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.
The
accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) under
the Securities Exchange Act of 1934. In the opinion of management, all adjustments (consisting of normal recurring accruals and
other items) considered necessary for a fair presentation have been included.
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 3,319,469 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, 2020
and December 31, 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, 2020, it had an accumulated
deficit of approximately $142.1 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, 2020, the Company had a negative working capital of approximately $7.1 million, accumulated deficit of $142.1 million,
and net loss of $2.5 million for the nine months then ended (the net loss was in part the result of a $0.9 million for interest
charges on debt and $0.5 million change in fair value of warrants that were recorded in the period). Stockholders’ deficit
totaled approximately $13.8 million at September 30, 2020, primarily due to recurring net losses from operations, deemed dividends
on warrants and preferred stock.
The
Company has taken the following steps to improve certain factors that are generating the going concern opinion, including:
|
•
|
During
the end of 2019 and during 2020, the Company was able to raise over $4.0 million in equity
and debt investments;
|
|
•
|
The
Company has executed several exchange agreements that converted to approximately $2.4
million of debt for equity, as well as eliminate some existing debt;
|
|
•
|
During
the quarter ended September 30, 2020, the Company uplisted to the Over the Counter (OTC)
bulletin board;
|
If
sufficient capital cannot be raised during 2020 and 2021, 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 28.3 million shares of its common stock outstanding at September 30, 2020,
with exercise prices ranging between $0.04 and $1.82 per share. Exercises of in the money warrants would generate a total of approximately
$5.0 million in cash, assuming full exercise, although the Company cannot be assured that holders will exercise any warrants.
Management may obtain additional funds through the public or private sale of debt or equity, and grants, if available.
2. SIGNIFICANT
ACCOUNTING POLICIES
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 common share stock
options, 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
Recently
Adopted Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 requires that expected credit losses relating to financial assets are measured on an amortized cost basis
and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit
losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also
requires the reversal of previously recognized credit losses if fair value increases. The Company adopted the standard on January
1, 2020. The adoption of ASU 2016-13 did not have a material impact on the Company.
In
August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes
to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. The amendments in ASU 2018-13 eliminate, add, and modify
certain disclosure requirements for fair value measurements. The amendments are effective for the Company’s interim and
annual reporting periods beginning after December 15, 2019, with early adoption permitted for either the entire ASU or only the
provisions that eliminate or modify requirements. The amendments with respect to changes in unrealized gains and losses, the range
and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description
of measurement uncertainty are to be applied prospectively. All other amendments are to be applied retrospectively to all periods
presented. The adoption of ASU 2016-13 did not have a material impact on the Company.
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. Uncollectibility, is determined based on the determination that a distributor
will not be able to make payment and the time frame has exceeded one year. 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, 2020 and December 31, 2019, our inventories were as follows (in thousands):
|
|
September 30,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Raw materials
|
|
$
|
782
|
|
|
$
|
781
|
|
Work in process
|
|
|
80
|
|
|
|
81
|
|
Finished goods
|
|
|
18
|
|
|
|
17
|
|
Inventory reserve
|
|
|
(827
|
)
|
|
|
(831
|
)
|
Total
|
|
$
|
53
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
The
company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its
assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold.
Deposits
on Inventory
Deposits
made for long-term inventory parts were recorded in Other Assets. On September 4, 2020, the Company paid and additional deposit
of $200,000 for the deposit of a major part in the assembly of the Company’s devices. The Company had a prior deposit of
$292,000 with this vendor that was being held until the Company could pay the entire balance of the $493,000 order. The Company
had reserved and recorded an expense for the entire balance of $292,000 in prior periods as it was unsure when it would have the
financial resources to pay the balance. Upon the payment of the additional deposit the Company reversed the reserve of $292,000.
In addition, since the parts will be delivered within 6 months the deposit on inventory was recorded as a current item on the
Company’s Balance Sheet.
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 statement of operations. Expenditures
for repairs and maintenance are expensed as incurred. Property and equipment are summarized as follows at September 30, 2020 and
December 31, 2019 (in thousands):
|
|
September 30,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Equipment
|
|
$
|
1,042
|
|
|
$
|
1,349
|
|
Software
|
|
|
652
|
|
|
|
740
|
|
Furniture and fixtures
|
|
|
41
|
|
|
|
124
|
|
Leasehold Improvement
|
|
|
12
|
|
|
|
180
|
|
|
|
|
1,747
|
|
|
|
2,393
|
|
Less accumulated depreciation and amortization
|
|
|
(1,746
|
)
|
|
|
(2,393
|
)
|
Total
|
|
$
|
1
|
|
|
$
|
—
|
|
During
the three months ended September 30, 2020, the Company disposed of approximately $648,000 of property and equipment that was fully
depreciated.
Debt
Issuance Costs
Debt
issuance costs are capitalized and amortized over the term of the associated debt. Debt issuance costs are presented in the balance
sheet as a direct deduction from the carrying amount of the debt liability consistent with the debt discount.
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 $17,000 and $14,000 for the nine months ended September 30, 2020 and 2019, respectively.
Leases
With
the implementation of ASU 2016-02, “Leases (Topic 842)”, the Company recorded a lease-right-of-use asset 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, 2020, the balance of the lease-right-of-use asset was approximately $61,000 and the lease liability was approximately $57,000.
The
cumulative effect of initially applying the new guidance had an immaterial impact on the opening balance of retained earnings.
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,
2020
|
|
December 31,
2019
|
Compensation
|
|
$
|
1,141
|
|
|
$
|
1,123
|
|
Professional fees
|
|
|
29
|
|
|
|
181
|
|
Interest
|
|
|
1,466
|
|
|
|
1,603
|
|
Warranty
|
|
|
2
|
|
|
|
2
|
|
Vacation
|
|
|
34
|
|
|
|
41
|
|
Preferred dividends
|
|
|
169
|
|
|
|
120
|
|
Other accrued expenses
|
|
|
65
|
|
|
|
165
|
|
Total
|
|
$
|
2,906
|
|
|
$
|
3,235
|
|
Subscription
receivables
Cash
received from investors for common stock shares that has not completed processing is recorded as a liability to subscription receivables.
As of September 30, 2020, all common stock shares were issued to investors. As of September 30, 2020, the outstanding subscription
receivable was nil. As of December 31, 2019, the Company had reserved 1,270,000 common stock shares in exchange for $635,000.
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,
|
|
|
2020
|
|
2019
|
Devices
|
|
$
|
—
|
|
|
|
—
|
|
Disposables
|
|
|
—
|
|
|
|
2
|
|
Major part components
|
|
|
77
|
|
|
|
16
|
|
Warranty
|
|
|
—
|
|
|
|
2
|
|
Total
|
|
$
|
77
|
|
|
$
|
20
|
|
Revenue
by geographic location (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
Asia
|
|
$
|
77
|
|
|
$
|
6
|
|
Europe
|
|
|
—
|
|
|
|
14
|
|
Total
|
|
$
|
77
|
|
|
$
|
20
|
|
Significant
Distributors
Accounts
receivable, that netted to a balance of $1,000, and were reserved against, were from more than one distributor and represents
100% of the balance as of September 30, 2020. During the nine months ended September 30, 2020, revenues were from one distributor
and for other parts. During the nine months ended September 30, 2019, revenues were from two distributors and for extended warranties.
Revenues from these distributors totaled $20,000 for the period ended September 30, 2019. Accounts receivable, not reserved against,
were from one distributor and represents 100% of the balance for the period ended September 30, 2019.
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, 2020, and December 31, 2019, the Company had $42,000 and $101,000 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 has entered into an agreed upon payment plan with the IRS for delinquent payroll taxes and also with the Georgia Department
of State. 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, 2019, the Company has approximately $79 million of cumulative net operating losses. The 2019 Federal and State tax
returns have been filed. A full valuation allowance has been recorded related the deferred tax assets generated from the net operating
losses.
The
current corporate tax rates in the U.S. is 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, 2020 and December 31, 2019, 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 stock based payments granted or modified subsequently
based on fair value estimates.
On
July 14, 2020, the Company granted stock options to employees and consultants. The new Stock Plan (the “Plan”) allows
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.
Stock
options granted have a 10-year life and expire 90 days after employment or upon termination of consulting agreement. Vesting schedule
varies per grantee. Generally stock options granted vest as follows: 25% vest immediately, and the remaining stock options vest
over 33 months, beginning three months after grant.
For
the nine months ended September 30, 2020 and 2019, stock based compensation for options attributable to employees, non-employees,
officers and Board members was approximately $251,000 and $8,000, respectively. These amounts have been included in the Company’s
statements of operations under general and administrative expense. Compensation costs for stock options which vest over time are
recognized over the vesting period. As of September 30, 2020, and 2019 the Company had $618,000 and nil, of unrecognized compensation
costs related to granted stock options that will be recognized, respectively.
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, 2020. The fair value
of the warrants was estimated using the Binomial Simulation model. Gains and losses from changes to derivatives are included in
change in fair value of warrants 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, 2020 and December
31, 2019:
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, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Short-term loans
|
|
|
—
|
|
|
|
—
|
|
|
|
(83
|
)
|
|
|
(83
|
)
|
Warrants issued in connection with Long-term loans
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,594
|
)
|
|
|
(2,594
|
)
|
Warrants issued in connection with Senior Secured Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,838
|
)
|
|
|
(2,838
|
)
|
Derivative liability/bifurcated conversion option in connection with Auctus $1,100,000 loan on December 17, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
(36
|
)
|
Total long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5,551
|
)
|
|
$
|
(5,551
|
)
|
|
|
Fair Value at December 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Distributor Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(114
|
)
|
|
|
(114
|
)
|
Warrants issued in connection with Short-term loans
|
|
|
—
|
|
|
|
—
|
|
|
|
(83
|
)
|
|
|
(83
|
)
|
Warrants issued in connection with Long-term loans
|
|
|
—
|
|
|
|
—
|
|
|
|
(893
|
)
|
|
|
(893
|
)
|
Warrants issued in connection with Senior Secured Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,002
|
)
|
|
|
(4,002
|
)
|
Derivative liability/bifurcated conversion option in connection with Auctus $1,100,000 loan on December 17, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5,092
|
)
|
|
$
|
(5,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of changes to
Level 3 instruments during the nine months ended September 30, 2020:
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|
Distributor Debt
|
|
Short-Term Loans
|
|
Long-Term Loans
|
|
Senior Secured Debt
|
|
Derivative
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
$
|
(114
|
)
|
|
$
|
(83
|
)
|
|
$
|
(893
|
)
|
|
$
|
(4,002
|
)
|
|
$
|
—
|
|
|
$
|
(5,092)
|
Warrants exchanged for fixed price warrants
|
|
|
67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
67
|
Change in fair value of
derivatives during the year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
(36)
|
Change in fair value of
warrants during the year
|
|
|
47
|
|
|
|
—
|
|
|
|
(1,701
|
)
|
|
|
1,164
|
|
|
|
—
|
|
|
|
(490)
|
Balance, September 30, 2020
|
|
$
|
—
|
|
|
$
|
(83
|
)
|
|
$
|
(2,594
|
)
|
|
$
|
(2,838
|
)
|
|
$
|
(36
|
)
|
|
$
|
(5,551)
|
As
of September 30, 2020, the fair value of warrants was approximately $5.6 million and the
fair value of the derivative liability was $36,000. A net change of approximately $0.5 million has been recorded to the
accompanying statement of operations for the nine months ended September 30, 2020.
4.
STOCKHOLDERS’ DEFICIT
Common
Stock
The
Company has authorized 3,000,000,000 shares of common stock with $0.001 par value, of which 13,096,189 were issued and outstanding
as of September 30, 2020. As of December 31, 2019, there were 3,000,000,000 authorized shares of common stock, of which 3,319,469
were issued and outstanding.
For
the nine months ended September 30, 2020, the Company issued 9,776,720 shares of common stock as listed below:
Exchange of Debt for common stock shares and warrants
|
|
|
8,132,013
|
|
Shares issued for manufacturing agreements
|
|
|
12,147
|
|
Shares issued for payment of Series D dividends
|
|
|
106,560
|
|
Investments
|
|
|
1,526,000
|
|
Issued during the nine months ended September 30, 2020
|
|
|
9,776,720
|
|
Summary
table of common stock share transactions:
Balance at December 31, 2019
|
|
|
3,319,469
|
|
Issued in 2020
|
|
|
9,776,720
|
|
Balance at September 30, 2020
|
|
|
13,096,189
|
|
Investments
During
the second and third quarters of 2020, the Company received equity investments in the amount of $1,636,000 and incurred fees due
on these investments of $97,000. These investors received a total of 1,653.5 Series E preferred stock (if the Investor elects
to convert their Series E preferred stock, each Series E preferred stock shares converts into 4,000 shares of the Company’s
common stock shares).
During
January and April 2020, the Company received equity investments in the amount of $128,000. These investors received a total of
256,000 common stock shares and 256,000 warrants issued to purchase common stock shares at a strike price of $0.25, 256,000 warrants
to purchase common stock shares at a strike price of $0.75 and 128 Series D preferred stock (if the Investor elects to convert
their Series D preferred stock, each Series D preferred stock shares converts into 3,000 shares of the Company’s common
stock shares). Of the amount invested $38,000 was from related parties.
During
December 2019, the Company received equity investments in the amount of $635,000. The $635,000 of investments were recorded as
a subscription liability in December 2019. The common stock shares were issued in January 2020. These investors received a total
of 1,270,000 common stock shares and 1,270,000 warrants to purchase common stock shares at a strike price of $0.25, 1,270,000
warrants issued to purchase common stock shares at a strike price of $0.75 and 635 Series D preferred stock (each Series D preferred
stock shares converts into 3,000 shares of the Company’s common stock shares). Of the amount invested $350,000 was from
related parties.
Debt
Exchanges
On
January 8, 2020, the Company exchanged $2,064,366 in debt for several equity instruments (noted below) that were determined to
have a total fair value of $2,065,548, resulting in a loss on extinguishment of debt of $1,183 which is recorded in other income
(expense) on the accompanying consolidated statements of operations. The Company also issued 6,957,013 warrants to purchase common
stock shares; with exercise prices of $0.25, $0.75 and $0.20. In addition, one of the investors forgave approximately $29,000
of debt, which was recorded as a gain for extinguishment of debt.
On
June 3, 2020, the Company exchanged $328,422 in debt from Auctus, (summarized in footnote 10: Convertible Notes), for 500,000
common stock shares and 700,000 warrants to purchase common stock shares. The fair value of the common stock shares was $250,000
(based on a $0.50 fair value for the Company’s stock) and of the warrants to purchase common stock shares was $196,818 (based
on a $0.281 black scholes fair valuation). This resulted in a net loss on extinguishment of debt of $118,396 ($446,818 fair value
less the $328,422 of exchanged debt).
On
June 30, 2020, the Company exchanged $125,000 in debt (during June 2020, $125,000 in payables had been converted into short-term
debt) from Mr. James Clavijo, for 500,000 common stock shares and 250,000 warrants to purchase common stock shares. The fair value
of the common stock shares was $250,000 (based on a $0.50 fair value for the Company’s stock) and of the warrants to purchase
common stock shares was $99,963 (based on a $0.40 black scholes fair valuation). This resulted in a net loss on extinguishment
of debt of $224,963 ($349,963 fair value less the $125,000 of exchanged debt). After the exchange transaction a balance was due
to Mr. Clavijo of $10,213 which was paid.
The
following table summarizes the debt exchanges:
|
|
Total Debt and Accrued Interest
|
|
Total Debt
|
|
Total Accrued Interest
|
|
Common Stock Shares
|
|
Warrants (Exercise $0.25)
|
|
Warrants (Exercise $0.75)
|
|
Warrants (Exercise $0.20)
|
|
Warrants (Exercise $0.15)
|
|
Warrants (Exercise $0.50)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aquarius
|
|
$
|
145,544
|
|
|
|
107,500
|
|
|
|
38,044
|
|
|
|
291,088
|
|
|
|
145,544
|
|
|
|
145,544
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
K2 Medical (Shenghuo)3
|
|
|
803,653
|
|
|
|
771,927
|
|
|
|
31,726
|
|
|
|
1,905,270
|
|
|
|
704,334
|
|
|
|
704,334
|
|
|
|
496,602
|
|
|
|
—
|
|
|
|
—
|
|
Mr. Blumberg
|
|
|
305,320
|
|
|
|
292,290
|
|
|
|
13,030
|
|
|
|
1,167,630
|
|
|
|
119,656
|
|
|
|
119,656
|
|
|
|
928,318
|
|
|
|
—
|
|
|
|
—
|
|
Mr. Case
|
|
|
179,291
|
|
|
|
150,000
|
|
|
|
29,291
|
|
|
|
896,456
|
|
|
|
—
|
|
|
|
—
|
|
|
|
896,456
|
|
|
|
—
|
|
|
|
—
|
|
Mr. Grimm
|
|
|
51,050
|
|
|
|
50,000
|
|
|
|
1,050
|
|
|
|
255,548
|
|
|
|
—
|
|
|
|
—
|
|
|
|
255,548
|
|
|
|
—
|
|
|
|
—
|
|
Mr. Gould
|
|
|
111,227
|
|
|
|
100,000
|
|
|
|
11,227
|
|
|
|
556,136
|
|
|
|
—
|
|
|
|
—
|
|
|
|
556,136
|
|
|
|
—
|
|
|
|
—
|
|
Mr. Mamula
|
|
|
15,577
|
|
|
|
15,000
|
|
|
|
577
|
|
|
|
77,885
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77,885
|
|
|
|
—
|
|
|
|
—
|
|
Dr. Imhoff2
|
|
|
400,417
|
|
|
|
363,480
|
|
|
|
36,937
|
|
|
|
1,699,255
|
|
|
|
100,944
|
|
|
|
100,944
|
|
|
|
1,497,367
|
|
|
|
—
|
|
|
|
—
|
|
Ms. Rosenstock1
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mr. James2
|
|
|
2,286
|
|
|
|
2,000
|
|
|
|
286
|
|
|
|
7,745
|
|
|
|
1,227
|
|
|
|
1,227
|
|
|
|
5,291
|
|
|
|
—
|
|
|
|
—
|
|
Auctus
|
|
|
328,422
|
|
|
|
249,119
|
|
|
|
79,303
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
700,000
|
|
|
|
—
|
|
Mr. Clavijo
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
—
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
|
Mr. Wells4
|
|
|
220,000
|
|
|
|
220,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,737,787
|
|
|
$
|
2,496,316
|
|
|
$
|
241,471
|
|
|
|
7,957,013
|
|
|
|
1,121,705
|
|
|
|
1,121,705
|
|
|
|
4,713,603
|
|
|
|
700,000
|
|
|
|
500,000
|
|
1
Ms. Rosenstock also forgave $28,986 in debt to the Company.
2
Mr. Imhoff and Mr. James are members of the board of directors and therefore related parties.
3
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.
4
Mr. Wells will also receive 66,000 common share stock options; the details of which are explained in the following paragraph.
On
July 9, 2020, the Company entered into an exchange agreement with Mr. Bill Wells (one of its former employees). In lieu of agreeing
to dismiss approximately half of what is owed by the Company, Mr. Wells will receive the following: (i) cash payments of $20,000
within 60 days of the signing of the agreement; cash payments over time in the amount of $90,000 in the form of an unsecured note
with the Company to be executed within 30 days of a new financing(s) totaling at least $3.0 million. The note shall bear interest
of 6.0% and mature over 18 months; (iii) 66,000 common share stock options that vest at a rate of 3,667 per month and have a $0.49
exercise price (if two consecutive payments in (ii) are not made the stock options will be canceled and a cash payment will be
required; and (iv) the total amount of forgiveness by creditor of approximately $110,000 shall be prorated according to amount
paid. During the three months ended September 30, 2020, the Company made a payment of $20,000; this payment allowed the Company
to write off a total of $40,000 in debt, with the corresponding $20,000 difference recorded as a gain.
Preferred
Stock
Overview
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, 2020 and December 31, 2019, 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, 2020 and December 31, 2019. In
addition, some 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. At September 30, 2020, shares of Series C2 had a conversion price
of $0.50 per share, such that each share of Series C preferred stock would convert into approximately 2,000 shares of the Company’s
common stock.
Series
C Convertible Preferred Stock
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, 2020 and December 31, 2019, there were 286 shares outstanding with a conversion price of $0.50
per share, such that each share of Series C preferred stock would convert into approximately 2,000 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 December 31, 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, 2020, 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, 2020, there were 1,050 shares outstanding with a conversion price of $0.50 per share, such that each share of Series
C preferred stock would convert into approximately 381,098 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.
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. At September 30, 2020, shares of Series C2 had a conversion price
of $0.50 per share, such that each share of Series C preferred stock would convert into approximately 2,000 shares of the Company’s
common 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.
Series
D Convertible Preferred Stock
On
January 8, 2020, the Company entered into a Security Agreement with the Series D Investors (the “Series D Security Agreement”)
pursuant to which all obligations under the Series D Certificate of Designation are secured by all of the Company’s assets
and personal properties, with certain accredited investors, including the Chief Executive Officer, Chief Operating Officer and
a director of the Company. In total, for $763,000 the Company issued 763 shares of Series D Preferred Stock, 1,526,000 common
stock shares, 1,526,000 common stock warrants, exercisable at $0.25, and 1,526,000 common stock warrants, exercisable $0.75. Each
Series D Preferred Stock is convertible into 3,000 common stock shares. The Series D Preferred Stock will have cumulative dividends
at the rate per share of 10% per annum. The stated value and liquidation preference on the Series D Preferred Stock is $554.
Each
share of Series D Preferred is convertible, at any time for a period of 5 years after issuance, into that number of shares of
Common Stock, determined by dividing the Stated Value by $0.25, subject to certain adjustments set forth in the Series D Certificate
of Designation (the “Series D Conversion Price”). The conversion of Series D Preferred is subject to a 4.99% beneficial
ownership limitation, which may be increased to 9.99% at the election of the holder of the Series D Preferred. If the average
of the VWAPs (as defined in the Series D Certificate of Designation) for any consecutive 5 trading day period (“Measurement
Period”) exceeds 200% of the then Series D Conversion Price and the average daily trading volume of the Common Stock on
the primary trading market exceeds 1,000 shares per trading day during the Measurement Period (subject to adjustments), the Company
may redeem the then outstanding Series D Preferred, for cash in an amount equal to aggregate Stated Value then outstanding plus
accrued but unpaid dividends .
The
Series D Warrants may be exercised cashlessly if there is no effective registration statement covering the Common Stock issuable
upon exercise of the Series D Warrants. The Series D Warrants contain a 4.99% beneficial ownership blocker which may be increased
to 9.99% at the holder’s election.
On
January 8, 2020, the Company also entered into a Registration Rights Agreement (the “Series D Registration Rights Agreement
“) with the Series D Investors pursuant to which the Company agreed to file with the SEC, a registration statement on a
Form S-3 (or on other appropriate form if a Form S-3 is not available) covering the Common Stock issuable upon conversion of the
Series D Warrants within 90 days of the date of the Registration Rights Agreement and cause such registration statement to be
declared effective within 120 days of the date of the Registration Rights Agreement. All reasonable expenses related to such registration
shall be borne by the Company.
During
August 2020, the Company issued 106,560 common stock shares for the payment of Series D Preferred Stock dividends accrued.
Series
E Convertible Preferred Stock
During
the nine months ended September 30, 2020, the Company entered into a Security Agreement with the Series E Investors (the “Series
E Security Agreement”) pursuant to which all obligations under the Series E Certificate of Designation are secured by all
of the Company’s assets and personal properties, with certain accredited investors. In total, for $1,636,000 the Company
issued 1,635.5 shares of Series E Preferred Stock. Each Series E Preferred Stock is convertible into 4,000 common stock shares.
The Series E Preferred Stock will have cumulative dividends at the rate per share of 6% per annum. The stated value and liquidation
preference on the Series E Preferred Stock is $1,636. The Company incurred fees due on these investments of $97,000.
Each
share of Series E Preferred is convertible, at any time for a period of 5 years after issuance, into that number of shares of
Common Stock, determined by dividing the Stated Value by $0.25, subject to certain adjustments set forth in the Series E Certificate
of Designation (the “Series E Conversion Price”). The conversion of Series E Preferred is subject to a 4.99% beneficial
ownership limitation, which may be increased to 9.99% at the election of the holder of the Series E Preferred. If the average
of the VWAPs (as defined in the Series E Certificate of Designation) for any consecutive 5 trading day period (“Measurement
Period”) exceeds 200% of the then Series E Conversion Price and the average daily trading volume of the Common Stock on
the primary trading market exceeds 1,000 shares per trading day during the Measurement Period (subject to adjustments), the Company
may redeem the then outstanding Series E Preferred, for cash in an amount equal to aggregate Stated Value then outstanding plus
accrued but unpaid dividends.
Warrants
The
following table summarizes transactions involving the Company’s outstanding warrants to purchase common stock for the nine
months ended September 30, 2020:
|
|
Warrants
(Underlying Shares)
|
Outstanding, January 1, 2020
|
|
|
46,016,840
|
|
Issuances
|
|
|
11,270,013
|
|
Cancelled / Expired
|
|
|
(70
|
)
|
Exchanged in debt restructuring
|
|
|
(28,962,508
|
)
|
Exercised
|
|
|
—
|
|
Outstanding, September 30, 2020
|
|
|
28,324,275
|
|
The Company
had the following shares reserved for the warrants as of September 30, 2020:
Warrants
(Underlying Shares)
|
|
Exercise
Price
|
Expiration
Date
|
4,262
|
(1)
|
$1.824
per share
|
March
19, 2021
|
7,185,000
|
(2)
|
$0.20
per share
|
February
12, 2023
|
1,725,000
|
(3)
|
$0.04
per share
|
February
21, 2021
|
325,000
|
(4)
|
$0.18
per share
|
April
4, 2022
|
215,000
|
(5)
|
$0.25
per share
|
July
1, 2022
|
100,000
|
(6)
|
$0.25
per share
|
September
1, 2022
|
7,500,000
|
(7)
|
$0.20
per share
|
December
17, 2024
|
250,000
|
(8)
|
$0.16
per share
|
March
31, 2025
|
2,597,705
|
(9)
|
$0.25
per share
|
December
30, 2022
|
2,597,705
|
(10)
|
$0.75
per share
|
December
30, 2022
|
4,713,603
|
(11)
|
$0.20
per share
|
December
30, 2022
|
60,000
|
(12)
|
$0.25
per share
|
April
23, 2023
|
50,000
|
(13)
|
$0.25
per share
|
December
30, 2022
|
50,000
|
(14)
|
$0.75
per share
|
December
30, 2022
|
700,000
|
(15)
|
$0.15
per share
|
May
21, 2023
|
250,000
|
(16)
|
$0.50
per share
|
June
23, 2023
|
1,000
|
(17)
|
$0.50
per share
|
August
10, 2022
|
28,324,275*
|
|
|
|
*
However, please refer to Footnote 10 - CONVERTIBLE DEBT in the paragraph: Debt Restructuring for more information regarding
our warrants.
|
|
(1)
|
Issued
to investors for a loan in March 2018.
|
(2)
|
Exchanged
in January 2020 from amount issued as part of a February 2016 private placement with senior secured
debt
holder
|
(3)
|
Issued
to a placement agent in conjunction with a February 2016 private placement with senior secured debt holder
|
(4)
|
Issued
to investors for a loan in April 2019
|
(5)
|
Issued
to investors for a loan in July 2019
|
(6)
|
Issued
to investors for a loan in September 2019
|
(7)
|
Issued
to investors for a loan in December 2019
|
(8)
|
Issued
to investors for a loan in January 2020
|
(9)
|
Issued
to investors as part of Series D Preferred Stock Capital raise in December 2020
|
(10)
|
Issued
to investors as part of Series D Preferred Stock Capital raise in December 2020
|
(11)
(12)
(13)
(14)
(15)
(16)
|
Issued
to investors as part of Series D Preferred Stock Capital raise in December 2020
Issued
to a consultant for services in April 2020
Issued
to an investor as part of Series D Preferred Stock Capital raise in April 2020
Issued
to an investor as part of Series D Preferred Stock Capital raise in April 2020
Issued
to an investor for a loan in May 2020
Issued
to an investor in exchange of debt in June 2020
|
(17)
|
Issued
to a consultant for services in August 2020
|
|
|
|
Footnote
(2) - On January 16, 2020, the Company entered into an exchange agreement with GPB. This exchange agreement canceled the existing
outstanding warrants, which were subject to anti-dilution and ratchet provisions, to purchase 35,937,500 shares of common stock
at an exercise price of $0.04 per share and resulted in the issuance of new warrants to purchase 7,185,000 share of common stock
at a price of $0.20 per share. The new warrants have fixed exercise prices of $0.20; subject to the Company meeting the agreed
upon terms of the exchange agreement.
Warrant
to purchase 70 shares of common stock were not recorded as their exercise price after considering reverse stock splits, were greater
than $60,000 and deemed to be immaterial for disclosure
On
January 6, 2020, the Company entered into a finder’s fee agreement. The finder will receive 5% cash and 5% warrants on all
funds it raises including bridge loans. The three-year common stock share warrants will have an exercise price of $0.25. During
2019 and 2020, the finder helped the Company raise $300,000, therefore a fee of $15,000 was paid and 60,000 warrants will be issued.
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 at least
$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 at least $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.
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, 2020 and December 31, 2019. 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. As of September 30, 2020, and December 31, 2019, there were no stock options outstanding and exercisable.
On
July 14, 2020, the Company granted 1,800,000 stock options to employees and consultants. The new Stock Plan (the “Plan”)
allows 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. The plan provides for stock options to be granted
up to 10% of the outstanding common stock shares.
The
fair value of options issued during the nine months ended September 30, 2020 was estimated using the Black-Scholes option-pricing
model and the following assumptions:
•
|
a dividend yield of 0%;
|
|
|
•
|
an expected life of 10 years;
|
|
|
•
|
volatility of 153.1%; and
|
|
|
•
|
risk-free interest rate of 0.98%.
|
The
fair value of each option grant made during 2020 was estimated on the date of each grant using the Black-Scholes option pricing
model and recognized as stock based compensation rateably over the option vesting periods, which approximates the service period.
The
following lists the stock options granted:
|
|
Grant
Date
|
|
|
Expiration
Date
|
|
Vesting
Period
|
|
Number
of Stock Options Granted
|
|
|
|
|
Exercise
Price
|
|
Black
Scholes Valuation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cartwright,
Gene
|
|
07/14/2020
|
|
|
07/12/2030
|
|
Vesting(1)
|
|
400,000
|
|
|
|
|
$0.49
|
|
$0.483
|
Faupel,
Mark
|
|
07/14/2020
|
|
|
07/12/2030
|
|
Vesting(1)
|
|
400,000
|
|
|
|
|
$0.49
|
|
$0.483
|
Imhoff,
John
|
|
07/14/2020
|
|
|
07/12/2030
|
|
Immediate
|
|
50,000
|
|
|
|
|
$0.49
|
|
$0.483
|
James,
Michael
|
|
07/14/2020
|
|
|
07/12/2030
|
|
Immediate
|
|
50,000
|
|
|
|
|
$0.49
|
|
$0.483
|
Clavijo,
James
|
|
07/14/2020
|
|
|
07/12/2030
|
|
Vesting(1)
|
|
300,000
|
|
|
|
|
$0.49
|
|
$0.483
|
Battle,
Lisa
|
|
07/14/2020
|
|
|
07/12/2030
|
|
Vesting(1)
|
|
178,000
|
|
|
|
|
$0.49
|
|
$0.483
|
Sufka,
Melissa
|
|
07/14/2020
|
|
|
07/12/2030
|
|
Vesting(1)
|
|
178,000
|
|
|
|
|
$0.49
|
|
$0.483
|
Waterstreet,
Alesandra
|
|
07/14/2020
|
|
|
07/12/2030
|
|
Vesting(1)
|
|
178,000
|
|
|
|
|
$0.49
|
|
$0.483
|
Wells,
William
|
|
07/14/2020
|
|
|
07/12/2030
|
|
18
months
|
|
66,000
|
|
|
|
|
$0.49
|
|
$0.483
|
|
|
|
|
|
|
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
(1)
|
25%
immediate and 25% each year thereafter; 36 months in total
|
As
of September 30, 2020, the Company has issued and outstanding options to purchase a total of 1,800,000 shares of common stock
pursuant to the plan, at a weighted average exercise price of $0.49 per share.
As
of September 30, 2020,
Stock options vested
|
|
|
519,500
|
|
Stock options unvested
|
|
|
1,280,500
|
|
Total stock options granted at September 30, 2020
|
|
|
1,800,000
|
|
Stock
option activity for the nine months ended September 30, 2020 is as follows:
|
|
September 30, 2020
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
—
|
|
|
|
—
|
|
Options granted
|
|
|
1,800,000
|
|
|
$
|
0.49
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
Options expired/forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding at end of the period
|
|
|
1,800,000
|
|
|
$
|
0.49
|
|
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, 2020, and December 31, 2019, 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 June 30, 2018; $8,022 each month for the period
beginning April 1, 2018 and ending June 30, 2019; $8,268 each month for the period beginning April 1, 2019 and ending June 30,
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, 2020 under non-cancellable operating leases for office space and equipment are
as follows (in thousands):
Year
|
|
Amount
|
|
2020
|
|
|
|
30
|
|
|
2021
|
|
|
|
30
|
|
|
Total
|
|
|
|
60
|
|
|
Less: Interest
|
|
|
|
3
|
|
|
Present value of lease liability
|
|
|
|
57
|
|
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 (current director Richard Blumberg is the designee).
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 to purchase 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 device 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. On March 5, 2020 the Company
had recorded an accrued liability for SMI of $692,335, which was 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).
Contingencies
Based
on the current outbreak of the Coronavirus SARS-CoV-2, the pathogen responsible for COVID-19, which has already had an impact
on financial markets, there could be additional repercussions to the Company’s operating business, including but not limited
to, the sourcing of materials for product candidates, manufacture of supplies for preclinical and/or clinical studies, delays
in clinical operations, which may include the availability or the continued availability of patients for trials due to such things
as quarantines, conduct of patient monitoring and clinical trial data retrieval at investigational study sites.
The
future impact of the outbreak is highly uncertain and cannot be predicted, and the Company cannot provide any assurance that the
outbreak will not have a material adverse impact on the Company’s operations or future results or filings with regulatory
health authorities. The extent of the impact to the Company, if any, will depend on future developments, including actions taken
to contain the coronavirus.
8.
NOTES PAYABLE
Notes
Payable in Default
At
September 30, 2020 and December 31, 2019, the Company maintained notes payable to both related and non-related parties totaling
approximately $319,000 and $776,000, 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 as 20%. The Company is accruing interest at the default
rate of 18.0% on two of the loans. As described in Note 4: STOCKHOLDERS’ DEFICIT certain notes payable in default
outstanding had been exchanged for equity and cash as described in the note.
As
described previously, the Company entered into an exchange agreement with Dr. Imhoff. Based on this agreement the Company exchanged
$199,417 of short-term debt outstanding.
As
described previously, the Company entered into an exchange agreement with Ms. Rosenstock. Based on this agreement the Company
exchanged $50,000 of short-term debt outstanding and forgave $28,986.
On
February 8, 2019, a note payable in default to Aquarius 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 balance on the note was $107,500
and accrued interest was $38,044 for a total of $145,544 outstanding. As of September 30, 2020, the Company had entered into an
exchange agreement with Aquarius. Based on this agreement the Company exchanged $145,544 of debt outstanding for: 291,088 common
stock shares; 145,544 warrants issued to purchase common stock shares at a strike price of $0.25; and 145,544 warrants issued
to purchase common stock shares at a strike price of $0.75.
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 an 8% original issue discount and other expenses). The note bears
an interest rate of 16% and was due and payable on September 11, 2019. 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 issued 315,000 warrants at an exercise
price of $0.25 per warrant and exercisable within 3 years from issuance (the “Initial Warrants”). As of September
30, 2020, the loan had been paid off. As of December 31, 2019, $57,946 remained outstanding, which included a fee of $4,951 and
interest of $4,606.
As
described previously, the Company entered into an exchange agreement with Mr. Blumberg. Based on this agreement the Company exchanged
$70,320 of short-term debt outstanding.
As
described previously, the Company entered into an exchange agreement with Mr. James. Based on this agreement the Company exchanged
$2,286 of short-term debt outstanding.
The
following table summarizes the Notes payable in default, including related parties:
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Dr. Imhoff
|
|
$
|
—
|
|
|
$
|
199
|
|
Dr. Cartwright
|
|
|
1
|
|
|
|
2
|
|
Ms. Rosenstock
|
|
|
—
|
|
|
|
50
|
|
Mr. Fowler
|
|
|
26
|
|
|
|
26
|
|
Mr. Mermelstein
|
|
|
275
|
|
|
|
244
|
|
GPB
|
|
|
17
|
|
|
|
17
|
|
Aquarius
|
|
|
—
|
|
|
|
108
|
|
Accilent
|
|
|
—
|
|
|
|
58
|
|
Mr. Blumberg
|
|
|
—
|
|
|
|
70
|
|
Mr. James
|
|
|
—
|
|
|
|
2
|
|
Notes payable in default
|
|
$
|
319
|
|
|
$
|
776
|
|
The
notes payable to related parties was $1,000 of the $319,000 balance at September 30, 2020 and $349,000 of the $776,000 balance
at December 31, 2019.
Short
Term Notes Payable
At
September 30, 2020 and December 31, 2019, the Company maintained short term notes payable to both related and non-related parties
totaling $130,000 and $1,026,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry annual
interest rates between 5% and 19%.
As
described previously, the Company entered into an exchange agreement with Dr. Imhoff. Based on this agreement the Company exchanged
$167,000 of short-term debt outstanding.
The
Company issued promissory notes to Mr. Cartwright and Mr. Faupel, in the amounts of approximately $48,000 and $4,000, respectively.
The notes were initially issued with 0% interest, however interest increased to 6.0% interest 90 days after the Company received
$1,000,000 in financing proceeds.
On
August 22, 2018, the Company issued a promissory note to Mr. Case 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). As of September 30, 2020, the
Company had exchanged $179,291 of debt outstanding for: 896,456 common stock shares; and 896,455 warrants issued to purchase common
stock shares at a strike price of $0.20. As of December 31, 2019, the Company had not repaid the note and original issue discount
of $157,500 ($7,500 is recorded in accrued expenses).
As
described previously, the Company entered into an exchange agreement with Mr. Mamula. Based on this agreement the Company exchanged
$15,577 of short-term debt outstanding.
On
September 19, 2018, and February 15, 2019, the Company issued promissory notes to Mr. Gould for $50,000 each in aggregate principal
amount of a 6% promissory note for an aggregate purchase price of $52,500 each (representing a $2,500 original issue discount).
As of September 30, 2020, the Company had entered into an exchange agreement with Mr. Gould. Based on this agreement the Company
exchanged $111,227 of debt outstanding for: 556,136 common stock shares; and 556,136 warrants issued to purchase common stock
shares at a strike price of $0.20. As of December 31, 2019, the Company had not repaid the note and original issue discount of
$52,500 ($2,500 is recorded in accrued expenses) and therefore the accrued interest rate increased to 12%.
As
described previously, the Company entered into an exchange agreement with K2 Medical. Based on this agreement the Company exchanged
$203,000 of short-term debt outstanding.
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 December 31, 2019, $60,105 had been paid, leaving a balance of $8,016. As of September
30, 2020, the balance of $68,121 had been paid in full.
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 $14,459, including interest at 4.91% and matures in April 2020. As of September 30, 2020, the balance
was paid in full. The balance due on insurance policies totaled $57,483 at December 31, 2019.
On
July 4, 2020, the Company entered into a premium finance agreement to finance its insurance policies totaling $109,000. The note
requires monthly payments of $11,299, including interest at 4.968% and matures in April 2021. As of September 30, 2020, the balance
was $78,119.
As
described previously, the Company entered into an exchange agreement with Mr. Blumberg. Based on this agreement the Company exchanged
$223,000 of short-term debt outstanding.
As
described previously, the Company entered into an exchange agreement with Mr. Grimm. Based on this agreement the Company exchanged
$51,050 of short-term debt outstanding.
On
June 30, 2020, the Company exchanged $125,000 in debt (during June 2020, $125,000 in payables had been converted into short-term
debt) from Mr. James Clavijo, for 500,000 common stock shares and 250,000 warrants to purchase common stock shares. The fair value
of the common stock shares was $250,000 (based on a $0.50 fair value for the Company’s stock) and of the warrants to purchase
common stock shares was $99,963 (based on a $0.40 black scholes fair valuation). This resulted in a net loss on extinguishment
of debt of $224,963 ($349,963 fair value less the $125,000 of exchanged debt). After the exchange transaction a balance was due
Mr. Clavijo of $10,213 which was paid.
The
following table summarizes the Short-term notes payable, including related parties:
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Dr. Imhoff
|
|
$
|
—
|
|
|
$
|
167
|
|
Dr. Cartwright
|
|
|
48
|
|
|
|
48
|
|
Dr. Faupel
|
|
|
4
|
|
|
|
4
|
|
Mr. Case
|
|
|
—
|
|
|
|
150
|
|
Mr. Mamula
|
|
|
—
|
|
|
|
15
|
|
Mr. Gould
|
|
|
—
|
|
|
|
100
|
|
K2 (Shenghuo)
|
|
|
—
|
|
|
|
203
|
|
Everest
|
|
|
—
|
|
|
|
8
|
|
Premium Finance (insurance)
|
|
|
78
|
|
|
|
59
|
|
Mr. Blumberg
|
|
|
—
|
|
|
|
223
|
|
Mr. Grimm
|
|
|
—
|
|
|
|
49
|
|
Short-term notes payable, including related parties
|
|
$
|
130
|
|
|
$
|
1,026
|
|
The
short-term notes payable past due to related parties was $52,000 of the $130,000 balance at September 30, 2020 and $645,000 of
the $1,026,000 balance at December 31, 2019.
Troubled
Debt Restructuring
The
debt extinguished for Notes Payable which closed on January 8, 2020, the Company exchanged $2,064,366 in debt for common stock
shares and warrants as described above that were determined to have a total fair value of $2,065,548, resulting in a loss on extinguishment
of debt of $1,183 which is recorded in other income (expense) on the accompanying consolidated statements of operations. In addition,
one of the investors forgave approximately $29,000 of debt, which was recorded as a gain for extinguishment of debt. Also, during
June 2020, the Company exchanged $125,000 in debt for common stock shares and warrants as described. This debt extinguished met
the criteria for troubled debt. The basic criteria are that the borrower is troubled, ie., they are having financial difficulties,
and a concession is granted by the creditor. Due to the Company being in default on several of its loans the debt is considered
troubled debt. The troubled debt restructuring for Notes Payable, had an immaterial effect on the Company’s basic or diluted
earnings per share calculation for September 30, 2020 and 2019.
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, 2020, the note had been exchanged for
common stock shares and warrants. This was part of the exchange made on January 8, 2020, for $790,544 of debt outstanding for:
1,905,270 common stock shares issued on March 23, 2020; 496,602 warrants issued to purchase common stock shares at a strike price
of $0.20; 692,446 warrants issued to purchase common stock shares at a strike price of $0.25; and 692,446 warrants issued to purchase
common stock shares at a strike price of $0.75. As of December 31, 2019, the Company had a note due of $512,719.
Troubled
Debt Restructuring
The
debt extinguished for Related Party Convertible Note Payable – Short-Term, which closed on January 8, 2020, the Company
exchanged in part $512,719 in debt for several common stock shares and warrants as described above. This debt extinguished met
the criteria for troubled debt. The basic criteria are that the borrower is troubled, i.e., they are having financial difficulties,
and a concession is granted by the creditor. Due to the Company being in default on several of its loans the debt is considered
troubled debt. The troubled debt restructuring for Notes Payable, had an immaterial effect on the Company’s basic or diluted
earnings per share calculation for September 30, 2020 and 2019.
Convertible
Note Payable – Short-Term
On
March 31, 2020, we entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $112,750
in aggregate principal amount of a 12% convertible promissory note. On March 31, 2020, we issued the note to Auctus and issued
250,000 five-year common stock warrants at an exercise price of $0.16. On April 3, 2020, we received net proceeds of $100,000.
The note matures on January 26, 2021 and accrues interest at a rate of 12% per year. We may not prepay the note, in whole or in
part. After the 90th calendar day after the issuance date, and ending on the later of maturity date and the date of
payment of the default amount, Auctus may convert the note, at any time, in whole or in part, provided such conversion does not
provide Auctus with more than 4.99% of the outstanding common share stock. The conversion may be made converted into shares of
the our common stock, at a conversion price equal to the lesser of: (i) the lowest Trading Price during the twenty-five (25) trading
day period on the last trading prior to the issue date and (ii) the variable conversion price (55% multiplied by the market price,
market price means the lowest trading price for the common stock during the twenty-five (25) trading day period ending on the
latest complete trading day prior to the conversion date. Trading price is the lowest trade price on the trading market as reported.
The note includes customary events of default provisions and a default interest rate of 24% per year. As of September 30, 2020,
the note outstanding was $112,750, which consisted of unamortized balance of $32,890 of a beneficial conversion feature, unamortized
original issue discount of $7,650, unamortized debt issuance costs of $5,517 and interest of $6,803 included in accrued expenses
on the accompanying consolidated balance sheet.
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% is due and payable on May 15, 2020. 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 receives 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. During
2020, Eagle provided a forbearance to the Company on the default after a payment was made. On May 15, 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 December 31,
2019, the outstanding note was for $25,651, which consisted of unamortized balance of $14,438 of a beneficial conversion feature,
unamortized original issue discount of $1,942, unamortized debt issuance costs of $2,774 and interest of $1,166 included in accrued
expenses on the accompanying consolidated balance sheet. On May 14, 2020, the outstanding note was paid off.
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 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 receives 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 Adar’s option and in its sole discretion, Adar may consider the notes immediately due and payable. During 2020,
Adar provided a forbearance to the Company on the default after a payment was made. On May 15, 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 December 31,
2019, the note outstanding increased to $84,780 as a default penalty of $27,030 was added to the outstanding balance of the note,
which consisted of unamortized balance of $14,438 of a beneficial conversion feature, unamortized original issue discount of $1,942,
unamortized debt issuance costs of $2,774 and interest of $3,190 included in accrued expenses on the accompanying consolidated
balance sheet. On May 22, 2020, the outstanding note was paid off.
The
following table summarizes the Convertible notes payable:
|
|
September 30, 2020
|
|
December 31, 2019
|
Shenghuo
|
|
$
|
—
|
|
|
$
|
513
|
|
Auctus
|
|
|
113
|
|
|
|
—
|
|
Eagle
|
|
|
—
|
|
|
|
26
|
|
Adar
|
|
|
—
|
|
|
|
85
|
|
Debt discount and issuance costs to be amortized
|
|
|
(13
|
)
|
|
|
(9
|
)
|
Debt discount related to beneficial conversion
|
|
|
(33
|
)
|
|
|
(29
|
)
|
Short-term convertible notes payable
|
|
$
|
67
|
|
|
$
|
586
|
|
10.
CONVERTIBLE DEBT
Senior
Secured Promissory Note
Effective
February 12, 2016, the Company entered into a securities purchase agreement with GPB Debt Holdings II LLC (“GPB”)
for the issuance of a $1,437,500 senior secured convertible note for an aggregate purchase price of $1,029,000 (representing an
original issue discount of $287,500 and debt issuance costs of $121,000). On May 28, 2016, the balance of the note was increased
by $87,500 for a total principal balance of $1,525,000. On December 7, 2016, the Company entered into an exchange agreement with
GPB and as a result the principal balance increased by a transfer $312,500 (see – “Senior Secured Promissory Note”)
for a total principal balance of $1,837,500. In addition, GPB received warrants for 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 and recorded an additional
discount on the debt. 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. At December
31, 2019, the common stock purchase warrant 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, 2020, and as a result of the January 15, 2020 exchange agreement, the common stock purchase warrant exercise
price had been adjusted to $0.20 and the number of common stock shares exchangeable for was 7,185,000. This exchange is subject
to the Company meeting repayment conditions. Those conditions involved in part the repayment of $450,000, $100,000 and $950,000
for the completion of each Auctus financing tranche. The Company has executed Tranche 1 and 2 and has paid GPB $550,000. In addition,
the Company would need to begin repaying $50,000, in repayment of $1,500,000, each month, beginning on September 15, 2020 (if
the Company is not in default it may request an additional four-month forbearance on that repayment). On September 2, 2020, the
Company made a payment of $50,000, which provided the Company an additional four-month forbearance.
The
convertible note required monthly interest payments at a rate of 17% per year and was due on February 12, 2018. Subject to resale
restrictions and the availability of sufficient authorized but unissued shares of the Company’s common stock, the note is
convertible at a conversion price equal to 70% of the average closing price per share for the five trading days prior to issuance.
In an event of default, the note will accrue interest at a rate of 22%. 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, 2020
and December 31, 2019, had not done so. The note is secured by a lien on substantially all of the Company’s assets.
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, 2020, and December 31, 2019, GPB
had earned approximately $35,000 and $31,000 in royalties that are unpaid, respectively.
As
of September 30, 2020, the balance due on the convertible debt was $1,798,032, consisting of principal of $1,451,002 and a prepayment
penalty of $347,030 and compared to December 31, 2019, where the balance due on the convertible debt was $2,177,030 consisting
of principal of $1,830,000 and a prepayment penalty of $347,030. Interest accrued on the note total $1,213,105 and $1,175,925
at September 30, 2020 and December 31, 2019, respectively, and is included in accrued expenses on the accompanying consolidated
balance sheet.
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.
Troubled
Debt Restructuring
The
debt restructured for Convertible Debt, which closed on January 15, 2020, the Company restructured several re-payment plans as
described above and in addition cancelled warrants and issued new warrants as part of the restructure. This debt restructure met
the criteria for troubled debt. The basic criteria are that the borrower is troubled, i.e., they are having financial difficulties,
and a concession is granted by the creditor. Due to the Company being in default on several of its loans the debt is considered
troubled debt. See Note 8: Notes Payable, for total gain or loss recorded in the period. The troubled debt restructuring for Convertible
Debt, based on the reduction in warrants outstanding would have an effect on the Company’s diluted earnings per share calculation
for September 30, 2020, but not on the basic earnings per share calculation. The earnings per share value would have adjusted
from 0.026 to 0.014 for the three months ended September 30, 2020. However, for the nine months ended September 30, 2020 the basic
and diluted earnings per share would have remained the same as the Company had a loss.
Secured
Promissory Note.
Effective
September 10, 2014, the Company sold a secured promissory note to an accredited investor, GHS Investments, LLC (“GHS”),
with an initial principal amount of $1,275,000, for a purchase price of $570,000 (less an original issue discount of $560,000
and debt issuance costs of $145,000). The note is secured by the Company’s current and future accounts receivable and inventory
and accrued interest at a rate of 18% per year. The note has subsequently been assigned to different credited investors and the
terms of the note were amended extend the maturity until August 31, 2016. The balance of this note was reduced by a transfer of
$306,863 as part of a debt restructuring that occurred on December 7, 2016 (see – “Senior Secured Promissory Note”).
The holder may convert the outstanding balance into shares of common stock at a conversion price per share equal to 75% of the
lowest daily volume average price of common stock during the five days prior to conversion. During July and August 2020, GHS converted
$50,454 of principal and interest for 175,000 common stock shares. In addition, during July and August 2020, as part of the conversion
of the outstanding note, the Company paid $59,564 in cash for principal and interest that remained outstanding. As of September
30, 2020, the note was paid in full. The balance due on the note was $148,223 at December 31, 2019.
Other
Convertible Debt in Default
GHS
Effective
May 19, 2017, the Company entered into a securities purchase agreement with GHS for the purchase of a $66,000 convertible promissory
note for the purchase of $60,000 in net proceeds (representing a 10% original issue discount of $6,000). The accrued interest
rate of 8% per year until it matured in December 31, 2017. Beginning February 2018, the note is convertible, in whole or in part,
at the holder’s option, into shares of the Company’s stock at a conversion price equal to 60% of the lowest trading
price during the 25 trading days prior to conversion. Upon the occurrence of an event of default, the note will bear interest
at a rate of 20% per year and the holder of the note may require the Company to redeem or convert the note at 150% of the outstanding
principal balance. At September 30, 2020 and December 31, 2019, the balance due on this note was $83,094, including a default
penalty of $37,926. Interest accrued on the note totals $21,631, and $16,641 at September 30, 2020 and December 31, 2019, and
is included in accrued expenses on the accompanying consolidated balance sheet, respectively. GHS converted $12,700 of principal
and accrued interest during the year ended December 31, 2019.
Effective
May 17, 2018, the Company entered into a securities purchase agreement with GHS for the purchase of a convertible promissory note
with a principal of $9,250 for a purchase price of $7,500 (representing an original issue discount of $750 and debt issuance costs
of $1,000). The note accrued interest at a rate of 8% per year until its matured June 17, 2019. Beginning February 2018, the note
is convertible, in whole or in part, at the holder's option, into shares of the Company's stock at a conversion price equal to
70% of the lowest trading price during the 25 trading days prior to conversion (if the note cannot be converted due to Depository
Trust Company freeze then rate decreases to 60%). Upon the occurrence of an event of default, the note will bear interest at a
rate of 20% per year and the holder of the note may require the Company to redeem or convert the note at 150% of the outstanding
principal balance. At September 30, 2020 and December 31, 2019, the balance due on this note was $14,187, including a default
penalty of $4,937. Interest accrued on the note totals $5,037 and $3,972 at September 30, 2020 and December 31, 2019, respectively,
and is included in accrued expenses on the accompanying consolidated balance sheet.
Effective
June 22, 2018, the Company entered into a securities purchase agreement with GHS for the purchase of a $68,000 convertible promissory
note for a purchase price of $60,000 (representing an original issue discount of $6,000 and debt issuance costs of $2,000). At
issuance, the Company recorded a $29,143 beneficial conversion feature, which was fully amortized at December 31, 2019. The accrued
interest at a rate of 10% per year until it matured on June 22, 2019. Beginning May 2019, the note is convertible, in whole or
in part, at the holder's option, into shares of the Company's stock at a conversion price equal to 70% of the lowest trading price
during the 25 trading days prior to conversion (if the note cannot be converted due to Depository Trust Company freeze then rate
decreases to 60%). Upon the occurrence of an event of default, the note will bear interest at a rate of 20% per year and the holder
of the note may require the Company to redeem or convert the note at 150% of the outstanding principal balance. At September 30,
2020 and December 31, 2019, the balance due on this note was $103,285, including a default penalty of $35,285. Interest accrued
on the note totals $37,041 and $29,287 at September 30, 2020 and December 31, 2019, respectively, and is included in accrued expenses
on the accompanying consolidated balance sheet.
Auctus
On
May 22, 2020, the Company entered into an exchange agreement with Auctus. Based on this agreement the Company exchanged three
outstanding notes, in the amounts of $150,000, $89,250, and $65,000 for a total amount $328,422 of debt outstanding, as well as
any accrued interest and default penalty, for: $160,000 in cash payments (payable in monthly payments of $20,000), converted a
portion of the notes pursuant to original terms of the notes into 500,000 restricted common stock shares (shares were issued on
June 3, 2020); and 700,000 warrants issued to purchase common stock shares at a strike price of $0.15. The fair value of the common
stock shares was $250,000 (based on a $0.50 fair value for the Company’s stock) and of the warrants to purchase common stock
shares was $196,818 (based on a $0.281 black scholes fair valuation). During the three months ended September 30, 2020, the Company
paid $80,000 to reduce the outstanding balance. As of September 30, 2020, a balance of $60,000 remained to be paid for these exchanged
loans.
Auctus
notes exchanged in the May 22, 2020 transaction
Effective
March 20, 2018, the Company entered into a securities purchase with Auctus Fund, LLC ("Auctus") for the issuance of
a $150,000 convertible promissory note and warrants exercisable for 4,262 shares of the Company's common stock. At issuance, the
Company recorded a $97,685 beneficial conversion feature, which was fully amortized at December 31, 2018. The warrants are exercisable
at any time, at an exercise price equal to $0.04 per share, subject to certain customary adjustments and price-protection provisions
contained in the warrant. The warrants have a five-year term. The note accrued interest at a rate of 12% per year until it matured
in December 2018. Beginning December 2018, the note is convertible, in whole or in part, at the holder's option, into shares of
the Company's stock at a conversion price equal to 60% of the lowest trading price during the 20 trading days prior to conversion.
Upon the occurrence of an event of default, the note will bear interest at a rate of 24% per year and the holder of the note may
require the Company to redeem or convert the note at 150% of the outstanding principal balance. At September 30, 2020, the balance
due on this note was $140,000. On May 22, 2020, the default penalty and outstanding interest was exchanged as described in the
preceding paragraph. At December 31, 2019, the balance due on this total was $192,267, including a default penalty of $70,931,
respectively. Interest accrued on the note totals $45,629 at December 31, 2019, respectively, and is included in accrued expenses
on the accompanying consolidated balance sheet. Auctus converted nil and $14,236 of principal and accrued interested during the
nine months and year ended September 30, 2020 and December 31, 2019, respectively. During the three months ended September 30,
2020, the Company paid $80,000 to reduce the outstanding balance. At September 30, 2020, the balance due on this note was $60,000.
Effective
July 3, 2018, the Company entered into a securities purchase with Auctus for the issuance of a $89,250 convertible promissory
note. At issuance, the Company recorded a $59,000 beneficial conversion feature, which was fully amortized at December 31, 2019.
The note accrued interest at a rate of 12% per year until it matured in April 2019. Beginning April 2019, the note is convertible,
in whole or in part, at the holder's option, into shares of the Company's stock at a conversion price equal to 60% of the lowest
trading price during the 20 trading days prior to conversion. Upon the occurrence of an event of default, the note will bear interest
at a rate of 24% per year and the holder of the note may require the Company to redeem or convert the note at 150% of the outstanding
principal balance. At December 31, 2019, the balance due on this total was $90,641, including a default penalty of $56,852, respectively.
Interest accrued on the note totals $16,436 at December 31, 2019, respectively, and is included in accrued expenses on the accompanying
consolidated balance sheet. At September 30, 2020, the balance due on this note was nil.
Effective
March 29, 2019, the Company entered into a securities purchase with Auctus for the issuance of a $65,000 convertible promissory
note. At issuance, the Company recorded a $65,000 beneficial conversion feature, which was fully amortized at December 31, 2019.
The note accrued interest at a rate of 12% until it matured in December 2019. Beginning December 2019, the note is convertible,
in whole or in part, at the holder's option, into shares of the Company's stock at a conversion price equal to 50% of the lowest
trading price during the 25 trading days prior to conversion. Upon the occurrence of an event of default, the note will bear interest
at a rate of 24% per year and the holder of the note may require the Company to redeem or convert the note at 150% of the outstanding
principal balance. At December 31, 2019, the balance due on this total was $106,210, including a default penalty of $41,210, respectively.
Interest accrued on the note totaled $142 at December 31, 2019 and is included in accrued expenses on the accompanying consolidated
balance sheet. At September 30, 2020, the balance due on this note was nil.
The
following table summarizes the Convertible notes (including debt in default):
|
|
September 30, 2020
|
|
December 31, 2019
|
GPB
|
|
$
|
1,798
|
|
|
$
|
1,798
|
|
|
$
|
2,177
|
|
|
$
|
2,177
|
|
GHS
|
|
|
—
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
104
|
|
|
|
201
|
|
|
|
103
|
|
|
|
349
|
|
Auctus
|
|
|
60
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
|
—
|
|
|
|
60
|
|
|
|
106
|
|
|
|
389
|
|
Convertible notes (including debt in default)
|
|
|
|
|
|
$
|
2,059
|
|
|
|
|
|
|
$
|
2,915
|
|
The
convertible notes payable in default was $261,000 of the $2,059,000 balance at September 30, 2020 and the total balance of $2,915,000
at December 31, 2019, respectively.
Troubled
Debt Restructuring
The
debt restructured for Convertible Debt in default from Auctus, which closed on May 22, 2020, the Company restructured several
re-payment plans as described above and in addition cancelled warrants and issued new warrants as part of the restructure. This
debt restructure met the criteria for troubled debt. The basic criteria are that the borrower is troubled, i.e., they are having
financial difficulties, and a concession is granted by the creditor. Due to the Company being in default on several of its loans
the debt is considered troubled debt. The troubled debt restructuring for Convertible Debt in default from Auctus, had no effect
on the Company’s basic or diluted earnings per share calculation for September 30, 2020 and 2019.
11.
LONG-TERM DEBT
Long-term
Debt – Related Parties
On
July 24, 2019, Dr. Faupel and Mr. Cartwright agreed to an addendum to the debt restructuring 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. The resulting difference of
$20,000 was recorded to accrued interest. 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 resulting difference of $30,000 was recorded
to accrued interest and elimination of debt.
Troubled
Debt Restructuring
The
debt extinguished for Mr. Cartwright and Mr. Faupel meet the criteria for troubled debt. The basic criteria are that the borrower
is troubled, i.e., they are having financial difficulties, and a concession is granted by the creditor. Due to the Company being
in default on several of its loans the debt is considered troubled debt. The troubled debt restructuring for Long-term Debt –
Related Parties, had an immaterial effect on the Company’s basic or diluted earnings per share calculation for September
30, 2020 and 2019 as the gain was recorded in 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 December 31, 2019
|
|
|
17
|
|
Balance outstanding at December 31, 2019
|
|
$
|
224
|
|
Interest accrued through September 30, 2020
|
|
|
9
|
|
Balance outstanding at September 30, 2020
|
|
$
|
233
|
|
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 December 31, 2019
|
|
|
26
|
|
Balance outstanding at December 31, 2019
|
|
$
|
345
|
|
Interest accrued through September 30, 2020
|
|
|
14
|
|
Balance outstanding at September 30, 2020
|
|
$
|
359
|
|
Future
debt obligations at September 30, 2020 for Long-term Debt – Related Parties are as follows (in thousands):
Year
|
|
Amount
|
|
2020
|
|
|
|
—
|
|
|
2021
|
|
|
|
—
|
|
|
2022
|
|
|
|
200
|
|
|
2023
|
|
|
|
200
|
|
|
2024
|
|
|
|
192
|
|
|
Totals
|
|
|
|
592
|
|
Long-term
Convertible Notes Payable, net
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 was received in December 2019 and matures
December 17, 2021 and accrues interest at a 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% or 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 connection
with the first tranche of $700,000, the Company issued to 7,500,000 warrants to purchase common stock at an exercise price of
$0.20. The fair value of the warrants at the date of issuance was $745,972 and was $635,000 allocated to the warrant liability
and a loss of $110,972 was recorded at the date of issuance for the amount of the fair value in excess of the net proceeds received
of $635,000. The $700,000 proceeds were received net of debt issuance costs of $65,000 (net proceeds of $635,000, after administrative
and legal expenses Company received $570,000). The Company used $65,000 of the proceeds to make a partial payment of the $89,250
convertible promissory note issued on July 3, 2018 to Auctus. On May 27, 2020, the second tranche of $400,000 was received. 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. As of September 30, 2020, and December 31, 2019, $700,000 remained outstanding and accrued interest of $56,000 and $2,722,
respectively. Further, as of September 30, 2020, and December 31, 2019, the Company had unamortized debt issuance costs of $39,271
and $64,000, respectively and an unamortized debt discount on warrants of $383,645, and $622,000, respectively and providing a
net balance of $277,083 and $15,000, respectively. The Company also recorded a liability for the fair value of derivative liability
in the amount of $36,000 as of September 30, 2020.
On
May 27, 2020, the Company received the second tranche in the amount of $400,000, from the December 17, 2019, securities purchase
agreement and convertible note with Auctus. The net amount paid to the Company was $313,000 This second tranche is part of the
convertible note issued to Auctus for a total of $2.4 million of which $700,000 has already been provided by Auctus. The notes
maturity date is 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% or 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. 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. In addition, as part of this transaction the Company
was required to pay a 2.0% fee to a registered broker-dealer. As of September 30, 2020, $400,000 remained outstanding and accrued
interest of $14,000. Further, as of September 30, 2020, the Company had unamortized debt issuance costs of $55,461, providing
a net balance of $344,539.
The
total outstanding balance for the first two tranches outstanding as of September 30, 2020, was approximately $622,000.
In
addition, the Company determined that the conversion option needed to be bifurcated from the debt arrangement and will be valued
at fair value each reporting period. The initial value at the date of issuance deemed to be $0 due to the presence of the $0.15
floor price. As of September 30, 2020, the Company calculated an intrinsic value of the bifurcation to be $36,300.
Future
debt obligations at September 30, 2020 for Long-term Convertible Notes Payable, net are as follows (in thousands):
Year
|
|
Amount
|
|
2020
|
|
|
|
—
|
|
|
2021
|
|
|
|
1,100
|
|
|
2022
|
|
|
|
—
|
|
|
2023
|
|
|
|
—
|
|
|
2024
|
|
|
|
—
|
|
|
Total
|
|
|
|
1,100
|
|
Long-term
debt
On
May 4, 2020, the Company received a loan from the Small Business Administration (SBA) pursuant to the Paycheck Protection Program
(PPP) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in the amount of $50,184. The loan bears interest
at a rate of 1.00%, and matures in 24 months, with the principal and interest payments being deferred until the date of forgiveness
with interest accruing, then converting to monthly principal and interest payments, at the interest rate provided herein, for
the remaining eighteen (18) months. Lender will apply each payment first to pay interest accrued to the day Lender received the
payment, then to bring principal current, and will apply any remaining balance to reduce principal. Payments must be made on the
same day as the date of this Note in the months they are due. Lender shall adjust payments at least annually as needed to amortize
principal over the remaining term of the Note. Under the provisions of the PPP, the loan amounts will be forgiven as long as:
the loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over a 24 week period after
the loan is made; and employee and compensation levels are maintained. In addition, payroll costs are capped at $100,000 on an
annualized basis for each employee. Not more than 40% of the forgiven amount may be for non-payroll costs. As of September 30,
2020, the outstanding balance was $50,351 including $167 in accrued interest.
12.
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 year.
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 year, plus Series C, Series D and Series E 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,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Net loss
|
|
$
|
(2,520
|
)
|
|
$
|
(3,004
|
)
|
Basic weighted average number of shares outstanding
|
|
|
9,985
|
|
|
|
3,296
|
|
Net loss per share (basic)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.91
|
)
|
Diluted weighted average number of shares outstanding
|
|
|
9,985
|
|
|
|
3,296
|
|
Net loss per share (diluted)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.91
|
)
|
|
|
|
|
|
|
|
|
|
Dilutive equity instruments (number of equivalent units):
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
Preferred stock
|
|
|
—
|
|
|
|
—
|
|
Convertible debt
|
|
|
59,179
|
|
|
|
38,855
|
|
Warrants
|
|
|
8,048
|
|
|
|
30,265
|
|
Total Dilutive instruments
|
|
|
67,227
|
|
|
|
69,120
|
|
|
|
|
|
|
|
|
|
|
13.
SUBSEQUENT EVENTS
On
October 15, 2020, the Company’s registration statement (Form S1) filed on September 10, 2020 and amended on October 8, 2020
was made effective by the SEC.
On
October 27, 2020, the Company amended the lease of its offices in Norcross, Georgia. The Company has extended the lease for sixty-two
(62) months. The lease will begin on April 1, 2021 and end on May 31, 2026. Rents for the one-year periods beginning on April
1, 2021 and ending on May 31, 2026 are: $8,824, $9,091, $9,370, $9,648, $9,936, and $10,236. Also, the Company will pay any additional
rent for the Company’s proportionate share of basic costs and all other charges when due and payable under the lease. The
landlord will abate the rent for the first two months. In addition, the Company will have a five-year renewal option effective
June 1, 2026. The rent for the renewal option will be based upon prevailing market rate and shall escalate by three percent (3%).