NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
1.
|
ORGANIZATION,
BACKGROUND, AND BASIS OF PRESENTATION
|
Guided
Therapeutics, Inc. (formerly SpectRx, Inc.), together with its wholly owned subsidiary, InterScan, Inc. (formerly Guided Therapeutics,
Inc.), collectively referred to herein as the “Company”, is a medical technology company focused on developing innovative
medical devices that have the potential to improve healthcare. The Company’s primary focus is the continued commercialization
of its LuViva non-invasive cervical cancer detection device and extension of its cancer detection technology into other cancers,
including esophageal. The Company’s technology, including products in research and development, primarily relates to biophotonics
technology for the non-invasive detection of cancers.
Basis
of Presentation
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.
A
1:800 reverse stock split of all of the Company’s issued and outstanding common stock was implemented on March 29, 2019.
As a result of the reverse stock split, every 800 shares of issued and outstanding common stock were 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 2,652,309,322 shares to 3,319,486 shares as of that date with rounding. See Note 4, Stockholders’
Deficit. Unless otherwise specified, all per share amounts are reported on a post-stock split basis, as of September 30, 2019.
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 September 30, 2019, it had an accumulated
deficit of approximately $140.6 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 for the foreseeable future 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.
Certain
prior year amounts have been reclassified in order to conform to the current year presentation.
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
September 30, 2019, the Company had a negative working capital of approximately $11.5 million, accumulated deficit of $140.6 million,
and incurred a net loss of $3.0 million for the nine months then ended. Stockholders’ deficit totaled approximately $18.0
million at September 30, 2019, primarily due to recurring net losses from operations, deemed dividends on warrants and preferred
stock, offset by proceeds from the exercise of options and warrants and proceeds from sales of stock.
The
Company’s capital-raising efforts are ongoing and the Company has taken the following steps to increase the likelihood of
a successful financing: 1) Debt will be significantly reduced and additional agreements will be executed, contingent on a successful
financing, to reduce debt even further either by forgiveness of debt and/or exchanges of debt for equity 2) Monthly operating
expenses have been reduced by nearly 50% since the beginning of 2017 and 3) Variable rate loans for the most part have either
been paid off or converted to equity. The capital raising efforts are summarized in Footnote 12 - SUBSEQUENT EVENTS. However,
if sufficient capital cannot be raised during 2020, 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 38.5 million shares of its common stock outstanding at September 30, 2019 with
exercise prices ranging between $0.04 and $60,000 per share. The Company estimates that only a portion of these warrants would
be exercisable given the high exercise prices and would generate a total of approximately $1.6 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. However, please refer to Footnote 10 - CONVERTIBLE
DEBT IN DEFAULT in the paragraph: Debt Restructuring for more information regarding our warrants.
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, 2018 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.
The Company uses the Monte Carlo simulations and binomial calculations in the calculation of the fair value of the warrant liabilities
and the valuation of embedded conversion options and freestanding warrants.
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
Implemented
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 is 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
depends on its classification as finance or operating lease. The update is effective for reporting periods beginning after December
15, 2018. The adoption resulted in the Company in recognizing a lease asset and a
corresponding lease liability of $213,000 at adoption.
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.
A
variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting organizations
and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not
yet determined the effect, if any, that the implementation of such proposed standards would have 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 distributors’ 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.
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 September
30, 2019 and December 31, 2018, our inventories were as follows (in thousands):
|
|
September
30,
|
|
December
31,
|
|
|
2019
|
|
2018
|
Raw
materials
|
|
$
|
781
|
|
|
$
|
783
|
|
Work
in process
|
|
|
81
|
|
|
|
81
|
|
Finished
goods
|
|
|
17
|
|
|
|
17
|
|
Inventory
reserve
|
|
|
(831
|
)
|
|
|
(767
|
)
|
Total
|
|
$
|
48
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
The
Company maintains reserves for excess and obsolete inventories to reflect inventory at stated
at lower of cost or net realizable value. The Company’s estimate for excess and obsolete
inventory is based upon the assumptions about future demand and market conditions. The establishment of a reserve for excess and
obsolete inventory establishes a new cost basis in the inventory. Such reserves are not reduced until the product is sold. If
the Company was able to sell such inventory any related reserves would be reversed in the period of sale.
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 are included in general and administrative expense on the consolidated statement of operations.
Expenditures for repairs and maintenance are expensed as incurred. Property and equipment are summarized as follows at September
30, 2019 and December 31, 2018 (in thousands):
|
|
September
30,
|
|
December
31,
|
|
|
2019
|
|
2018
|
Equipment
|
|
$
|
1,349
|
|
|
$
|
1,378
|
|
Software
|
|
|
740
|
|
|
|
740
|
|
Furniture
and fixtures
|
|
|
124
|
|
|
|
124
|
|
Leasehold
Improvement
|
|
|
180
|
|
|
|
199
|
|
|
|
|
2,393
|
|
|
|
2,441
|
|
Less
accumulated depreciation and amortization
|
|
|
(2,393
|
)
|
|
|
(2,420
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
Debt
Issuance Costs
Debt
issuance costs are capitalized and amortized over the term of the associated debt. Debt issuance costs are presented in the consolidated
balance sheet as a direct deduction from the carrying amount of the debt liability consistent with the debt discount.
Other
Assets
Other
assets primarily consist of a deposit for the corporate office.
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 U.S. FDA approval and recovery of these costs is uncertain. Such costs aggregated
approximately $14,000 and $11,000 for the nine months ended September 30, 2019 and 2018, respectively.
Leases
With
the implementation of ASU 2016-02, “Leases (Topic 842)”, the Company recorded a lease asset-right and a lease liability.
The implementation required the analysis of certain criteria in determining its treatment. The Company determined that its corporate
office lease met those criteria. The Company implemented the guidance using the alternative transition method. Under this alternative,
the effective date would be the date of initial application. The Company analyzed the lease at its effective date and calculated
an initial lease payment amount of $267,380 with a present value of $213,000 using a 20% discount. As of September 30, 2019, the
balance of the lease asset – right and lease liability was approximately $154,000. Rent was unpaid as of September 30, 2019,
and therefore the Company is including rent in accounts payable.
The
cumulative effect of initially applying the new guidance had an immaterial impact on the opening balance of retained earnings,
The Company does not expect the guidance to have a material impact on its consolidated net earnings in future periods. The Company
elected the Practical expedients permitted under the transition guidance within the new standards, which allowed the Company to
carry forward the historical lease classification.
Accrued
Liabilities
Accrued
liabilities are summarized as follows (in thousands):
|
|
September
30,
2019
|
|
December
31,
2018
|
Compensation
|
|
$
|
1,088
|
|
|
$
|
1,030
|
|
Professional
fees
|
|
|
176
|
|
|
|
203
|
|
Interest
|
|
|
1,419
|
|
|
|
892
|
|
Warranty
|
|
|
2
|
|
|
|
2
|
|
Vacation
|
|
|
50
|
|
|
|
53
|
|
Preferred
dividends
|
|
|
120
|
|
|
|
120
|
|
Stock
subscription for licenses
|
|
|
—
|
|
|
|
692
|
|
Other
accrued expenses
|
|
|
189
|
|
|
|
164
|
|
Total
|
|
$
|
3,044
|
|
|
$
|
3,156
|
|
Revenue
Recognition
The
Company follows, ASC 606 Revenue from Contracts with Customers establishes a single and comprehensive framework which sets out
how much revenue is to be recognized, and when. The core principle is that a vendor should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled
in exchange for those goods or services. Revenue will now be recognized by a vendor when control over the goods or services is
transferred to the customer. In contrast, Revenue based revenue recognition around an analysis of the transfer of risks and rewards;
this now forms one of a number of criteria that are assessed in determining whether control has been transferred. The application
of the core principle in ASC 606 is carried out in five steps: Step 1 – Identify the contract with a customer: a contract
is defined as an agreement (including oral and implied), between two or more parties, that creates enforceable rights and obligations
and sets out the criteria for each of those rights and obligations. The contract needs to have commercial substance and it is
probable that the entity will collect the consideration to which it will be entitled. Step 2 – Identify the performance
obligations in the contract: a performance obligation in a contract is a promise (including implicit) to transfer a good or service
to the customer. Each performance obligation should be capable of being distinct and is separately identifiable in the contract.
Step 3 – Determine the transaction price: transaction price is the amount of consideration that the entity can be entitled
to, in exchange for transferring the promised goods and services to a customer, excluding amounts collected on behalf of third
parties. Step 4 – Allocate the transaction price to the performance obligations in the contract: for a contract that has
more than one performance obligation, the entity will allocate the transaction price to each performance obligation separately,
in exchange for satisfying each performance obligation. The acceptable methods of allocating the transaction price include adjusted
market assessment approach, expected cost plus a margin approach, and, the residual approach in limited circumstances. Discounts
given should be allocated proportionately to all performance obligations unless certain criteria are met and reallocation of changes
in standalone selling prices after inception is not permitted. Step 5 – Recognize revenue as and when the entity satisfies
a performance obligation: the entity should recognize revenue at a point in time, except if it meets any of the three criteria,
which will require recognition of revenue over time: the entity’s performance creates or enhances an asset controlled by
the customer, the customer simultaneously receives and consumes the benefit of the entity’s performance as the entity performs,
and the entity does not create an asset that has an alternative use to the entity and the entity has the right to be paid for
performance to date.
Revenue
by product line (in thousands):
|
|
Nine
Months Ended September 30,
|
|
|
2019
|
|
2018
|
Devices
|
|
$
|
—
|
|
|
$
|
—
|
|
Disposables
|
|
|
2
|
|
|
|
10
|
|
Other
|
|
|
16
|
|
|
|
1
|
|
Warranty
|
|
|
2
|
|
|
|
4
|
|
Total
|
|
$
|
20
|
|
|
$
|
15
|
|
Revenue
by geographic location (in thousands):
|
|
Nine
Months Ended September 30,
|
|
|
2019
|
|
2018
|
Asia
|
|
$
|
6
|
|
|
$
|
—
|
|
Africa
|
|
|
—
|
|
|
|
11
|
|
Europe
|
|
|
14
|
|
|
|
4
|
|
North
America
|
|
|
—
|
|
|
|
—
|
|
South
America
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
20
|
|
|
$
|
15
|
|
Significant
Distributors
During
the nine months ended September 30, 2019, all the Company’s revenues were from two distributors and for extended warranties.
Revenue from these distributors totaled approximately $20,000 for the period ended September 30, 2019. Accounts receivable were
from one distributor and represents 100% of the balance for the period ended September 30, 2019. During the nine months ended
September 30, 2018, revenues were from two distributors, that totaled approximately $15,000.
Deferred
revenue
The
Company defers payments received as revenue until earned based on the related contracts and applying ASC 606 as required. As of
September 30, 2019, and December 31, 2018, the Company had $98,000 and $66,000 in deferred revenue, respectively.
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 return filings, payments and certain Federal and State
Unemployment Tax filings. Some of the federal income tax returns are currently under examination by the U.S. Internal Revenue
Service (“IRS”). The Company has entered into an agreed upon payment plan with the IRS for delinquent payroll taxes.
The Company is currently in process of setting up a payment arrangement for its delinquent state income taxes with the State of
Georgia and the returns are currently under review by state authorities. Although the Company has been experiencing recurring
losses, it is obligated to file tax returns for compliance with IRS regulations and that of applicable state jurisdictions. At
December 31, 2018, the Company has approximately $77.2 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.
Corporate
tax rates in the U.S. have decreased from 34% to 21%.
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 September
30, 2019 and December 31, 2018, 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 employees and 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 nine months ended September 30, 2019 and 2018 share-based compensation for options attributable to employees, non-emplolyees,
officers and Board members were approximately $8,000 and $35,000. 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 September
30, 2019, the Company did not have any unrecognized compensation costs related to granted stock options that will be recognized.
Beneficial
Conversion Features of Convertible Securities
Conversion
options that are not bifurcated as a derivative pursuant to ASC 815 and not accounted for as a separate equity component under
the cash conversion guidance are evaluated to determine whether they are beneficial to the investor at inception (a beneficial
conversion feature) or may become beneficial in the future due to potential adjustments. The beneficial conversion feature guidance
in ASC 470-20 applies to convertible stock as well as convertible debt which are outside the scope of ASC 815. A beneficial conversion
feature is defined as a nondetachable conversion feature that is in the money at the commitment date. The beneficial conversion
feature guidance requires recognition of the conversion option’s in-the-money portion, the intrinsic value of the option,
in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting discount is amortized as a dividend
over either the life of the instrument, if a stated maturity date exists, or to the earliest conversion date, if there is no stated
maturity date. If the earliest conversion date is immediately upon issuance, the dividend must be recognized at inception. When
there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price may trigger the recognition
of an additional beneficial conversion feature on occurrence.
Derivatives
The
Company reviews the terms of convertible debt issued to determine whether there are embedded derivative instruments, including
embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments.
In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option,
that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument
Bifurcated
embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair
value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative
instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the
fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments
themselves, usually resulting in those instruments being recorded at a discount from their face value. The discount from the face
value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument
through periodic charges to interest expense.
3.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
guidance for fair value measurements, ASC 820, 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 follow:
|
•
|
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 September 30, 2019. 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 September 30, 2019 and December
31, 2018:
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 September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Distributor
Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(114
|
)
|
|
$
|
(114
|
)
|
Warrants
issued in connection with Senior Secured Debt
|
|
|
|
|
|
|
|
|
|
|
(5,887
|
)
|
|
|
(5,887
|
)
|
Warrants
issued in connection with Short-Term Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
(102
|
)
|
|
|
(102
|
)
|
Total
long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6,103
|
)
|
|
$
|
(6,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value at December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Distributor
Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(114
|
)
|
|
$
|
(114
|
)
|
Warrants
issued in connection with Senior Secured Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,614
|
)
|
|
|
(4,614
|
)
|
Total
long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4,728
|
)
|
|
$
|
(4,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a summary of changes to Level 3 instruments during the nine months ended September 30, 2019:
|
|
Distributor
Debt
|
|
Short-Term
Loans
|
|
Senior
Secured Debt
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2018
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
|
$
|
(4,614
|
)
|
|
$
|
(4,728
|
)
|
Warrants
issued during the period
|
|
|
—
|
|
|
|
(108
|
)
|
|
|
—
|
|
|
|
(108
|
)
|
Change
in fair value during the period
|
|
|
—
|
|
|
|
6
|
|
|
|
(1,273
|
)
|
|
|
(1,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September
30, 2019
|
|
$
|
(114
|
)
|
|
$
|
(102
|
)
|
|
$
|
(5,887
|
)
|
|
$
|
(6,103
|
)
|
As
of September 30, 2019, the fair value of warrants was approximately $6.1 million. A net change of approximately $1.3 million has
been recorded to the accompanying consolidated statement of operations for the nine months ended September 30, 2019.
4.
STOCKHOLDERS’ DEFICIT
Common
Stock
The
Company has authorized 3,000,000,000 shares of common stock with $0.001 par value, of which 3,319,486 were issued and outstanding
as of September 30, 2019. As of December 31, 2018, there were 3,000,000,000 authorized shares of common stock, of which 2,669,348
were issued and outstanding.
For
the nine months ended September 30, 2019, the Company issued 650,138 shares of common stock as listed below:
Convertible
Debt Conversions
|
|
650,138
|
Summary
table of common stock share transactions:
Balance
at December 31, 2018
|
|
2,669,348
|
Issued
in 2019
|
|
650,138
|
Balance
at September 30, 2019
|
|
3,319,486
|
The
Company’s COO and director, Mark Faupel, is a shareholder of Shenghuo, and a former director, Richard Blumberg, is a managing
member of Shenghuo.
During
2018, the Company had exercised its rights under the $10,000,000 GHS Equity Financing Agreement entered into on March 1, 2018,
to exercise puts of $47,320 for the issuance of 87,500 common stock shares. Pursuant to the agreement a put maybe executed for
a price that is 80% of the “market price” which is the average of the two lowest volume weighted average prices of
the Company’s common stock for 15 consecutive trading days preceding the put date.
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, (the “Series C Preferred Stock”), of which
286 were issued and outstanding at September 30, 2019 and December 31, 2018, respectively and 20,250 shares of preferred stock
as Series C1 Preferred Stock, of which 1,050 shares were issued and outstanding at September 30, 2019 and December 31, 2018, respectively.
On
August 31, 2018, the Company entered into agreements with certain holders of the Company’s Series C1 Preferred Stock, including
the chairman of the Company’s board of directors, and the Chief Operating Officer and a director of the Company (the “Exchange
Agreements”), pursuant to which those holders separately agreed to exchange each share of the Series C1 Preferred Stock
held for one (1) share of the Company’s newly created Series C2 preferred stock, par value $0.001 per share (the “Series
C2 Preferred Stock”). In total, for 3,262.25 shares of Series C1 Preferred Stock to be surrendered, the Company issued 3,262.25
shares of Series C2 Preferred Stock.
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, exchange 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. Additionally, during October 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. For a total of Series C convertible preferred stock issued of 7,903 shares.
Of the 7,903 Series C convertible preferred stock issued, 1,835 were issued in exchange of Series B convertible preferred stock.
Therefore 6,068 Series C preferred stock were issued at a purchase price of $750 for gross proceeds of $4,551,000. The Company
received net cash proceeds of $3,698,000, after cash and non-cash expenses of $853,000.
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 September 30, 2019, there were 286 shares outstanding with a conversion price of $2.099 per share, such that
each share of Series C preferred stock would convert into approximately 476 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 number of unpaid dividends through the Dividend End
Date on the converted shares. At September 30, 2019, the “make-whole payment” for a converted share of Series C preferred
stock would convert to 200 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 1 share
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 September 30, 2019, the exercise price per share was $512,000.
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 29 shares of common stock. At September 30, 2019, there were 1,050 shares outstanding with a conversion price
of $2.099 per share, such that each share of Series C preferred stock would convert into approximately 476 shares of the Company’s
common stock.
On
August 31, 2018, 3,262.25 shares of Series C1 Preferred Stock were surrendered, and the Company issued 3,262.25 shares of Series
C2 Preferred Stock. At September 30, 2019, shares of Series C2 had a conversion price of $2.099 per share, such that each share
of Series C preferred stock would convert into approximately 476 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.
Series
C2 Convertible Preferred Stock
On
August 31, 2018, the Company entered into agreements with certain holders of the Company’s Series C1 Preferred Stock, including
the chairman of the Company’s board of directors, and the Chief Operating Officer and a director of the Company pursuant
to which those holders separately agreed to exchange each share of the Series C1 Preferred Stock held for one (1) share of the
Company’s newly created Series C2 Preferred Stock. In total, for 3,262.25 shares of Series C1 Preferred Stock to be surrendered,
the Company issued 3,262.25 shares of Series C2 Preferred Stock.
The
terms of the Series C2 Preferred Stock are substantially the same as the Series C1 Preferred Stock, except that (i) shares of
Series C1 Preferred Stock may not be convertible into the Company’s common stock by their holder for a period of 180 days
following the date of the filing of the Certificate of Designation (the “Lock-Up Period”); (ii) the Series C2 Preferred
Stock has the right to vote as a single class with the Company’s common stock on an as-converted basis, notwithstanding
the Lock-Up Period; and (iii) the Series C2 Preferred Stock will automatically convert into that number of securities sold in
the next Qualified Financing (as defined in the Exchange Agreement) determined by dividing the stated value ($1,000 per share)
of such share of Series C2 Preferred Stock by the purchase price of the securities sold in the Qualified Financing.
Warrants
The
following table summarizes transactions involving the Company’s outstanding warrants to purchase common stock for the nine
months ended September 30, 2019:
|
|
Warrants
(Underlying
Shares)
|
Outstanding,
January 1, 2019
|
|
|
23,551,857
|
|
Issuances
|
|
|
14,965,000
|
|
Canceled
/ Expired
|
|
|
(14
|
)
|
Exercised
|
|
|
—
|
|
Outstanding,
September 30, 2019
|
|
|
38,516,843
|
|
The
Company had the following shares reserved for the warrants as of September 30, 2019:
Warrants
(Underlying Shares)
|
|
Exercise
Price
|
Expiration
Date
|
13
|
(1)
|
$60,000.00
per share
|
June
14, 2021
|
3
|
(6)
|
$18,003,200.00
per share
|
December
2, 2019
|
2
|
(7)
|
$5,760,000.00
per share
|
December
2, 2020
|
2
|
(8)
|
$7,040,000.00
per share
|
December
2, 2020
|
1
|
(9)
|
$7,603,200.00
per share
|
June
29, 2020
|
13
|
(9)
|
$512,000.00
per share
|
September
21, 2020
|
24
|
(10)
|
$512,000.00
per share
|
June
29, 2020
|
12
|
(11)
|
$512,000.00
per share
|
September
4, 2020
|
1
|
(12)
|
$7,603,200.00
per share
|
September
4, 2020
|
1
|
(13)
|
$512,000.00
per share
|
October
23, 2020
|
1
|
(14)
|
$7,603,200.00
per share
|
October
23, 2020
|
35,937,500
|
(15)
|
$0.04
per share
|
June
14, 2021
|
1,725,000
|
(16)
|
$0.04
per share
|
February
21, 2021
|
22
|
(17)
|
$11,137.28
per share
|
June
6, 2021
|
250
|
(18)
|
$0.04
per share
|
February
13, 2022
|
25
|
(19)
|
$144.00
per share
|
May
16, 2022
|
688
|
(20)
|
$15.20
per share
|
November
16, 2020
|
250
|
(21)
|
$15.20
per share
|
December
28, 2020
|
75
|
(22)
|
$16.08
per share
|
January
10, 2021
|
4,262
|
(23)
|
$0.04
per share
|
March
19, 2021
|
1,875
|
(24)
|
$16.08
per share
|
March
20, 2021
|
63
|
(25)
|
$48.00
per share
|
April
30, 2021
|
125
|
(26)
|
$48.00
per share
|
May
17, 2021
|
125
|
(27)
|
$48.00
per share
|
May
25, 2021
|
500
|
(28)
|
$48.00
per share
|
June
1, 2021
|
1,875
|
(29)
|
$200.00
per share
|
August
22, 2021
|
625
|
(30)
|
$200.00
per share
|
September
18, 2021
|
1,250
|
(31)
|
$1.12
per share
|
October
23, 2021
|
19
|
(32)
|
$0.64
per share
|
November
20, 2021
|
375
|
(33)
|
$0.32
per share
|
December
5, 2021
|
100
|
(34)
|
$0.16
per share
|
December
19, 2021
|
188
|
(35)
|
$0.24
per share
|
December
23, 2021
|
14
|
(36)
|
$0.24
per share
|
December
27, 2021
|
313
|
(37)
|
$0.24
per share
|
January
7, 2021
|
188
|
(38)
|
$0.21
per share
|
January
17, 2021
|
438
|
(39)
|
$0.16
per share
|
January
30, 2021
|
625
|
(40)
|
$0.16
per share
|
February
15, 2021
|
325,000
|
(41)
|
$0.18
per share
|
April
4, 2022
|
200,000
|
(42)
|
$0.20
per share
|
April
25, 2022
|
215,000
|
(43)
|
$0.20
per share
|
July
1, 2022
|
100,000
|
(44)
|
$0.20
per share
|
September
1, 2022
|
38,516,843*
*
However, please refer to Footnote 10 - CONVERTIBLE DEBT IN DEFAULT in the paragraph: Debt Restructuring for more information
regarding our warrants.
|
|
(1)
|
Issued
in June 2015 in exchange for warrants originally issued as part of a May 2013 private placement.
|
(6)
|
Issued
in June 2015 in exchange for warrants originally issued as part of a 2014 public offering.
|
(7)
|
Issued
as part of a March 2015 private placement.
|
(8)
|
Issued
to a placement agent in conjunction with a June 2015 private placement.
|
(9)
|
Issued
as part of 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
to a placement agent in conjunction with a June 2015 private placement.
|
(13)
|
Issued
as part of a June 2015 private placement.
|
(14)
|
Issued
to a placement agent in conjunction with a June 2015 private placement.
|
(15)
|
Issued
as part of a February 2016 private placement.
|
(16)
|
Issued
to a placement agent in conjunction with a February 2016 private placement.
|
(17)
(18)
|
Issued
pursuant to a strategic license agreement.
Issued
as part of a February 2017 private placement.
|
(19)
|
Issued
as part of a May 2017 private placement.
|
(20)
|
Issued
to investors for a loan in November 2017.
|
(21)
|
Issued
to investors for a loan in December 2017.
|
(22)
|
Issued
to investors for a loan in January 2018.
|
(23)
|
Issued
to investors for a loan in March 2018.
|
(24)
|
Issued
to investors for a loan in March 2018.
|
(25)
|
Issued
to investors for a loan in April 2018.
|
(26)
|
Issued
to investors for a loan in May 2018.
|
(27)
|
Issued
to investors for a loan in May 2018.
|
(28)
|
Issued
to investors for a loan in June 2018
|
(29)
|
Issued
to investors for a loan in August 2018
|
(30)
|
Issued
to investors for a loan in September 2018
|
(31)
|
Issued
to investors for a loan in October 2018
|
(32)
|
Issued
to investors for a loan in November 2018
|
(33)
|
Issued
to investors for a loan in December 2018
|
(34)
|
Issued
to investors for a loan in December 2018
|
(35)
|
Issued
to investors for a loan in December 2018
|
(36)
|
Issued
to investors for a loan in December 2018
|
(37)
|
Issued
to investors for a loan in January 2019
|
(38)
|
Issued
to investors for a loan in January 2019
|
(39)
|
Issued
to investors for a loan in January 2019
|
(40)
|
Issued
to investors for a loan in February 2019
|
(41)
|
Issued
to investors for a loan in April 2019
|
(42)
|
Issued
to investors for a loan in April 2019
|
(43)
|
Issued
to investors for a loan in July 2019
|
(44)
|
Issued
to investors for a loan in September 2019
|
|
|
|
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 (8).
In addition, warrants subject to footnotes (1) and (9)-(11), (13), and (15) – (44) 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 (1), (15) and (16) 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.
For
the warrants to footnote (15), the Company further agreed to amend the warrant issued with the original senior secured convertible
note, to adjust the number of shares issuable upon exercise of the warrant to equal the number of shares that will initially be
issuable upon conversion of the new convertible note (without giving effect to any beneficial ownership limitations set forth
in the terms of the new convertible note).
The
warrants subject to footnote (1) 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 U.S. FDA for LuViva and the date on which the common stock achieves
an average market price for 20 consecutive trading days of at least $832,000.00 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 $103,680,000.00
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 (1) in the table above. The holders of the warrants subject
to footnote (1) 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.
The
warrants subject to footnote (6) 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.
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 1,482 shares of common stock (but subject to exponential increase upon operation of certain anti-dilution
provisions), the Company issued or is obligated to issue 21 shares of common stock and new warrants that, if exercised as of the
date hereof, would be exercisable for an aggregate of 271 shares of common stock. As of September 30, 2019, the Company had issued
18 shares of common stock and rights to common stock shares for 3. 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 September 30, 2019 and December 31, 2018. 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 over four years and expire ten years from
the date of grant.
Due
to the 1:800 reverse stock split of all of the Company’s issued and outstanding common stock was implemented on March 29,
2019. As a result of the reverse stock split, every 800 shares of issued and outstanding common stock were converted into 1 share
of common stock. This resulted in the number of stock options outstanding to be zero.
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 year.
As
of September 30, 2019, and December 31, 2018, there was no accrual recorded for any potential losses related to pending litigation.
7.
COMMITMENTS AND CONTINGENCIES
Operating
Leases
In
December 2009, the Company moved its offices, which comprise its administrative, research and development, marketing and production
facilities to 5835 Peachtree Corners East, Suite B, Peachtree Corners, Georgia 30092. The Company leased approximately 23,000
square feet under a lease that expired in June 2017. In July 2017, the Company leased the offices on a month to month basis. On
February 23, 2018, the Company modified its lease to reduce its occupancy to 12,835 square feet. The fixed monthly lease expense
will be: $13,859 each month for the period beginning January 1, 2018 and ending March 31, 2018; $8,022 each month for the period
beginning April 1, 2018 and ending March 31, 2019; $8,268 each month for the period beginning April 1, 2019 and ending March 31,
2020; and $8,514 each month for the period beginning April 1, 2020 and ending March 31, 2021.
The
Company recognizes lease expense on a straight-line basis over the estimated lease term and combine lease and non-lease components.
Future minimum rental payments at September 30, 2019 under non-cancellable operating leases for office space and equipment are
as follows (in thousands):
Year
|
|
Amount
|
|
2019
|
|
|
|
29
|
|
|
2020
|
|
|
|
120
|
|
|
2021
|
|
|
|
30
|
|
|
Total
|
|
|
|
179
|
|
|
Less:
Interest
|
|
|
|
25
|
|
|
Present
value of lease liability
|
|
|
|
154
|
|
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 (former director Richard Blumberg was the 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 $11,137,
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 22 shares of common stock at
an exercise price equal to the conversion price of the note, subject to customary anti-dilution adjustment.
On
July 24, 2019, Shandong Yaohua Medical Instrument Corporation (“SMI”), agreed to modify its existing agreement. Under
the terms of this modification, the Company agreed to grant (1) exclusive manufacturing rights, excepting the disposable cervical
guides for the Republic of Turkey, and the final assembly rights for Hungary, and (2) exclusive distribution and sales for LuViva
in jurisdictions, subject to the following terms and conditions. First, SMI shall complete the payment for parts, per the purchase
order, for five additional LuViva devices. Second, in consideration for the $885,144 that the Company received, SMI will receive
12,147 common stock shares. Third, SMI shall honor all existing purchase orders it has executed to date with the Company, in order
to maintain jurisdiction sales and distribution rights. If SMI needs cervical guides then it will do so at a cost including labor,
plus ten percent markup. The Company will provide 200 cervical guides at no cost for the clinical trials. Fourth, the Company
and SMI will make best efforts to sell devices after CFDA approval. With an initial estimate of year one sales of 200 LuViva devices;
year two sales of 500 LuViva devices; year three sales of 1,000 LuViva devices; and year four sales of 1,250 LuViva devices. Fifth,
SMI shall pay for entire costs of securing approval of LuViva with the Chinese FDA. Sixth, SMI shall arrange, at its sole cost,
for a manufacturer in China to build tooling to support manufacture. In addition, SMI retains the right to manufacture for China,
Hong Kong, Macau and Taiwan, where SMI has distribution and sales rights. For each single-use cervical guide sold by SMI in the
jurisdictions, SMI shall transfer funds to escrow agent at a rate of $1.90 per chip. If within 18 months of the license’s
effective date, SMI fails to achieve commercialization of LuViva in China, SMI shall no longer have any rights to manufacture,
distribute or sell LuViva. Commercialization is defined as: Filing an application with the Chinese FDA for the approval of LuViva;
Any assembly or manufacture of the devices or disposables that begins in China; and purchase of at least 10 devices and disposables
for clinical evaluations and regulatory use and or sales in the jurisdictions. The Company had recorded an accrued liability for
SMI of $692,335, which will be reclassified to additional paid in capital and 12,147 common stock shares.
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).
8.
NOTES PAYABLE
Long-term
Debt – Related Parties
On
July 24, 2019, Dr. Faupel and Mr. Cartwright agreed to an addendum to the exchange agreement and to modify the terms of the original
exchange agreement. Under this modification Dr. Faupel and Mr. Cartwright agreed to extend the note to be due in full on the third
anniversary of that agreement. The modification also included simple interest at a 6% rate, with the principal and accrued interest
due in total at the date of maturity or September 4, 2021.
During
the quarter ended September 30, 2018, the Company entered into an exchange agreement dated July 14, 2018, Dr Faupel, agreed to
exchange outstanding amounts due to him for loans, interest, bonus, salary and vacation pay in the amount of $661,000 for a $207,000
promissory note dated September 4, 2018. As a result of the exchange agreement, the Company recorded a gain for extinguishment
of debt of $199,000 and a capital contribution of $235,000 during the year ended December 31, 2018. In the July 20, 2018 exchange
agreement, Dr, Cartwright, agreed to exchange outstanding amounts due to him for loans, interest, bonus, salary and vacation pay
in the amount of $1,621,000 for a $319,000 promissory note dated September 4, 2018. As a result of the exchange agreement, the
Company recorded a gain for extinguishment of debt of $840,000 and a capital contribution of $432,000 during the year ended December
31, 2018.
The
table below summarizes the detail of the exchange agreement:
For
Dr. Faupel:
|
|
|
Salary
|
|
$
|
134
|
|
Bonus
|
|
|
20
|
|
Vacation
|
|
|
95
|
|
Interest
on compensation
|
|
|
67
|
|
Loans
to Company
|
|
|
196
|
|
Interest
on loans
|
|
|
149
|
|
Total
outstanding prior to exchange
|
|
$
|
661
|
|
Amount
forgiven during the quarter ended September 30, 2018
|
|
|
(454
|
)
|
Promissory
note dated September 4, 2018
|
|
$
|
207
|
|
Interest
accrued through September 30, 2019
|
|
|
14
|
|
Balance
outstanding at September 30, 2019
|
|
$
|
221
|
|
For
Dr. Cartwright:
|
|
|
Salary
|
|
$
|
337
|
|
Bonus
|
|
|
675
|
|
Interest
on compensation
|
|
|
59
|
|
Loans
to Company
|
|
|
528
|
|
Interest
on loans
|
|
|
22
|
|
Total
outstanding prior to exchange
|
|
$
|
1,621
|
|
Amount
forgiven during the quarter ended September 30, 2018
|
|
|
(1,302
|
)
|
Promissory
note dated September 4, 2018
|
|
$
|
319
|
|
Interest
accrued through September 30, 2019
|
|
|
21
|
|
Balance
outstanding at September 30, 2019
|
|
$
|
340
|
|
Notes
Payable in Default
At
September 30, 2019 and December 31, 2018, the Company maintained notes payable to both related and non-related parties totaling
approximately $780,000 and $700,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry
annual interest rates between 0% and 10% and have default rates as high a 20%. The Company is accruing interest at the default
rate of 18.0% on two of the loans.
On
July 1, 2019, the Company entered into a loan agreement with Accilent Capital Management Inc / Rev Royalty Income and Growth Trust
(“Accilent”), providing for the purchase by Accilent of an unsecured promissory note in the principal amount of $49,389
(CAD$ 65,500). The note was fully funded on July 9, 2019 (net of a 8% original issue discount and other expenses). The note bears
an interest rate of 16% and are due and payable on September 11, 2019. The Company could have prepaid the note, with three months
of interest as a penalty. Following maturity, demand, default, or judgment and until actual payment in full, interest rate shall
be paid at the rate of 19% per annum. The Company will issue warrants to purchase one common share of the Company for each warrant
held in the aggregate amount of 215,000 warrants at an exercise price of $0.25 per warrant, or alternatively, the same price as
for warrants granted to investors as part of a financing of the Company subject to adjustment and exercisable within 3 years from
issuance (the “Initial Warrants”). In the event that the common shares of the Issuer are not listed on the TSX Venture
Exchange pursuant to the “Transaction” on or prior to September 1, 2019, an additional 100,000 warrants will be issued
at an exercise price equal to the lesser of $0.25 or the price of the next issuance of common shares of the Issuer (the “Revised
Exercise Price”). Further, the exercise price of the Initial Warrants will adjust to the Revised Exercise Price has stated
herein. As of September 30, 2019, $55,548 remained outstanding, which included a fee of $3,951 and interest of $2,207.
The
following table summarizes the Notes payable in default, including related parties:
|
|
|
|
|
September
30, 2019
|
|
December
31, 2018
|
Dr.
Imhoff
|
|
$
|
198
|
|
|
$
|
199
|
|
Dr.
Cartwright
|
|
|
2
|
|
|
|
2
|
|
Ms.
Rosenstock
|
|
|
50
|
|
|
|
50
|
|
Mr.
Fowler
|
|
|
26
|
|
|
|
26
|
|
Mr.
Mermelstein
|
|
|
235
|
|
|
|
211
|
|
GHS
|
|
|
15
|
|
|
|
15
|
|
GPB
|
|
|
17
|
|
|
|
17
|
|
Aquarius
|
|
|
108
|
|
|
|
108
|
|
Accilent
|
|
|
56
|
|
|
|
—
|
|
Mr.
Blumberg
|
|
|
70
|
|
|
|
70
|
|
Mr.
James
|
|
|
2
|
|
|
|
2
|
|
Notes
payable in default, including related parties
|
|
$
|
780
|
|
|
$
|
700
|
|
The
notes payable in default to related parties was $349,000 of the $780,000 balance.
Short
Term Notes Payable
In
July 2019, the Company entered into a premium finance agreement to finance its insurance policies totaling $142,000. The note
requires monthly payments of $14,000, including interest at 4.91% and matures in April 2020. As of September 30, 2019, the note
for the premium finance agreement was $99,984. The balance due on insurance policies totaled $50,000 at December 31, 2018.
On
August 22, 2018, the Company issued a promissory note to an investor for $150,000 in aggregate principal amount of a 6% promissory
note for an aggregate purchase price of $157,500 (representing a $7,500 original issue discount). Pursuant to the promissory note
the entire unpaid principal balance on the promissory note together with all accrued and unpaid interest and loan origination
fees, if any, at the choice of the investor, shall be due and payable in full from the funds received by the Company from a financing
of at least $2,000,000, or at the option of the investor, to be included in the Company’s financing under the same terms
as the new investors with the most favorable terms making a cash investment. If the Company does not complete a financing of at
least $2,000,000 within 90 days of the execution of this promissory note, any unpaid amounts shall be due in full to the investor
and shall accrue interest at 12% (instead of 6%) per annum from the date thereof (90 days after execution), if not paid in full.
In addition, the investor will be granted 1,500,000 warrants under this promissory note. The warrants shall be issued and vest
upon the financing of at least $2,000,000 and expire on the third anniversary of said financing. The warrant exercise price shall
be set at the same price as for warrants granted to the investors with the most favorable terms as part of any $2,000,000 or more
financing of the Company or $0.25, whichever is lower. The warrants shall have standard anti-dilution features to protect the
holder from dilution due to down rounds of financing. As of September 30, 2019, and December 31, 2018, the Company had not repaid
the note.
On
September 19, 2018, the Company issued a promissory note to an investor for $50,000 in aggregate principal amount of a 6% promissory
note for an aggregate purchase price of $52,500 (representing a $2,500 original issue discount). Pursuant to the promissory note
the entire unpaid principal balance on the promissory note together with all accrued and unpaid interest and loan origination
fees, if any, at the choice of the investor, shall be due and payable in full from the funds received by the Company from a financing
of at least $2,000,000, or at the option of the investor, to be included in the Company’s financing under the same terms
as the new investors with the most favorable terms making a cash investment. If the Company does not complete a financing of at
least $2,000,000 within 90 days of the execution of this promissory note, any unpaid amounts shall be due in full to the investor
and shall accrue interest at 12% (instead of 6%) per annum from the date thereof (90 days after execution), if not paid in full.
In addition, the investor will be granted 500,000 warrants under this promissory note. The warrants shall be issued and vest upon
the financing of at least $2,000,000 and expire on the third anniversary of said financing. The warrant exercise price shall be
set at the same price as for warrants granted to the investors with the most favorable terms as part of any $2,000,000 or more
financing of the Company or $0.25, whichever is lower. The warrants shall have standard anti-dilution features to protect the
holder from dilution due to down rounds of financing. As of September 30, 2019, and December 31, 2018, the Company had not repaid
the note and therefore the accrued interest rate increased to 12%.
On
February 15, 2019, the Company issued a promissory note to an investor for $50,000 in aggregate principal amount of a 6% promissory
note for an aggregate purchase price of $52,500 (representing a $2,500 original issue discount). Pursuant to the promissory note
the entire unpaid principal balance on the promissory note together with all accrued and unpaid interest and loan origination
fees, if any, at the choice of the investor, shall be due and payable in full from the funds received by the Company from a financing
of at least $1,000,000, or at the option of the investor, to be included in the Company’s financing under the same terms
as the new investors with the most favorable terms making a cash investment. If the Company does not complete a financing of at
least $1,000,000 within 90 days of the execution of this promissory note, any unpaid amounts shall be due in full to the investor
and shall accrue interest at 12% (instead of 6%) per annum from the date thereof (90 days after execution), if not paid in full.
In addition, the investor will be granted 500,000 warrants under this promissory note. The warrants shall be issued and vest upon
the financing of at least $1,000,000 and expire on the third anniversary of said financing. The warrant exercise price shall be
set at the same price as for warrants granted to the investors with the most favorable terms as part of any $1,000,000 or more
financing of the Company or $0.25, whichever is lower. The warrants shall have standard anti-dilution features to protect the
holder from dilution due to down rounds of financing. As of September 30, 2019, the Company had not repaid the note.
On
February 8, 2019, a note payable in default as reported in the Company’s Form 10-K report - Footnote 9: Notes payable
– Note payable in default, was exchanged for a note with a convertible option. The note amount was for $145,544. At
the sole discretion of the Company, rather than paying the holder in cash, the note can be exchanged for equity in the new financing
of at least $1,000,000. If the financing occurs the Company will then have the option to exchange the debt for $145,544 and award
291,088 warrants at $0.25 per share. If the Company elects to pay the balance in cash, the note shall accrue simple interest of
6% per annum commencing on the date of the new financing of at least $1,000,000.
On
February 14, 2019, the Company entered into a Purchase and Sale Agreement with Everest Business Funding for the sale of its accounts
receivable. The transaction provided the Company with $48,735 after $1,265 in debt issuance costs (bank costs) for a total purchase
amount of $50,000, in which the Company would have to repay $68,500. At a minimum the Company would need to pay $535.16 per day
or 20.0% of the future collected accounts receivable or “receipts.” The effective interest rate as calculated for
this transaction is approximately 132.5%. As of September 30, 2019, $51,838 had been paid, leaving a balance of $14,745.
At
September 30, 2019 and December 31, 2018, the Company also maintained short term notes payable to both related and non-related
parties totaling $1,059,000 and $899,000, respectively. These notes are short term, straight-line amortizing notes. The notes
carry annual interest rates between 5% and 19%.
The
following table summarizes the Short-term notes payable, including related parties:
|
|
|
|
|
September
30, 2019
|
|
December
31, 2018
|
Dr.
Imhoff
|
|
$
|
158
|
|
|
$
|
135
|
|
Dr.
Cartwright
|
|
|
36
|
|
|
|
144
|
|
Dr.
Faupel
|
|
|
5
|
|
|
|
123
|
|
Ms.
Maloof
|
|
|
25
|
|
|
|
25
|
|
Mr.
Case
|
|
|
150
|
|
|
|
150
|
|
Mr.
Mamula
|
|
|
15
|
|
|
|
—
|
|
Mr.
Gould
|
|
|
100
|
|
|
|
50
|
|
K2 (Shenghuo)
|
|
|
203
|
|
|
|
177
|
|
Everest
|
|
|
15
|
|
|
|
—
|
|
Premium
Finance (insurance)
|
|
|
100
|
|
|
|
50
|
|
Mr.
Blumberg
|
|
|
212
|
|
|
|
45
|
|
Mr.
Grimm
|
|
|
40
|
|
|
|
—
|
|
Short-term
notes payable, including related parties
|
|
$
|
1,059
|
|
|
$
|
899
|
|
The
short-term notes payable in default to related parties was $639,000 of the $1,059,000 balance.
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 September 30, 2019, and December 31, 2018, the Company
had a note due of $496,622 and $432,000, respectively. The note accrues 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 $11,137,
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 22 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
March 12, 2018, the Company entered into a securities purchase agreement with Eagle Equities, LLC, providing for the purchase
by Eagle of a convertible redeemable note in the principal amount of $66,667. The note was fully funded on March 14, 2018, upon
which the Company received $51,000 of net proceeds (net of a 10% original issue discount and other expenses). The note bears an
interest rate of 8% and are due and payable on March 12, 2019. The note may be converted by Eagle at any time after twelve months
from issuance into shares of our common stock (as determined in the notes) calculated at the time of conversion, except for the
second note, which also requires full payment by Eagle of the secured note it issued to us before conversions may be made. The
conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days
including the day upon which the Company receive a notice of conversion. The notes may be prepaid in accordance with the terms
set forth in the notes. The notes also contain certain representations, warranties, covenants and events of default including
if the Company are delinquent in our periodic report filings with the SEC and increases in the amount of the principal and interest
rates under the notes in the event of such defaults. In the event of default, at Eagle’s option and in its sole discretion,
Eagle may consider the notes immediately due and payable. As of September 30, 2019, the notes had been converted and no balance
remained outstanding. At December 31, 2018, the outstanding balance was $3,095, including unamortized debt issuance costs of $1,751,
and unamortized discount of $1,297 and accrued interest of $177. In addition, as of September 30, 2019 the beneficial conversion
feature had been fully amortized. At December 31, 2018, the Company recorded a $44,444 beneficial conversion feature which $35,701
was amortized leaving and unamortized balance of $8,743. As of September 30, 2019, the beneficial conversion feature was fully
amortized.
On
April 5, 2019, the Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus
of $65,000 in aggregate principal amount of a 12% convertible promissory note. Funds were received by the Company on April 5,
2019. The note matures on December 29, 2019 and accrues interest at a rate of 12% per year. The Company can 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, for 135% of outstanding principal and interest at any time from 61
to 90 days from issuance and for 150% of outstanding principal and interest at any time from 91 days from issuance to 180 days
from issuance. The note may not be prepaid after the 180th day. After seven 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 lesser of: (i) the lowest trading price during the previous 25 trading days period ending on the latest complete
trading day prior to the date of this note, and (ii) the variable conversion price shall mean 50% multiplied by the market price
on the OTC Pink, OTCQB or applicable trading market, 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 (unless the event default is due to an unfavorable
OTC market designation or unavailability of Rule 144. As of September 30, 2019, the outstanding note balance was $65,000, and
the Company had recorded a $65,000 beneficial conversion feature and $14,250 of debt issuance costs. As of September 30, 2019,
the Company had unamortized debt issuance cost of $4,785 and an unamortized balance of $65,000 of a beneficial conversion feature.
In addition, $38,822 was allocated to a warrant liability, which had a balance, net of amortization, of $15,024 as of September
30, 2019.
On
May 15, 2019, the Company entered into a securities purchase agreement with Eagle Equities, LLC, providing for the purchase by
Eagle of a convertible redeemable note in the principal amount of $57,750. The note was fully funded on May 21, 2019, upon which
the Company received $45,000 of net proceeds (net of a 10% original issue discount and other expenses). The note bears an interest
rate of 8% and is due and payable on May 15, 2020. The Company could have prepaid the note, in whole or in part, for 115% of outstanding
principal and interest until 30 days from issuance, for 121% of outstanding principal and interest at any time from 31 to 60 days
from issuance, for 127% of outstanding principal and interest at any time from 61 to 90 days from issuance, for 133% of outstanding
principal and interest at any time from 91 to 120 days from issuance, for 139% of outstanding principal and interest at any time
from 121 to 150 days from issuance and for 145% of outstanding principal and interest at any time from 151 days from issuance
to 180 days from issuance. The note may not be prepaid after the 180th day. The note may be converted by Eagle at any
time after five months from issuance into shares of the Company common stock (as determined in the notes) calculated at the time
of conversion. The conversion price of the notes will be equal to 60% of the average of the two lowest closing bid prices of the
Company’s common stock shares as reported on OTC Markets exchange, for the 20 prior trading days including the day upon
which the Company receive a notice of conversion is received by the Company. The notes may be prepaid in accordance with the terms
set forth in the notes. The notes also contain certain representations, warranties, covenants and events of default including
if the Company are delinquent in our periodic report filings with the SEC and increases in the amount of the principal and interest
rates under the notes in the event of such defaults. In the event of default, at Eagle’s option and in its sole discretion,
Eagle may consider the notes immediately due and payable. As of September 30, 2019, the Company had recorded a $38,500 beneficial
conversion feature, $5,250 original issue discount and $7,500 of debt issuance costs. As of September 30, 2019, the outstanding
note was for $57,750, which consisted of unamortized balance of $24,063 of a beneficial conversion feature, unamortized original
issue discount of $3,265 and unamortized debt issuance costs of $4,664.
On
May 15, 2019, the Company entered into a securities purchase agreement with Adar Bays, LLC, providing for the purchase by Adar
of a convertible redeemable note in the principal amount of $57,750. The note was fully funded on May 21, 2019, upon which the
Company received $45,000 of net proceeds (net of a 10% original issue discount and other expenses). The note bears an interest
rate of 8% and are due and payable on May 15, 2020. The Company could have prepaid the note, in whole or in part, for 115% of
outstanding principal and interest until 30 days from issuance, for 121% of outstanding principal and interest at any time from
31 to 60 days from issuance, for 127% of outstanding principal and interest at any time from 61 to 90 days from issuance, for
133% of outstanding principal and interest at any time from 91 to 120 days from issuance, for 139% of outstanding principal and
interest at any time from 121 to 150 days from issuance and for 145% of outstanding principal and interest at any time from 151
days from issuance to 180 days from issuance. The note may not be prepaid after the 180th day. The note may be converted
by Adar at any time after five months from issuance into shares of the Company common stock (as determined in the notes) calculated
at the time of conversion. The conversion price of the notes will be equal to 60% of the average of the two lowest closing bid
prices of the Company’s common stock shares as reported on OTC Markets exchange, for the 20 prior trading days including
the day upon which the Company receive a notice of conversion is received by the Company. The notes may be prepaid in accordance
with the terms set forth in the notes. The notes also contain certain representations, warranties, covenants and events of default
including if the Company are delinquent in our periodic report filings with the SEC and increases in the amount of the principal
and interest rates under the notes in the event of such defaults. In the event of default, at Adar’s option and in its sole
discretion, Adar may consider the notes immediately due and payable. As of September 30, 2019, the Company had recorded a $38,500
beneficial conversion feature, $5,250 original issue discount and $7,500 of debt issuance costs. As of September 30, 2019, the
outstanding note was for $57,750, which consisted of unamortized balance of $24,063 of a beneficial conversion feature, unamortized
original issue discount of $3,265 and unamortized debt issuance costs of $4,664.
The
following table summarizes the Convertible notes payable:
|
|
September
30, 2019
|
|
December
31, 2018
|
Shenghuo
|
|
$
|
497
|
|
|
$
|
432
|
|
Eagle
|
|
|
58
|
|
|
|
3
|
|
Adar
|
|
|
58
|
|
|
|
—
|
|
Auctus
|
|
|
65
|
|
|
|
—
|
|
Debt
discount and issuance costs to be amortized
|
|
|
(20
|
)
|
|
|
(10
|
)
|
Debt
discount on warrants for loan agreements
|
|
|
(16
|
)
|
|
|
—
|
|
Debt
discount related to beneficial conversion
|
|
|
(48
|
)
|
|
|
(45
|
)
|
Convertible
notes payable, including related parties
|
|
$
|
594
|
|
|
$
|
380
|
|
The
convertible notes payable to related parties was $497,000 of the $594,000 balance.
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) $20,000.00
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 $12,000.00, 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 $173,755 and $151,974 at September 30, 2019 and December 31, 2018, 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. 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 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 $640.00 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 September 30, 2019, had not done so). As of September 30, 2019, the
balance due on the convertible debt was $2,177,030 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 $366,373. In addition, the Company has accrued $1,059,219 of interest
expense for the period ended September 30, 2019. As of December 31, 2018, the balance due on the convertible debt was $2,198,236.
In addition, the Company had accrued $699,743 of interest expense for the year ended December 31, 2018. The convertible note is
secured by a lien on all 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 September 30, 2019, the exercise
price had been adjusted to $0.04 and the number of common stock shares exchangeable for was 35,937,500. As of September 30, 2019,
and December 31, 2018, 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 3.85% of the Company’s revenues from the sale of products. As of September 30, 2019, and 2018, GPB had earned approximately
$32,000 and $31,000 in royalties, respectively.
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 $1.0 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 17% 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 22% 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 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. Additionally, the Company further agreed to amend the warrant issued
with the original senior secured convertible note, to adjust the number of shares issuable upon exercise of the warrant to equal
the number of shares that will initially be issuable upon conversion of the new convertible note (without giving effect to any
beneficial ownership limitations set forth in the terms of the new 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 on December
7, 2016 from 3.5% to 3.85% of revenues from the sales of the Company’s products.
On
August 8, 2017, the Company entered into a forbearance agreement with GPB, with regard to the senior secured convertible note.
Under the forbearance agreement, GPB has agreed to forbear from exercising certain of its rights and remedies (but not waive such
rights and remedies), arising as a result of the Company’s failure to pay the monthly interest due and owing on the note.
In consideration for the forbearance, the Company agreed to waive, release, and discharge GPB from all claims against GPB based
on facts existing on or before the date of the forbearance agreement in connection with the note, or the dealings between the
Company and GPB, or the Company’s equity holders and GPB, in connection with the note. Pursuant to the forbearance agreement,
the Company has reaffirmed its obligations under the note and related documents and executed a confession of judgment regarding
the amount due under the note, which GPB may file upon any future event of default by the Company. During the forbearance period,
the Company must continue to comply will all the terms, covenants, and provisions of the note and related documents.
The
“Forbearance Period” shall mean the period beginning on the date hereof and ending on the earliest to occur of: (i)
the date on which Lender delivers to Company a written notice terminating the Forbearance Period, which notice may be delivered
at any time upon or after the occurrence of any Forbearance Default (as hereinafter defined), and (ii) the date Company repudiates
or asserts any defense to any Obligation or other liability under or in respect of this Agreement or the Transaction Documents
or applicable law, or makes or pursues any claim or cause of action against Lender; (the occurrence of any of the foregoing clauses
(i) and (ii), a “Termination Event”). As used herein, the term “Forbearance Default” shall mean: (A) the
occurrence of any Default or Event of Default other than the Specified Default; (B) the failure of Company to timely comply with
any material term, condition, or covenant set forth in this Agreement; (C) the failure of any representation or warranty made
by Company under or in connection with this Agreement to be true and complete in all material respects as of the date when made;
or (D) Lender’s reasonable belief that Company: (1) has ceased or is not actively pursuing mutually acceptable restructuring
or foreclosure alternatives with Lender; or (2) is not negotiating such alternatives in good faith. Any Forbearance Default will
not be effective until one (1) Business Day after receipt by Company of written notice from Lender of such Forbearance Default.
Any effective Forbearance Default shall constitute an immediate Event of Default under the Transaction Documents.
Other
Convertible Debt in Default
On
May 18, 2017, the Company entered into a securities purchase agreement with GHS Investments, LLC, an existing investor, providing
for the purchase by GHS of a convertible promissory note in the aggregate principal amount of $66,000, for $60,000 in net proceeds
(representing a 10% original issue discount). The transaction closed on May 19, 2017. The note matures upon the earlier of our
receipt of $100,000 from revenues, loans, investments, or any other means (other than the Eagle and Adar bridge financings) and
December 31, 2017. In addition to the 10% original issue discount, the note accrues interest at a rate of 8% per year. The Company
may prepay the note, in whole or in part, for 110% of outstanding principal and interest until 30 days from issuance, for 120%
of outstanding principal and interest at any time from 31 to 60 days from issuance and for 140% of outstanding principal and interest
at any time from 61 days to 180 days from issuance. The note may not be prepaid after 180 days. After nine months from the date
of issuance, the note will become convertible, at any time thereafter, in whole or in part, at the holder’s option, into
shares of our common stock, at a conversion price equal to 60% of the lowest trading price during the 25 trading days prior to
conversion. The note includes customary event of default provisions and a default interest rate of the lesser of 20% per year
or the maximum amount permitted by law. Upon the occurrence of an event of default, the holder of the note may require us to redeem
the note (or convert it into shares of common stock) at 150% of the outstanding principal balance. As of September 30, 2019, the
Company’s total outstanding amount was $83,094, (which includes $37,926 for a default penalty) and accrued interest of $11,610.
GHS converted $12,700 of principal and accrued interest payable for the nine months ended September 30, 2019. This was compared
with a total outstanding amount of $94,411, (which includes $37,926 for a default penalty) and accrued interest of $517 as of
December 31, 2018. GHS converted $29,642 of principal and accrued interest payable for the period ended December 31, 2018.
On
March 20, 2018, the Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus
of $150,000 in aggregate principal amount of a 12% convertible promissory note. On March 20, 2018, 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 4,262 shares of the Company’s common stock. The warrant is exercisable at any time, at an exercise price per share equal
to $0.04, 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 accrues interest at a rate of 12% per year. The Company
could have prepaid 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 nine 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. As of September
30, 2019, the Company has a net debt of $192,267 (which includes $70,931 for a default premium) and accrued interest of $33,836.
Auctus converted $14,237 of principal and accrued interest payable for the nine months ended September 30, 2019. As of December
31, 2018, the Company had a net debt of $204,801 and accrued interest of $471. Auctus converted $30,152 of principal and accrued
interest payable for the period ended December 31, 2018. In addition, at December 31, 2018, the Company recorded a $97,685 beneficial
conversion feature which was fully amortized at year end. 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, this has not occurred as of the date of this Form 10-Q quarterly report.
On
May 17, 2018, the Company entered into a securities purchase agreement with GHS Investments, LLC, an existing investor, providing
for the purchase by GHS of a convertible promissory note in the aggregate principal amount of $9,250 (with $750 representing a
10% original issue discount and $1,000 for transaction costs). The note matured on June 17, 2019. In addition to the 10% original
issue discount, the note accrues interest at a rate of 10% per year. The Company may prepay the note, in whole or in part, for
110% of outstanding principal and interest until 30 days from issuance, for 120% of outstanding principal and interest at any
time from 31 to 60 days from issuance and for 140% of outstanding principal and interest at any time from 61 days to 180 days
from issuance. The note may not be prepaid after 180 days. After nine months from the date of issuance, the note will become convertible,
at any time thereafter, in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price
equal to 30% of the lowest trading price during the 25 trading days prior to conversion (if note cannot be converted due to issues
with DTC then rate increases to 40%). The note includes customary event of default provisions and a default interest rate of the
lesser of 20% per year or the maximum amount permitted by law. Upon the occurrence of an event of default, the holder of the note
may require us to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance. As
of September 30, 2019, the Company has a net debt of $14,190 (which includes $4,937 for a default penalty), and accrued interest
of $3,257. As of December 31, 2018, the Company had a net debt of $14,187 (which includes $4,937 for a default penalty), including
unamortized debt issuance costs of $424, unamortized discount of $318 and accrued interest of $1,135. In addition, as of September
30, 2019 the beneficial conversion feature of $3,964 had been fully amortized. At December 31, 2018, $2,280 was amortized leaving
and unamortized balance of $1,684.
On
June 22, 2018, the Company entered into a securities purchase agreement with GHS Investments, LLC, an existing investor, providing
for the purchase by GHS of a convertible promissory note in the aggregate principal amount of $68,000 (with $6,000 representing
a 10% original issue discount and $2,000 for transaction costs). The note matured on June 22, 2019. In addition to the 10% original
issue discount, the note accrues interest at a rate of 10% per year. The Company may prepay the note, in whole or in part, for
110% of outstanding principal and interest until 30 days from issuance, for 120% of outstanding principal and interest at any
time from 31 to 60 days from issuance and for 140% of outstanding principal and interest at any time from 61 days to 180 days
from issuance. The note may not be prepaid after 180 days. After nine months from the date of issuance, the note will become convertible,
at any time thereafter, in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price
equal to 30% of the lowest trading price during the 25 trading days prior to conversion (if note cannot be converted due to issues
with DTC then rate increases to 40%). The note includes customary event of default provisions and a default interest rate of the
lesser of 20% per year or the maximum amount permitted by law. Upon the occurrence of an event of default, the holder of the note
may require us to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance. As
of September 30, 2019, the Company has a net debt of $103,285 (which includes $35,285 for a default penalty), and accrued interest
of $23,713. As of December 31, 2018, the Company had a net debt of $103,285 (which includes $35,285 for a default penalty), including
unamortized debt issuance costs of $3,318, unamortized discount of $2,844 and accrued interest of $8,263. In addition, as of September
30, 2019 the beneficial conversion feature of $29,143 had been fully amortized. At December 31, 2018, $15,288 was amortized leaving
an unamortized balance of $13,855.
On
July 3, 2018, the Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus
of $89,250 in aggregate principal amount of a 12% convertible promissory note. On July 3, 2018, the Company issued the note to
Auctus. The note matured on April 3, 2019 and accrues interest at a rate of 12% per year. The Company could have prepaid 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 nine 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 which went into effect on April 3, 2019. 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. As of September 30, 2019, the Company has a net debt of $146,102 and accrued interest of $17,532. As of December 31,
2018, the Company had a net debt of $81,528, including unamortized original issue discount of $1,443, unamortized debt issuance
costs of $6,279 and accrued interest of $5,385. In addition, as of September 30, 2019 the beneficial conversion feature of $59,000
was fully amortized. At December 31, 2018, $39,233 was amortized leaving and unamortized balance of $20,267. 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, this has not occurred as of this Form 10-Q quarterly report.
Auctus
From
the above described paragraphs, Auctus outstanding notes totaled $338,000 for the period ended September 30, 2019. As described
in the Note 12. SUBSEQUENT EVENTS, these notes were converted into the new note for Auctus of $700,000.
The
following table summarizes the Convertible notes in default:
|
|
September
30, 2019
|
|
December
31, 2018
|
GPB
|
|
$
|
2,177
|
|
|
$
|
2,198
|
|
GHS
|
|
|
375
|
|
|
|
364
|
|
Auctus
|
|
|
338
|
|
|
|
223
|
|
Debt
Discount to be amortized
|
|
|
—
|
|
|
|
(7
|
)
|
Convertible
notes in default
|
|
$
|
2,890
|
|
|
$
|
2,778
|
|
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.
The
following table sets forth pertinent data relating to the computation of basic and diluted net loss per share attributable to
common shareholders.
In
thousands
|
|
Nine
months ended September 30,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(3,004
|
)
|
|
$
|
3,650
|
|
Basic
weighted average number of shares outstanding
|
|
|
3,296
|
|
|
|
252
|
|
Net
(loss) income per share (basic)
|
|
$
|
(0.91
|
)
|
|
$
|
14.48
|
|
Diluted
weighted average number of shares outstanding
|
|
|
3,296
|
|
|
|
13,736
|
|
Net
(loss) income per share (diluted)
|
|
$
|
(0.91
|
)
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
Dilutive
equity instruments (number of equivalent units):
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
—
|
|
|
|
—
|
|
Preferred
stock
|
|
|
—
|
|
|
|
1,362
|
|
Convertible
debt
|
|
|
38,855
|
|
|
|
8,310
|
|
Warrants
|
|
|
30,265
|
|
|
|
3,812
|
|
Total
Dilutive instruments
|
|
|
69,120
|
|
|
|
13,484
|
|
|
|
|
|
|
|
|
|
|
12.
SUBSEQUENT EVENTS
In
addition, after September 30, 2019, the Company entered into promissory notes with investors and related parties for a total of
$33,000.
On
December 17, 2019, the Company entered into a securities purchase agreement and convertible note with Auctus. The convertible
note issued to Auctus will be for a total of $2.4 million. The first tranche of $700,000 has been received and will have a maturity
date of December 17, 2021 and an interest rate of ten percent (10%). The note may not be prepaid in whole or in part except as
otherwise explicitly allowed. Any amount of principal or interest on the note which is not paid when due shall bear interest at
the rate of the lessor of 24% and the maximum permitted by law (the “default interest”). The variable conversion prices
shall equal the lesser of: (i) the lowest trading price on the issue date, and (ii) the variable conversion price. The variable
conversion price shall mean 95% multiplied by the market price (the market price means the average of the five lowest trading
prices during the period beginning on the issue date and ending on the maturity date), minus $0.04 per share, provided however
that in no event shall the variable conversion price be less than $0.15. If an event of default under this note occurs and/or
the note is not extinguished in its entirety prior to December 17, 2020 the $0.15 price shall no longer apply. In addition, Auctus
will receive 7,500,000 five-year common stock purchase warrants, at an exercise price of $0.20, on the first tranche of $700,000.
From the $700,000, the Company shall receive $570,000, $65,000 will go to attorney’s fees and Auctus Fund Management, and
$65,000 will be paid for the partial payment of an $89,250 promissory note that was issued on July 3, 2018 to Auctus. At a future
date, the second tranche of $400,000 will be received when the Company files its S-1 registration statement. The last tranche
of $1.3 million will be received within 60 days of the S-1 registration statement becoming effective. The conversion price of
the notes will be at market value with a minimum conversion amount of $0.15. The last two tranches will have warrants attached.
During
December 2019 and January 2020, the Company received equity investments in the amount of $738,000. These investors received a
total of 1,476,000 common stock shares and 1,476,000 warrants to purchase common stock shares at a strike price of $0.25 and 1,476,000
warrants to purchase common stock shares at a strike price of $0.75. Of the amount invested $388,000 was from related parties.
During
the fourth quarter of 2019 and January 2020, the Company entered into the exchange agreements listed below.
On
December 5, 2019, the Company entered into an exchange agreement with Aquarius. Based on this agreement the Company will exchange
$145,544 of debt outstanding for: 291,088 common stock shares; 145,544 warrants to purchase common stock shares at a strike price
of $0.25; and 145,544 warrants to purchase common stock shares at a strike price of $0.75.
On
December 30, 2019, the Company entered into an exchange agreement with K2 Medical. Based on this agreement the Company will exchange
$803,654 of debt outstanding for: 1,905,270 common stock shares; 496,602 warrants to purchase common stock shares at a strike
price of $0.20; 704,334 warrants to purchase common stock shares at a strike price of $0.25; and 704,334 warrants to purchase
common stock shares at a strike price of $0.75.
On
December 30, 2019, the Company entered into an exchange agreement with Mr. Blumberg. Based on this agreement the Company will
exchange $305,320 of debt outstanding for: 1,167,630 common stock shares; 928,318 warrants to purchase common stock shares at
a strike price of $0.20; 119,656 warrants to purchase common stock shares at a strike price of $0.25; and 119,656 warrants to
purchase common stock shares at a strike price of $0.75.
On
December 30, 2019, the Company entered into an exchange agreement with Mr. Case. Based on this agreement the Company will exchange
$179,291 of debt outstanding for: 896,456 common stock shares; and 896,455 warrants to purchase common stock shares at a strike
price of $0.20.
On
December 30, 2019, the Company entered into an exchange agreement with Mr. Grimm. Based on this agreement the Company will exchange
$51,110 of debt outstanding for: 255,548 common stock shares; and 255,548 warrants to purchase common stock shares at a strike
price of $0.20.
On
December 30, 2019, the Company entered into an exchange agreement with Mr. Gould. Based on this agreement the Company will exchange
$111,227 of debt outstanding for: 556,136 common stock shares; and 556,136 warrants to purchase common stock shares at a strike
price of $0.20.
On
December 30, 2019, the Company entered into an exchange agreement with Mr. Mamula. Based on this agreement the Company will exchange
$15,577 of debt outstanding for: 77,885 common stock shares; and 77,885 warrants to purchase common stock shares at a strike price
of $0.20.
On
December 30, 2019, the Company entered into an exchange agreement with Mr. Imhoff. Based on this agreement the Company will exchange
$400,417 of debt outstanding for: 1,699,255 common stock shares; 1,497,367 warrants to purchase common stock shares at a strike
price of $0.20; 100,944 warrants to purchase common stock shares at a strike price of $0.25; and 100,944 warrants to purchase
common stock shares at a strike price of $0.75.
On
December 30, 2019, the Company entered into an exchange agreement with Ms. Rosenstock. Based on this agreement the Company will
exchange $78,986 of debt outstanding for: 100,000 common stock shares; and 50,000 warrants to purchase common stock shares at
a strike price of $0.25; and 50,000 warrants to purchase common stock shares at a strike price of $0.75. Ms. Rosenstock, also
forgave $28,986 in debt to the Company.
On
January 6, 2020, the Company entered into an exchange agreement with Jones Day. The Company will exchange $1,744,768 of debt outstanding
for: $175,000, an unsecured promissory note in the amount of $550,000; due 13 months form the date of issuance, that may be called
by the Company at any time prior to maturity upon a payment of $150,000; and an unsecured promissory note in the principal amount
of $444,768, bearing an annualized interest rate of 6.0% and due in four equal annual installments beginning on the second anniversary
of the date of issuance.
On
January 16, 2020, the Company entered into an exchange agreement with GPB. Based on this agreement the Company will exchange $3,360,811
of debt outstanding as of December 12, 2019 for: cash of $1,500,000; 1,860,811 common stock shares; 7,185,000 warrants to purchase
common stock shares at a strike price of $0.20 for existing 2016 warrants; 1,860,811 warrants to purchase common stock shares
at a strike price of $0.25; 3,721,622 warrants to purchase common stock shares at a strike price of $0.75; and 2,791 series D
preferred stock shares. If the Company is able to raise capital in excess of $4,000,000, the exchange amounts shall be adjusted.
If the financing is between $4,000,000 and $4,900,000, for every $100,000 raised in excess of $4,000,000 the Company will pay
an additional $50,000 to pay down debt. If between $5,000,000 and $6,000,000 is raised thru financings, the Company will pay an
additional $1,000,000 to pay down debt. If the financing is in excess of $6,000,000 then the Company will pay the entire debt
balance outstanding. In the event of alternative financings, the Company may elect to pay GPB a total of $1,500,000 in cash to
GPB at which time GPB shall waive any security interest in the assets of the Company, and GPB shall exchange any remaining debt
from the notes into the Series D unit offering. GPB shall have the right to convert the outstanding notes into equity, but not
the obligation. A 9.99% blocker shall be in effect such that GPB agrees to restrict its holdings of the Company’s common
stock shares to less than 9.99% of the total number of the Company’s outstanding common stock shares at any one point in
time. All royalty payments owed to GPB pursuant thereto shall remain obligations of the Company to GPB and shall remain in full
force and effect. The Company shall have 8 months from the execution date of this exchange agreement, subject to early termination
as forth below (in “forbearance agreement”). The Company shall be entitled to extend the forbearance agreement for
four additional months for a $50,000 per month payment. If after the financing is completed and in the event of future financings
or significant collaborations with a partner generating sales greater than $1,000,000, the Company agrees to buy back $500,000
of the Series D preferred stock shares. The interest rate will revert to their original non default rates. Also, all existing
warrants issued prior to exchange agreement will be canceled.
In
addition, the Company is negotiating additional exchange agreements that would potentially eliminate or convert debt into equity;
as well as convert certain forms of equity for other equity.
On
January 22, 2020, the Company entered into a promotional agreement with a consultant. The consultant will provide the Company
investor and public relations services. As compensation for these services, the Company will issue a total of 5,000,000 common
stock warrants at a $0.25 strike price and expiring in three years, if the following conditions occur: 1,250,000 common stock
warrants, 6 months after the close of the Series D Preferred Stock units, if the minimum common stock share price is a minimum
of $0.50 based on a 30-day VWAP, with a two year term; 1,250,000 common stock warrants, 12 months after the close of the Series
D Preferred Stock units, if the minimum common stock share price is a minimum of $0.75 based on a 30-day VWAP, with a one and
half year term; 1,250,000 common stock warrants, 18 months after the close of the Series D Preferred Stock units, if the minimum
common stock share price is a minimum of $1.00 based on a 30-day VWAP, with a one year term; and 1,250,000 common stock warrants,
24 months after the close of the Series D Preferred Stock units, if the minimum common stock share price is a minimum of $1.25
based on a 30-day VWAP, with a one year term. The consultant agrees to a 10.0% blocker at any single point in time it cannot own
10.0% of the total common stock shares outstanding.