remaining vesting period of approximately three years.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The
guidance for fair value measurements, ASC820, Fair Value Measurements and Disclosures, establishes the authoritative definition
of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements.
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement
date. The Company uses a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:
|
•
|
Level 1 – Quoted market prices in active
markets for identical assets and liabilities;
|
|
•
|
Level 2 – Inputs, other than level 1 inputs,
either directly or indirectly observable; and
|
|
•
|
Level 3 – Unobservable inputs developed
using internal estimates and assumptions (there is little or no market date) which reflect those that market participants
would use.
|
The
Company records its derivative activities at fair value, which consisted of warrants as of March 31, 2017. The fair value of the
warrants was estimated using the Binomial Simulation model. Gains and losses from derivative contracts are included in net gain
(loss) from derivative contracts in the statement of operations. The fair value of the Company’s derivative warrants is
classified as a Level 3 measurement, since unobservable inputs are used in the valuation.
The following table presents the fair value
for those liabilities measured on a recurring basis as of March 31, 2017 and December 31, 2016:
FAIR VALUE MEASUREMENTS (In Thousands)
The following is summary of items that
the Company measures at fair value on a recurring basis:
|
|
Fair Value at March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Senior Secured Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(847
|
)
|
|
$
|
(847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(847
|
)
|
|
$
|
(847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Distributor Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(114
|
)
|
|
$
|
(114
|
)
|
Warrants issued in connection with Senior Secured Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,306
|
)
|
|
|
(1,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,420
|
)
|
|
$
|
(1,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of changes to
Level 3 instruments during the three months ended March 31, 2017:
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|
|
Series
C
Warrants
|
|
Series
B
Warrants
|
|
Senior
Secured
Debt
|
|
Distributor
Debt
|
|
Total
|
Balance,
December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,306
|
)
|
|
$
|
(114
|
)
|
|
$
|
(1,420
|
)
|
Warrants
issued during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
(55
|
)
|
|
|
—
|
|
|
|
(55
|
)
|
Change
in fair value during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
628
|
|
|
|
—
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March
31, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(733
|
)
|
|
$
|
(114
|
)
|
|
$
|
(847
|
)
|
As of March 31, 2017, the fair value
of warrants was approximately $847,000. A net change of approximately $628,000 has been recorded to the accompanying statement
of operations for the three months ended March 31, 2017.
4. STOCKHOLDERS’ DEFICIT
Common Stock
The Company has authorized 1,000,000,000 shares
of common stock with $0.001 par value, of which 1,556,427 were issued and outstanding as of March 31, 2017. As of December 31,
2016, there were 1,000,000,000 authorized shares of common stock, of which 668,651 were issued and outstanding.
A 1:800 reverse stock split of all of our issued
and outstanding common stock was implemented on November 7, 2016. As a result of the reverse stock split, every 800 shares of issued
and outstanding common stock was converted into 1 share of common stock. All fractional shares created by the reverse stock split
were rounded to the nearest whole share. The number of authorized shares of common stock did not change. On February 24, 2016,
the Company had also implemented a 1:100 reverse stock split of its issued and outstanding common stock. The number of the authorized
shares did not change.
For the three months ended March 31, 2017,
the Company issued 887,776 shares of common stock as listed below:
Series C Preferred Stock Conversions
|
|
472,278
|
Series C Preferred Stock Dividends
|
|
230,392
|
Issuance of shares in Transit due to Shandong agreement
|
|
49,256
|
Issuance of shares due to commitment in Debt agreement
|
|
50,000
|
Convertible Debt Conversions
|
|
45,850
|
Total
|
|
887,776
|
On January 22, 2017, the Company entered into
a license agreement with Shandong Yaohua Medical Instrument Corporation, or SMI, pursuant to which the Company granted SMI an exclusive
global license to manufacture the LuViva device and related disposables (subject to a carve-out for manufacture in Turkey) and
exclusive distribution rights in the Peoples Republic of China, Macau, Hong Kong and Taiwan. In exchange for the license, SMI will
pay a $1.0 million licensing fee, payable in five installments through October 2017, as well as a royalty on each disposable sold
in the territories. SMI will also underwrite the cost of securing approval of LuViva with the Chinese Food and Drug Administration,
or CFDA. Pursuant to the SMI agreement, SMI must become capable of manufacturing LuViva in accordance with ISO 13485 for medical
devices by the second anniversary of the SMI agreement, or else forfeit the license. During 2017, SMI must purchase no fewer than
ten devices (with up to two devices pushed to 2018 if there is a delay in obtaining approval from the CFDA). In the three years
following CFDA approval, SMI must purchase a minimum of 3,500 devices (500 in the first year, 1,000 in the second, and 2,000 in
the third) or else forfeit the license. As manufacturer of the devices and disposables, SMI will be obligated to sell each to us
at costs no higher than our current costs. As partial consideration for, and as a condition to, the license, and to further align
the strategic interests of the parties, the Company agreed to issue $1.0 million in shares of its common stock to SMI, in five
installments through October 2017, at a price per share equal to the lesser of the average closing price for the five days prior
to issuance and $1.25.
In order to facilitate the SMI agreement, immediately
prior to its execution the Company entered into an agreement with Shenghuo Medical, LLC, regarding its previous license to Shenghuo
(see Note 7, Commitments and Contingencies). Under the terms of the new agreement, Shenghuo agreed to relinquish its manufacturing
license and its distribution rights in SMI’s territories, and to waive its rights under the original Shenghuo agreement,
all for as long as SMI performs under the SMI agreement. As consideration, the Company agreed to split with Shenghuo the licensing
fees and net royalties from SMI that the Company will receive under the SMI agreement. Should the SMI agreement be terminated,
the Company have agreed to re-issue the original license to Shenghuo under the original terms. The Company’s COO and director,
Mark Faupel, is a shareholder of Shenghuo, and another director, Richard Blumberg, is a managing member of Shenghuo.
Preferred Stock
The Company has authorized 5,000,000 shares
of preferred stock with a $.001 par value. The board of directors has the authority to issue these shares and to set dividends,
voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions. The board of directors
designated 525,000 shares of preferred stock redeemable convertible preferred stock, none of which remain outstanding, 33,000 shares
of preferred stock as Series B Preferred Stock, none of which remain outstanding, 9,000 shares of preferred stock as Series C Convertible
Preferred Stock, of which 1,406 and 1,643 were issued and outstanding at March 31, 2017 and December 31, 2016, respectively, and
20,250 shares of preferred stock as Series C1 Convertible Preferred Stock, of which 4,312 shares were issued and outstanding at
March 31, 2017 and December 31, 2016.
Series B Convertible Preferred Stock
Holders of the Series B Preferred Stock were
entitled to quarterly dividends at an annual rate of 10.0%, payable in cash or, subject to certain conditions, common stock, at
the Company’s option. There were no preferred dividends for the first quarter of 2017 or for the same period in 2016.
The Series B Preferred Stock were issued with
Tranche A warrants to purchase 24 shares of common stock and Tranche B warrants purchasing 7,539 shares of common stock, at an
exercise price of $8,364 and $75 per share, respectively.
At December 31, 2015, as a result of the operation
of certain anti-dilution provisions, the Tranche B warrants were convertible into 1 shares of common stock. These warrants are
re-measured based upon their fair value each reporting period and classified as a liability on the Balance Sheet.
Series C Convertible Preferred Stock
On June 29, 2015, the Company entered into
a securities purchase agreement with certain accredited investors, including John Imhoff and Mark Faupel, members of the Board,
for the issuance and sale of an aggregate of 6,737 shares of Series C convertible preferred stock, at a purchase price of $750
per share and a stated value of $1,000 per share. On September 3, 2015 the Company entered into an interim agreement amending the
securities purchase agreement to provide for certain of the investors to purchase an additional aggregate of 1,166 shares. Total
cash and non-cash expenses were valued at $853,000, resulting in net proceeds of $3,698,000.
Pursuant to the Series C certificate of designations,
shares of Series C preferred stock are convertible into common stock by their holder at any time, and may be mandatorily convertible
upon the achievement of specified average trading prices for the Company’s common stock. At March 31, 2017, there were 1,406
shares outstanding with a conversion price of $0.4016 per share, such that each share of Series C preferred stock would convert
into approximately 2,490 shares of the Company’s common stock, subject to customary adjustments, including for any accrued
but unpaid dividends and pursuant to certain anti-dilution provisions, as set forth in the Series C certificate of designations.
The conversion price will automatically adjust downward to 80% of the then-current market price of the Company’s common stock
15 trading days after any reverse stock split of the Company’s common stock, and 5 trading days after any conversions of
the Company’s outstanding convertible debt.
Holders of the Series C preferred stock are
entitled to quarterly cumulative dividends at an annual rate of 12.0% until 42 months after the original issuance date (the “Dividend
End Date”), payable in cash or, subject to certain conditions, the Company’s common stock. In addition, upon conversion
of the Series C preferred stock prior to the Dividend End Date, the Company will also pay to the converting holder a “make-whole
payment” equal to the amount of unpaid dividends through the Dividend End Date on the converted shares. At March 31, 2017,
the “make-whole payment” for a converted share of Series C preferred stock would convert to 1,619 shares of the Company’s
common stock. The Series C preferred stock generally has no voting rights except as required by Delaware law. Upon the Company’s
liquidation or sale to or merger with another corporation, each share will be entitled to a liquidation preference of $1,000, plus
any accrued but unpaid dividends.
In addition, the purchasers of the Series C
preferred stock received, on a pro rata basis, warrants exercisable to purchase an aggregate of approximately 150 shares of Company’s
common stock. The warrants contain anti-dilution adjustments in the event that the Company issues shares of common stock, or securities
exercisable or convertible into shares of common stock, at prices below the exercise price of such warrants. As a result of the
anti-dilution protection, the Company is required to account for the warrants as a liability recorded at fair value each reporting
period. At March 31, 2017, the exercise price per share was $640.
On May 23, 2016, an investor canceled certain
of these warrants, exercisable into 903 shares of common stock. The same investor also transferred certain of these warrants, exercisable
for 150 shares of common stock, to two investors who also had participated in the 2015 Series C financing.
Series C1 Convertible
Preferred Stock
Between April 27, 2016
and May 3, 2016, the Company entered into various agreements with certain holders of Series C preferred stock, including directors
John Imhoff and Mark Faupel, pursuant to which those holders separately agreed to exchange each share of Series C preferred stock
held for 2.25 shares of the Company’s newly created Series C1 preferred stock and 12 (9,600 pre-split) shares of the Company’s
common stock (the “Series C Exchanges”). In connection with the Series C Exchanges, each holder also agreed to roll
over the $1,000 stated value per share of the holder’s shares of Series C1 preferred stock into the next qualifying financing
undertaken by the Company on a dollar-for-dollar basis and, except in the event of an additional $50,000 cash investment in the
Company by the holder, to execute a customary “lockup” agreement in connection with the financing. In total, for 1,916
shares of Series C preferred stock surrendered, the Company issued 4,312 shares of Series C1 preferred stock and 22,996 shares
of common stock. At March 31, 2017, there were 4,312 shares outstanding with a conversion price of $0.4016 per share, such that
each share of Series C preferred stock would convert into approximately 2,490 shares of the Company’s common stock
The Series C1 preferred stock has terms that
are substantially the same as the Series C preferred stock, except that the Series C1 preferred stock does not pay dividends (unless
and to the extent declared on the common stock) or at-the-market “make-whole payments” and, while it has the same anti-dilution
protections afforded the Series C preferred stock, it does not automatically reset in connection with a reverse stock split or
conversion of our outstanding convertible debt.
Warrants
The following table summarizes transactions
involving the Company’s outstanding warrants to purchase common stock for the quarter ended March 31, 2017:
|
Warrants
(Underlying Shares)
|
Outstanding, January 1, 2017
|
|
4,349,762
|
|
Issuances
|
|
774,245
|
|
Canceled / Expired
|
|
—
|
|
Exercised
|
|
—
|
|
Outstanding, March 31, 2017
|
|
5,124,007
|
|
The Company had the following shares reserved for the warrants as
of March 31, 2017:
Warrants
(Underlying Shares)
|
|
Exercise
Price
|
Expiration
Date
|
24
|
(1)
|
$8,368.00
per share
|
May
23, 2018
|
7,542
|
(2)
|
$75.00
per share
|
June
14, 2021
|
3
|
(3)
|
$40,000.00
per share
|
April
23, 2019
|
8
|
(4)
|
$36,000.00
per share
|
May
22, 2019
|
3
|
(5)
|
$30,400.00
per share
|
September
10, 2019
|
5
|
(6)
|
$36,864.80
per share
|
September
27, 2019
|
10
|
(7)
|
$22,504.00
per share
|
December
2, 2019
|
105
|
(8)
|
$7,200.00
per share
|
December
2, 2020
|
105
|
(9)
|
$8,800.00
per share
|
December
2, 2020
|
25
|
(11)
|
$20,400.00
per share
|
March
30, 2018
|
22
|
(12)
|
$9,504.00
per share
|
June
29, 2020
|
659
|
(10)
|
$640.00
per share
|
June
29, 2020
|
343
|
(11)
|
$640.00
per share
|
September
4, 2020
|
362
|
(12)
|
$640.00
per share
|
September
21, 2020
|
7
|
(13)
|
$9,504.00
per share
|
September
4, 2020
|
198
|
(14)
|
$640.00
per share
|
October
23, 2020
|
7
|
(15)
|
$9,504.00
per share
|
October
23, 2020
|
4,673,034
|
(16)
|
$0.3077
per share
|
June
14, 2021
|
224,306
|
(17)
|
$0.3077
per share
|
February
21, 2021
|
17,239
|
(18)
|
$13.92
per share
|
June
6, 2021
|
200,000
|
(19)
|
$0.67
per share
|
February
13, 2022
|
5,124,007
|
|
|
|
(1)
|
|
Issued in June 2015 in exchange for warrants originally issued as part of a May
2013 private placement.
|
(2)
|
|
Issued in June 2015 in exchange for warrants originally issued as part of a May 2013 private placement.
|
(3)
|
|
Issued to a placement agent in conjunction with an April 2014 private placement.
|
(4)
|
|
Issued to a placement agent in conjunction with a September 2014 private placement
|
(5)
|
|
Issued as part of a September 2014 Regulation S offering.
|
(6)
|
|
Issued to a placement agent in conjunction with a 2014 public offering.
|
(7)
|
|
Issued in June 2015 in exchange for warrants originally issued as part of a 2014 public offering.
|
(8)
|
|
Issued as part of a March 2015 private placement.
|
(9)
|
|
Issued to a placement agent in conjunction with a June 2015 private placement
|
(10)
|
|
Issued as part of a June 2015 private placement.
|
(11)
|
|
Issued as part of a June 2015 private placement.
|
(12)
|
|
Issued as part of a June 2015 private placement.
|
(13)
|
|
Issued to a placement agent in conjunction with a June 2015 private placement
|
(14)
|
|
Issued as part of a June 2015 private placement.
|
(15)
|
|
Issued to a placement agent in conjunction with a June 2015 private placement
|
(16)
|
|
Issued as part of a February 2016 private placement.
|
(17)
|
|
Issued to a placement agent in conjunction with a February 2016 private placement
|
(18)
|
|
Issued pursuant to a strategic license agreement.
|
(19)
|
|
Issued as part of a February 2017 private placement.
|
All
outstanding warrant agreements provide for anti-dilution adjustments in the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other changes in the Company’s corporate structure; except for (9).
In addition, warrants subject to footnotes (2) and (10)-(12), (14), and (16) – (18) in the table above are subject to “lower
price issuance” anti-dilution provisions that automatically reduce the exercise price of the warrants (and, in the cases
of warrants subject to footnote (2), (16) and (17) in the table above, increase the number of shares of common stock issuable
upon exercise), to the offering price in a subsequent issuance of the Company’s common stock, unless such subsequent issuance
is exempt under the terms of the warrants.
The
warrants subject to footnote (2) are subject to a mandatory exercise provision. This provision permits the Company, subject to
certain limitations, to require exercise of such warrants at any time following (a) the date that is the 30th day after the later
of the Company’s receipt of an approvable letter from the FDA for LuViva and the date on which the common stock achieves
an average market price for 20 consecutive trading days of at least $1,040.00 with an average daily trading volume during such
20 consecutive trading days of at least 250 shares, or (b) the date on which the average market price of the common stock for
20 consecutive trading days immediately prior to the date the Company delivers a notice demanding exercise is at least $129,600.00
and the average daily trading volume of the common stock exceeds 250 shares for such 20 consecutive trading days. If these warrants
are not timely exercised upon demand, they will expire. Upon the occurrence of certain events, the Company may be required to
repurchase these warrants, as well as the warrants subject to footnote (2) in the table above.
The
warrants subject to footnote (5) in the table above are also subject to a mandatory exercise provision. This provision permits
the Company, subject to certain limitations; to require the exercise of such warrants should the average trading price of its
common stock over any 30 consecutive day trading period exceed $92.16.
The
warrants subject to footnote (7) in the table above are also subject to a mandatory exercise provision. This provision permits
the Company, subject to certain limitations, to require exercise of 50% of the then-outstanding warrants if the trading price
of its common stock is at least two times the initial warrant exercise price for any 20-day trading period. Further, in the event
that the trading price of the Company’s common stock is at least 2.5 times the initial warrant exercise price for any 20-day
trading period, the Company will have the right to require the immediate exercise of 50% of the then-outstanding warrants. Any
warrants not exercised within the prescribed time periods will be canceled to the extent of the number of shares subject to mandatory
exercise.
The holders
of the warrants subject to footnote (2) in the table above have agreed to surrender the warrants, upon consummation of a qualified
public financing, for new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without
certain anti-dilution protections included with the surrendered warrants.
Series
B Tranche B Warrants
As discussed
in Note 3, Fair Value Measurements, between June 13, 2016 and June 14, 2016, the Company entered into various agreements with
holders of the Company’s “Series B Tranche B” warrants, pursuant to which each holder separately agreed to exchange
the warrants for either (1) shares of common stock equal to 166% of the number of shares of common stock underlying the surrendered
warrants, or (2) new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain
anti-dilution protections included with the surrendered warrants. In total, for surrendered warrants then-exercisable for an aggregate
of 1,185,357 shares of common stock (but subject to exponential increase upon operation of certain anti-dilution provisions),
the Company issued or is obligated to issue 16,897 shares of common stock and new warrants that, if exercised as of the date hereof,
would be exercisable for an aggregate of 216,707 shares of common stock. As of March 31, 2017, the Company had issued 14,766 shares
of common stock and rights to common stock shares for 2,131. In certain circumstances, in lieu of presently issuing all of the
shares (for each holder that opted for shares of common stock), the Company and the holder further agreed that the Company will,
subject to the terms and conditions set forth in the applicable warrant exchange agreement, from time to time, be obligated to
issue the remaining shares to the holder. No additional consideration will be payable in connection with the issuance of the remaining
shares. The holders that elected to receive shares for their surrendered warrants have agreed that they will not sell shares on
any trading day in an amount, in the aggregate, exceeding 20% of the composite aggregate trading volume of the common stock for
that trading day. The holders that elected to receive new warrants will be required to surrender their old warrants upon consummation
of the Company’s next financing resulting in net cash proceeds to the Company of at least $1 million. The new warrants will
have an initial exercise price equal to the exercise price of the surrendered warrants as of immediately prior to consummation
of the financing, subject to customary “downside price protection” for as long as the Company’s common stock
is not listed on a national securities exchange, and will expire five years from the date of issuance.
5. STOCK
OPTIONS
The Company’s
1995 Stock Plan (the “Plan”) has expired pursuant to its terms, so zero shares remained available for issuance at
March 31, 2017. The Plan allowed for the issuance of incentive stock options, nonqualified stock options, and stock purchase rights.
The exercise price of options was determined by the Company’s board of directors, but incentive stock options were granted
at an exercise price equal to the fair market value of the Company’s common stock as of the grant date. Options historically
granted have generally become exercisable after four years and expire ten years from the date of grant.
As of March
31, 2017, the Company has issued and outstanding options to purchase a total of 123 shares of common stock pursuant to the Plan,
at a weighted average exercise price of $38,309 per share.
The fair value
of stock options are estimated using the Black-Scholes option pricing model. No options were issued during the period ended March
31, 2017.
Stock option
activity for March 31, 2017 as follows:
|
|
2017
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
Exercise Price
|
|
Outstanding
at beginning of year
|
|
|
125
|
|
|
$
|
37,920.00
|
|
|
|
Options
granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
Options
exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
Options
expired/forfeited
|
|
|
(2
|
)
|
|
$
|
14,000.00
|
|
|
|
Outstanding
at end of the period
|
|
|
123
|
|
|
$
|
38,309.00
|
|
|
|
6. LITIGATION AND
CLAIMS
From time to
time, the Company may be involved in various legal proceedings and claims arising in the ordinary course of business. Management
believes that the dispositions of these matters, individually or in the aggregate, are not expected to have a material adverse
effect on the Company’s financial condition. However, depending on the amount and timing of such disposition, an unfavorable
resolution of some or all of these matters could materially affect the future results of operations or cash flows in a particular
period.
As of March
31, 2017 and December 31, 2016, there was no accrual recorded for any potential losses related to pending litigation.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company
leases approximately 23,000 square feet under a lease that expires in June 2017. The fixed monthly lease expense is approximately
$15,000 plus common charges. The Company also leases office and equipment under operating lease agreements with monthly payments
of approximately $2,000. These leases expire at various dates through June 2017. Future minimum rental payments at March 31, 2017
under non-cancellable operating leases for office space and equipment are as follows (in thousands):
Related Party
Contracts
On
June 5, 2016, the Company entered into a license agreement with Shenghuo Medical, LLC pursuant to which the Company granted Shenghuo
an exclusive license to manufacture, sell and distribute LuViva in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines,
Singapore, Thailand, and Vietnam. Shenghuo was already the Company’s exclusive distributor in China, Macau and Hong Kong,
and the license extended to manufacturing in those countries as well. Under the terms of the license agreement, once Shenghuo
was capable of manufacturing LuViva in accordance with ISO 13485 for medical devices, Shenghuo would pay the Company a royalty
equal to $2.00 or 20% of the distributor price (subject to a discount under certain circumstances), whichever is higher, per disposable
distributed within Shenghuo’s exclusive territories. In connection with the license grant, Shenghuo was to underwrite the
cost of securing approval of LuViva with Chinese Food and Drug Administration. At its option, Shenghuo also would provide up to
$1.0 million in furtherance of the Company’s efforts to secure regulatory approval for LuViva from the U.S. Food and Drug
Administration, in exchange for the right to receive payments equal to 2% of the Company’s future sales in the United States,
up to an aggregate of $4.0 million. Pursuant to the license agreement, Shenghuo had the option to have a designee appointed to
the Company’s board of directors (director Richard Blumberg is that designee). As partial consideration for, and as a condition
to, the license, and to further align the strategic interests of the parties, the Company agreed to issue a convertible note to
Shenghuo, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment to Shenghuo of $300,000,
expected to be due the earlier of 90 days from issuance and consummation of any capital raising transaction by the Company with
net cash proceeds of at least $1.0 million. The note will accrue interest at 20% per year on any unpaid amounts due after that
date. The note will be convertible into shares of the Company’s common stock at a conversion price per share of $13.92,
subject to customary anti-dilution adjustment. The note will be unsecured, and is expected to provide for customary events of
default. The Company will also issue Shenghuo a five-year warrant exercisable immediately for approximately 21,549 shares of common
stock at an exercise price equal to the conversion price of the note, subject to customary anti-dilution adjustment. On January
22, 2017, the Company entered into a license agreement with SMI, pursuant to which the Company granted SMI an exclusive global
license to manufacture the LuViva device and related disposables (subject to a carve-out for manufacture in Turkey) and exclusive
distribution rights in the Peoples Republic of China, Macau, Hong Kong and Taiwan. In order to facilitate the SMI agreement, immediately
prior to its execution the Company entered into an agreement with Shenghuo regarding its previous license to Shenghuo. Under the
terms of the new agreement, Shenghuo agreed to relinquish its manufacturing license and its distribution rights in SMI’s
territories, and to waive its rights under the original Shenghuo agreement, all for as long as SMI performs under the SMI agreement.
On
September 6, 2016, the Company entered into a royalty agreement with one of its directors, John Imhoff, and another stockholder,
Dolores Maloof, pursuant to which the Company sold to them a royalty of future sales of single-use cervical guides for LuViva.
Under the terms of the royalty agreement, and for consideration of $50,000, the Company will pay them an aggregate perpetual royalty
initially equal to $0.10, and from and after October 2, 2016, equal to $0.20, for each disposable that the Company sells (or that
is sold by a third party pursuant to a licensing arrangement with the Company).
See also Note
8, Notes Payable, with respect to certain short term notes payable issued to certain of the Company’s officers and directors.
8. NOTES
PAYABLE
Notes Payable
in Default
At March 31,
2017 and December 31, 2016, the Company maintained notes payable and accrued interest to both related and non-related parties
totaling $651,000. These notes are short term, straight-line amortizing notes. The notes carry annual interest rates between 5%
and 10% and have default rates as high a 16.5%.
Short Term
Notes Payable
At March 31, 2017 and December 31,
2016, the Company maintained short term notes payable and accrued interest to both related and non-related parties totaling $564,000
and $127,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry annual interest rates between
5% and 10%.
In June 2016,
the Company entered into a premium finance agreement to finance its insurance policies totaling $193,862. The note requires monthly
payments of $17,622, including interest at 4.87% and matures in April 2017. The balance due on this note totaled $35,000 at March
31, 2017.
9. SHORT-TERM
CONVERTIBLE DEBT
Related
Party Convertible Note Payable – Short-Term
On
June 5, 2016, the Company entered into a license agreement with a distributor pursuant to which the Company granted the distributor
an exclusive license to manufacture, sell and distribute the Company’s LuViva Advanced Cervical Cancer device and related
disposables in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The distributor
was already the Company’s exclusive distributor in China, Macau and Hong Kong, and the license will extend to manufacturing
in those countries as well.
As
partial consideration for, and as a condition to, the license, and to further align the strategic interests of the parties, the
Company agreed to issue a convertible note to the distributor, in exchange for an aggregate cash investment of $200,000. The note
will provide for a payment to the distributor of $240,000, due upon consummation of any capital raising transaction by the Company
within 90 days and with net cash proceeds of at least $1.0 million. As of March 31, 2017 the Company had a note due of $356,595.
The note will accrue interest at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares
of the Company’s common stock at a conversion price per share of $13.92, subject to customary anti-dilution adjustment.
The note will be unsecured, and is expected to provide for customary events of default. The Company will also issue the distributor
a five-year warrant exercisable immediately for 17,239 shares of common stock at an exercise price equal to the conversion price
of the note, subject to customary anti-dilution adjustment.
Convertible
Note Payable – Short-Term
On
December 28, 2016, the Company entered into a securities purchase agreement with an investor for the issuance and sale to investor
of up to $330,000 in aggregate principal amount of 10% original issuance discount convertible promissory notes, for an aggregate
purchase price of $300,000. On that date, the Company issued to the investor a note in the principal amount of $222,000, for a
purchase price of $200,000. The note matures six months from their date of issuance and, in addition to the 10% original issue
discount, accrue interest at a rate of 10% per year. The Company may prepay the notes, in whole or in part, for 115% of outstanding
principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any time from 31 to 60 days
from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance until immediately prior
to the maturity date. After six months from the date of issuance (i.e., if the Company fails to repay all principal and interest
due under the notes at the maturity date), the investor may convert the notes, at any time, in whole or in part, into shares of
the Company’s common stock, at a conversion price equal to 60% of the lowest volume weighted average price of our common
stock during the 20 trading days prior to conversion, subject to certain customary adjustments and anti-dilution provisions contained
in the note.
As
of March 31, 2017, the Company had debt issuance costs net of accumulated amortization of $15,000, unamortized original issue
discount of $11,000 and net of debt of $194,000.
On
February 13, 2017, the Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to
Auctus of $170,000 in aggregate principal amount of a 12% convertible promissory note for an aggregate purchase price of $156,400
(representing a $13,600 original issue discount). On February 13, 2017, the Company issued the note to Auctus. Pursuant to the
purchase agreement, the Company also issued to Auctus a warrant exercisable to purchase an aggregate of 200,000 shares of the
Company’s common stock. The warrant is exercisable at any time, at an exercise price per share equal to $0.77 (110% of the
closing price of the common stock on the day prior to issuance), subject to certain customary adjustments and price-protection
provisions contained in the warrant. The warrant has a five-year term. The note matures nine months from the date of issuance
and, in addition to the original issue discount, accrues interest at a rate of 12% per year. The Company may prepay the note,
in whole or in part, for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal
and interest at any time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from
61 days from issuance to 180 days from issuance. After six months from the date of issuance, Auctus may convert the note, at any
time, in whole or in part, into shares of the Company’s common stock, at a conversion price equal to the lower of the price
offered in the Company’s next public offering or a 40% discount to the average of the two lowest trading prices of the common
stock during the 20 trading days prior to the conversion, subject to certain customary adjustments and price-protection provisions
contained in the note. The note includes customary events of default provisions and a default interest rate of 24% per year. Upon
the occurrence of an event of default, Auctus may require the Company to redeem the note (or convert it into shares of common
stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. In connection with the transaction, the
Company agreed to reimburse Auctus for $30,000 in legal and diligence fees, of which we paid $10,000 in cash and $20,000 in restricted
shares of common stock, valued at $0.40 per share (a 42.86% discount to the closing price of the common stock on the day prior
to issuance). The Company allocated proceeds of $90,000 to the warrants and common stock issued in connection with the financing.
As of March 31, 2017, the Company has net debt of $42,000, including unamortized original issue discount of $14,000, unamortized
debt issuance costs of $34,000 and unamortized discount related to common stock and warrants of $80,000.
10. CONVERTIBLE
DEBT IN DEFAULT
Secured
Promissory Note.
On
September 10, 2014, the Company sold a secured promissory note to an accredited investor with an initial principal amount of $1,275,000,
for a purchase price of $700,000 (an original issue discount of $560,000). The Company may prepay the note at any time. The note
is secured by the Company’s current and future accounts receivable and inventory, pursuant to a security agreement entered
into in connection with the sale. On March 10, 2015, May 4, 2015, June 1, 2015, June 16, 2015, June 29, 2015, January 21, 2016,
January 29, 2016, and February 12, 2016 the Company amended the terms of the note to extend the maturity ultimately until August
31, 2016. During the extension, interest accrues on the note at a rate of the lesser of 18% per year or the maximum rate permitted
by applicable law. On February 11, 2016, the Company consented to an assignment of the note to two accredited investors. In connection
with the assignment, the holders waived an ongoing event of default under the notes related to the Company’s minimum market
capitalization, and agreed to eliminate the requirement going forward. Pursuant to the terms of the amended note, the holder may
convert the outstanding balance into shares of common stock at a conversion price per share equal to the lower of (1) $25.0 or
(2) 75% of the lowest daily volume weighted average price of the common stock during the five days prior to conversion. If the
conversion price at the time of any conversion is lower than $15.00, the Company has the option of delivering the conversion amount
in cash in lieu of shares of common stock. On March 7, 2016, the Company further amended the note to eliminate the volume limitations
on sales of common stock issued or issuable upon conversion. On July 13, 2016, the Company consented to the assignment by one
of the accredited investors of its portion of the note of to a third accredited investor.
The
balance due on the note was $216,231 and $530,691 at March 31, 2017 and December 31, 2016, respectively. The balance was reduced
by $306,863 as part of a debt restructuring on December 7, 2016.
Total
debt issuance costs as originally capitalized were approximately $130,000. This amount was amortized over nine months and was
fully amortized as of December 31, 2015. Total amortized expense for the years ended December 31, 2015 was approximately $49,000.
For the year ended December 31, 2015, the Company recorded amortization of approximately $213,000 on the discount. The original
issue discount of $560,000 was fully amortized as of December 31, 2015.
On
November 2, 2016, the Company entered into a lockup and exchange agreement with GHS Investments, LLC, holder of approximately
$221,000 in outstanding principal amount of the Company’s secured promissory note and all of the outstanding shares of the
its Series C preferred stock. Pursuant to the agreement, upon the effectiveness of the 1:800 reverse stock split and continuing
for 45 days after, GHS and its affiliates were prohibited from converting any portion of the secured promissory note or any of
the shares of Series C preferred stock or selling any of the Company’s securities that they beneficially owned. The Company
agreed that, upon consummation of its next financing, the Company would use $260,000 of net cash proceeds first, to repay GHS’s
portion of the secured promissory note and second, with any remaining amount from the $260,000, to repurchase a portion of GHS’s
shares of Series C preferred stock. In addition, GHS has agreed to exchange the stated value per share (plus any accrued but unpaid
dividends) of its remaining shares of Series C preferred stock for new securities of the same type that the Company separately
issue in the next qualifying financing it undertakes, on a dollar-for-dollar basis in a private placement exchange.
Senior
Secured Promissory Note
On
February 11, 2016, the Company entered into a securities purchase agreement with GPB Debt Holdings II LLC for the issuance and
sale on February 12, 2016 of $1.4375 million in aggregate principal amount of a senior secured convertible note for an aggregate
purchase price of $1.15 million (a 20% original issue discount of $287,500) and a discount for debt issuance costs paid at closing
of $121,000 for a total of $408,500. In addition, GPB received a warrant exercisable to purchase an aggregate of approximately
2,246 shares of the Company’s common stock. The Company allocated proceeds totaling $359,555 to the fair value of the warrants
at issuance. This was recorded as an additional discount on the debt. The convertible note matures on the second anniversary of
issuance and, in addition to the 20% original issue discount, accrues interest at a rate of 17% per year. The Company is required
to pay monthly interest coupons and beginning nine months after issuance, the Company is required to pay amortized quarterly principal
payments. If the Company does not receive, on or before the first anniversary after issuance, an aggregate of at least $3.0 million
from future equity or debt financings or non-dilutive grants, then the holder will have the option of accelerating the maturity
date to the first anniversary of issuance. The Company may prepay the convertible note, in whole or in part, without penalty,
upon 20 days’ prior written notice. Subject to resale restrictions under Federal securities laws and the availability of
sufficient authorized but unissued shares of the Company’s common stock, the convertible note is convertible at any time,
in whole or in part, at the holder’s option, into shares of the Company’s common stock, at a conversion price equal
to the lesser of $0.80 per share or 70% of the average closing price per share for the five trading days prior to issuance, subject
to certain customary adjustments and anti-dilution provisions contained in the convertible note. On May 28, 2016, in exchange
for an additional $87,500 in cash from GPB to the Company, the principal balance was increased by the same amount. The Company
is currently in default as they are past due on the required monthly interest payments. In the event of default, the Company shall
accrue interest at a rate the lesser of 22% or the maximum permitted by law. The Company has accrued $117,000 for past due interest
payments at December 31, 2016. Upon the occurrence of an event of default, the holder may require the Company to redeem the convertible
note at 120% of the outstanding principal balance (but as of March 31, 2017, had not done so). As of March 31, 2017, the balance
due on the convertible debt was $1,831,863 as the Company has fully amortized debt issuance costs of $47,675 and the debt discount
of $768,055 and recorded a 20% penalty totaling $305,000. The convertible note is secured by a lien on all of the Company’s
assets, including its intellectual property, pursuant to a security agreement entered into by the Company and GPB.
The
warrant is exercisable at any time, pending availability of sufficient authorized but unissued shares of the Company’s common
stock, at an exercise price per share equal to the conversion price of the convertible note, subject to certain customary adjustments
and anti-dilution provisions contained in the warrant. The warrant has a five-year term. As of March 31, 2017, the exercise price
had been adjusted to $0.3077 and the number of common stock shares exchangeable for was 4,673,034. As of March 31, 2017, the effective
interest rate considering debt costs was 29%.
The
Company used a placement agent in connection with the transaction. For its services, the placement agent received a cash placement
fee equal to 4% of the aggregate gross proceeds from the transaction and a warrant to purchase shares of common stock equal to
an aggregate of 6% of the total number of shares underlying the securities sold in the transaction, at an exercise price equal
to, and terms otherwise identical to, the warrant issued to the investor. Finally, the Company agreed to reimburse the placement
agent for its reasonable out-of-pocket expenses.
In
connection with the transaction, on February 12, 2016, the Company and GPB entered into a four-year consulting agreement, pursuant
to which the investor will provide management consulting services to the Company in exchange for a royalty payment, payable quarterly,
equal to 3.5% of the Company’s revenues from the sale of products. As of March 31, 2017, GPB had earned approximately $24,000
in royalties.
Debt
Restructuring
.
On
December 7, 2016, the Company entered into an exchange agreement with GPB with regard to the $1,525,000 in outstanding principal
amount of senior secured convertible note originally issued to GPB on February 11, 2016, and the $306,863 in outstanding principal
amount of the Company’s secured promissory note that GPB holds (see “—Secured Promissory Note”). Pursuant
to the exchange agreement, upon completion of the next financing resulting in at least $1 million in cash proceeds, GPB will exchange
both securities for a new convertible note in principal amount of $1,831,863. The new convertible note will mature on the second
anniversary of issuance and will accrue interest at a rate of 19% per year. The Company will pay monthly interest coupons and,
beginning one year after issuance, will pay amortized quarterly principal payments. Subject to resale restrictions under Federal
securities laws and the availability of sufficient authorized but unissued shares of the Company’s common stock, the new
convertible note will be convertible at any time, in whole or in part, at the holder’s option, into shares of common stock,
at a conversion price equal to the price offered in the qualifying financing that triggers the exchange, subject to certain customary
adjustments and anti-dilution provisions contained in the new convertible note. The new convertible note will include customary
event of default provisions and a default interest rate of the lesser of 21% or the maximum amount permitted by law. Upon the
occurrence of an event of default, GPB will be entitled to require the Company to redeem the new convertible note at 120% of the
outstanding principal balance. The new convertible note will be secured by a lien on all of the Company’s assets, including
its intellectual property, pursuant to the security agreement entered into by the Company and GPB in connection with the issuance
of the original senior secured convertible note. As an inducement to GPB to enter into these transactions, the Company agreed
to increase the royalty payable to GPB pursuant to its consulting agreement with us from 3.5% to 3.85% of revenues from the sales
of the Company’s products.
11. INCOME (LOSS) PER COMMON
SHARE
Basic net income
(loss) per share attributable to common stockholders amounts are computed by dividing the net income (loss) plus preferred stock
dividends and deemed dividends on preferred stock by the weighted average number of shares outstanding during the period.
Diluted net
income (loss) per share attributable to common stockholders amounts are computed by dividing the net income (loss) plus preferred
stock dividends, deemed dividends on preferred stock, after-tax interest on convertible debt and convertible dividends by the
weighted average number of shares outstanding during the period, plus Series C convertible preferred stock, convertible debt,
convertible preferred dividends and warrants convertible into common stock shares.
Diluted net
loss per common share is the same as basic net loss per common share since the Company was operating in a loss position for 2017
and 2016.