The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. ORGANIZATION, BACKGROUND, AND BASIS OF PRESENTATION
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.
Organization and Background
All information and footnote disclosures included
in the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States.
A 1:800 reverse stock
split of all the Company’s issued and outstanding common stock was implemented on November 7, 2016. As a result of the reverse
stock split, every 800 shares of issued and outstanding common stock 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 453,694,400
shares to 570,707 shares as of that date. See Note 4, Stockholders’ Deficit. Unless otherwise specified, all per share amounts
are reported on a post-stock split basis, as of December 31, 2017. On February 24, 2016, the Company had also implemented a 1:100
reverse stock split of its issued and outstanding common stock.
The Company’s prospects
must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device
industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate.
The Company has experienced net losses since its inception and, as of March 31, 2018, it had an accumulated deficit of approximately
$137.5 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.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements included herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”)
for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all information and footnotes required by GAAP for complete financial statements. These statements reflect adjustments,
all of which are of a normal, recurring nature, and which are, in the opinion of management, necessary to present fairly the Company’s
financial position as of March 31, 2018, results of operations for the three months ended March 31, 2018 and 2017, and cash flows
for the three months ended March 31, 2018 and 2017. The results of operations for the three months ended March 31, 2018 are not
necessarily indicative of the results for a full fiscal year. Preparing financial statements requires the Company’s management
to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure
of contingent assets and liabilities. Actual results could differ from those estimates. These financial statements should be read
in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the
year ended December 31, 2017.
All information and
footnote disclosures included in the consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States.
Going Concern
The Company’s consolidated
financial statements have been prepared and presented on a basis assuming it will continue as a going concern. The factors below
raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include
any adjustments that might be necessary from the outcome of this uncertainty.
At March 31, 2018, the
Company had a negative working capital of approximately $11.7 million, accumulated deficit of $137.5 million, and net income of
$1.1 million for the quarter then ended (net income for the quarter for the period ended March 31, 2018, related to the gain for
the fair value of warrants of $1.7 million). Stockholders’ deficit totaled approximately $17.9 million at March 31, 2018.
The Company’s capital-raising
efforts are ongoing. If sufficient capital cannot be raised during the second quarter of 2018, 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
666.7 million shares of its common stock outstanding at March 31, 2018, with exercise prices ranging between $0.001 and $40,000
per share. Exercises of these warrants would generate a total of approximately $4.8 million in cash, assuming full exercise, although
the Company cannot be assured that holders will exercise any warrants. Management may obtain additional funds through the public
or private sale of debt or equity, and grants, if available. However, please refer to Footnote 10 - CONVERTIBLE DEBT IN DEFAULT
in the paragraph: Debt Restructuring for more information regarding our warrants.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting
policies were set forth in the audited financial statements and notes thereto for the year ended December 31, 2017 included in
its annual report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”).
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant areas where estimates are used include the allowance for doubtful accounts, inventory valuation
and input variables for Black-Scholes, Monte Carlo simulations and binomial calculations. The Company uses the Monte Carlo simulations
and binomial calculations in the calculation of the fair value of the warrant liabilities and the valuation of embedded conversion
options and freestanding warrants.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of Guided Therapeutics, Inc. and its wholly owned subsidiary. All intercompany transactions are eliminated.
Accounting Standard Updates
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Distributors (Topic 606),” (“ASU
2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from
contracts with distributors and supersedes most current revenue recognition guidance, including industry-specific guidance. This
new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model requires
revenue recognition to depict the transfer of promised goods or services to distributors in an amount that reflects the consideration
a company expects to receive. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from distributor contracts, including significant judgments and changes in judgments and assets
recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Deferral of
the Effective Date”, which amends ASU 2014-09. As a result, the effective date will be the first quarter of fiscal year 2018
with early adoption permitted in the first quarter of fiscal year 2017. Subsequently, the FASB has issued the following standards
related to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with Distributors (Topic 606), Principal versus Agent Considerations
(Reporting Revenue Gross versus Net),” (“ASU 2016-08”); ASU 2016-10, “Revenue from Contracts with Distributors
(Topic 606), Identifying Performance Obligations and Licensing,” (“ASU 2016-10”); ASU 2016-12, “Revenue
from Contracts with Distributors (Topic 606) Narrow-Scope Improvements and Practical Expedients,” (“ASU 2016-12”);
and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Distributors,” (“ASU
2016-20”), which are intended to provide additional guidance and clarity to ASU 2014-09. The Company must adopt ASU 2016-08,
ASU 2016-10, ASU 2016-12 and ASU 2016-20 along with ASU 2014-09 (collectively, the “New Revenue Standards”). The New
Revenue Standards may be applied using one of two retrospective application methods: (1) a full retrospective approach for all
periods presented, or (2) a modified retrospective approach that presents a cumulative effect as of the adoption date and additional
required disclosures. The Company adopted this standard on January 1, 2018, using the modified retrospective method, with no impact
on its 2017 financial statements. The cumulative effect of initially applying the new guidance had no impact on its financial statements.
However, additional disclosures will be included in future reporting periods in accordance with requirements of the new guidance.
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)” that requires lessees to be recognized on the balance sheet with the assets and liabilities associated
with the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets
and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement,
and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance
or operating lease. The update is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted.
The Company is evaluating the impact adoption of this guidance will have on determination or reporting of its financial results.
In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments - Credit Losses,” (“ASU 2016-13”). ASU 2016-13 sets forth a “current expected
credit loss” model which requires the Company to measure all expected credit losses for financial instruments held at the
reporting date based on historical experience, current conditions and reasonable supportable forecasts. The guidance in this new
standard replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured
at amortized cost and applies to some off-balance sheet credit exposures. The effective date will be the first quarter of fiscal
year 2020. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments,” (“ASU 2016-15”).
ASU 2016-15 reduces the existing diversity in practice in financial reporting by clarifying existing principles in ASC 230, “Statement
of Cash Flows,” and provides specific guidance on certain cash flow classification issues. The effective date for ASU 2016-15
will be the first quarter of fiscal year 2018, with early adoption permitted. The Company adopted this guidance during the quarter
ended March 31, 2018 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results
for the year ended March 31, 2018.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230) - Restricted Cash,” (“ASU 2016-18”). ASU 2016-18 requires a statement
of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents
should be included with cash and cash equivalents when reconciling the beginning-of-year and end-of-year total amounts shown on
the statement of cash flows. The guidance is effective for annual periods, and interim periods within those annual periods beginning
after December 15, 2017, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018
on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the year ended
March 31, 2018.
In May 2017, the FASB issued ASU 2017-09, “Compensation
– Stock Compensation (Topic 718), Scope of Modification Accounting)” (“ASU 2017-09”) which clarifies when
changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will
reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. ASU 2017-09
will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and
interim periods within those annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted
this guidance during the quarter ended March 31, 2018 on a prospective basis. The adoption of this guidance did not have a significant
impact on the operating results for the year ended March 31, 2018.
Except as noted above, the guidance issued
by the FASB during the current year is not expected to have a material effect on the Company’s consolidated financial statements.
Cash Equivalents
The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be a cash equivalent.
Accounts Receivable
The Company performs periodic credit evaluations
of its distributors’ financial conditions and generally does not require collateral. The Company reviews all outstanding
accounts receivable for collectability on a quarterly basis. An allowance for doubtful accounts is recorded for any amounts deemed
uncollectable. The Company does not accrue interest receivable on past due accounts receivable.
Concentrations of Credit Risk
The Company, from time to time during the years
covered by these consolidated financial statements, may have bank balances in excess of its insured limits. Management has deemed
this a normal business risk.
The Company performs periodic credit evaluations
of its distributors’ financial conditions and generally does not require collateral. The Company reviews all outstanding
accounts receivable for collectability on a quarterly basis. An allowance for doubtful accounts is recorded for any amounts deemed
uncollectable. The Company does not accrue interest receivable on past due accounts receivable.
Inventory Valuation
All inventories are stated at lower of cost
or net realizable value, with cost determined substantially on a “first-in, first-out” basis. Selling, general,
and administrative expenses are not inventoried, but are charged to expense when incurred. At March 31, 2018 and December 31, 2017,
our inventories were as follows (in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
790
|
|
|
$
|
789
|
|
Work in process
|
|
|
81
|
|
|
|
82
|
|
Finished goods
|
|
|
27
|
|
|
|
27
|
|
Consigned inventory
|
|
|
113
|
|
|
|
83
|
|
Inventory reserve
|
|
|
(716
|
)
|
|
|
(716
|
)
|
Total
|
|
$
|
295
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements
are amortized at the shorter of the useful life of the asset or the remaining lease term. Depreciation and amortization expense
is included in general and administrative expense on the statement of operations. Expenditures for repairs and maintenance are
expensed as incurred. Property and equipment are summarized as follows at March 31, 2018 and December 31, 2017 (in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Equipment
|
|
$
|
1,378
|
|
|
$
|
1,378
|
|
Software
|
|
|
740
|
|
|
|
740
|
|
Furniture and fixtures
|
|
|
124
|
|
|
|
124
|
|
Leasehold Improvement
|
|
|
199
|
|
|
|
199
|
|
|
|
|
2,441
|
|
|
|
2,441
|
|
Less accumulated depreciation and amortization
|
|
|
(2,398
|
)
|
|
|
(2,392
|
)
|
Total
|
|
$
|
43
|
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
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.
Other Assets
Other assets primarily consist of short- and
long-term deposits for various tooling inventory that are being constructed for the Company.
Patent Costs (Principally Legal Fees)
Costs incurred in filing, prosecuting, and
maintaining patents are recurring, and expensed as incurred. Maintaining patents are expensed as incurred as the Company has not
yet received FDA approval and recovery of these costs is uncertain. Such costs aggregated approximately $6,000 and $15,000 as of
March 31, 2018 and December 31, 2017, respectively.
Accrued Liabilities
Accrued liabilities are summarized as follows (in thousands):
|
|
March 31,
2018
|
|
December 31,
2017
|
Accrued compensation
|
|
$
|
2,225
|
|
|
$
|
2,122
|
|
Accrued professional fees
|
|
|
193
|
|
|
|
223
|
|
Accrued interest
|
|
|
532
|
|
|
|
511
|
|
Accrued warranty
|
|
|
37
|
|
|
|
39
|
|
Accrued vacation
|
|
|
160
|
|
|
|
152
|
|
Accrued dividends
|
|
|
226
|
|
|
|
291
|
|
Stock subscription
|
|
|
276
|
|
|
|
276
|
|
Accrued expenses for licensee
|
|
|
429
|
|
|
|
429
|
|
Other accrued expenses
|
|
|
249
|
|
|
|
204
|
|
Total
|
|
$
|
4,327
|
|
|
$
|
4,247
|
|
Revenue Recognition
Revenue from the sale of the Company’s
products is recognized upon shipment of such products to its distributors. The Company recognizes revenue from contracts on a straight-line
basis, over the terms of the contracts. Contracts generally are for shipment of devices and disposables and revenue is recognized
once it is transferred to a third-party shipper this is identified in the contract as the performance obligation that has been
met.
The Company adopted a new revenue standard
on January 1, 2018, using the modified retrospective method with no impact on our financial statements. The cumulative effect of
initially adopting the new guidance had no impact on the opening balance of retained earnings as of January 1, 2018. There was
no material impact on the condensed consolidated balance sheets as of March 31, 2018 or on the condensed consolidated statements
of income for the three months ended March 31, 2018. Results for reporting periods beginning after January 1, 2018 are presented
under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with our
historic accounting under Topic 605.
Significant Distributors
During the three months ended March 31, 2018,
all the Company’s revenues were from two distributors and for extended warranty. Revenue from these distributors totaled
$4,000 for the period ended March 31, 2018. Accounts receivable due from these distributors represents 100% of the balance for
the period ended March 31, 2018. During the three months ended March 31, 2017, there were revenues from one distributor, that totaled
approximately $21,000.
Deferred Revenue
The Company defers payments received as revenue
until earned based on the related contracts on a straight-line basis, over the terms of the contract. As of March 31, 2018, and
December 31, 2017, the Company has received prepayments for devices and disposables recorded as deferred revenue in the amount
of $28,000 and $21,000, respectively.
Research and Development
Research and development expenses consist of
expenditures for research conducted by the Company and payments made under contracts with consultants or other outside parties
and costs associated with internal and contracted clinical trials. All research and development costs are expensed as incurred.
Income Taxes
The
Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. Management provides valuation allowances
against the deferred tax assets for amounts that are not considered more likely than not to be realized.
The
Company is currently delinquent with its federal and applicable state tax return filings, payments and certain Federal and State
Unemployment Tax filings. Some of the federal income tax returns are currently under examination by the U.S. Internal Revenue Service
(“IRS”). The Company has entered an agreed upon payment plan with the IRS for delinquent payroll taxes. The Company
is currently in process of setting up a payment arrangement for its delinquent state income taxes with the State of Georgia and
the returns are currently under review by state authorities. Although the Company has been experiencing recurring losses, it is
obligated to file tax returns for compliance with IRS regulations and that of applicable state jurisdictions. At March 31, 2018
and December 31, 2017, the Company has approximately $82.9 million of net operating losses. This net operating loss will be eligible
to be carried forward for tax purposes at federal and applicable states level. A full valuation allowance has been recorded related
the deferred tax assets generated from the net operating losses.
Corporate
tax rates in the U.S. have decreased from 34% to 21%.
Uncertain Tax Positions
The
Company assesses each income tax position is assessed using a two-step process. A determination is first made as to whether it
is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing
authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial
statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At March 31,
2018 and December 31, 2017, 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. 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 Binomial model.
Stock Based Compensation
The Company records compensation expense related
to options granted to non-employees based on the fair value of the award.
Compensation cost is recorded as earned for
all unvested stock options outstanding at the beginning of the first year based upon the grant date fair value estimates, and for
compensation cost for all share-based payments granted or modified subsequently based on fair value estimates.
For the three months ended March 31, 2018 and
2017, share-based compensation for options attributable to employees, officers and Board members were approximately $13,000 and
$19,000, respectively. These amounts have been included in the Company’s statements of operations. Compensation costs for
stock options which vest over time are recognized over the vesting period. As of March 31, 2018, the Company had approximately
$39,000 of unrecognized compensation costs related to granted stock options to be recognized over the remaining vesting period
of approximately two years.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, ASC820,
Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for measuring
fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received
to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value
hierarchy based upon observable and non-observable inputs as 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 March 31, 2018. The fair value of the warrants was estimated using the Binomial
Simulation model. Gains and losses from derivative contracts are included in net gain (loss) from derivative contracts in the statement
of operations. The fair value of the Company’s derivative warrants is classified as a Level 3 measurement, since unobservable
inputs are used in the valuation.
The following table presents the fair value
for those liabilities measured on a recurring basis as of March 31, 2018 and December 31, 2017:
FAIR VALUE MEASUREMENTS (In Thousands)
The following is summary of items that
the Company measures at fair value on a recurring basis:
|
|
Fair Value at March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Distributor Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(114
|
)
|
|
$
|
(114
|
)
|
Warrants issued in connection with Short-Term Loans
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
(15
|
)
|
Warrants issued in connection with Senior Secured Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,145
|
)
|
|
|
(6,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6,274
|
)
|
|
$
|
(6,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Distributor Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(114
|
)
|
|
$
|
(114
|
)
|
Warrants issued in connection with Short-Term Loans
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Warrants issued in connection with Senior Secured Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,837
|
)
|
|
|
(7,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7,962
|
)
|
|
$
|
(7,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of changes to
Level 3 instruments during the three months ended March 31, 2018:
|
|
|
|
Short-Term Loan
|
|
|
|
Senior Secured Debt
|
|
|
Distributor Debt
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
$ (11)
|
|
|
|
$ (7,837)
|
|
|
$ (114)
|
|
|
|
$ (7,962
|
)
|
Change in fair value during the period
|
|
(4)
|
|
|
|
1,692
|
|
|
-
|
|
|
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2018
|
|
$ (15)
|
|
|
|
$ (6,145)
|
|
|
$ (114)
|
|
|
|
$ (6,274
|
)
|
As of March 31, 2018, the fair value of
warrants was approximately $6.3 million. A net change of approximately $1.7 million has been recorded to the accompanying statement
of operations for the three months ended March 31, 2018.
4. STOCKHOLDERS’ DEFICIT
Common
Stock
The Company has authorized 1,000,000,000 shares
of common stock with $0.001 par value, of which 138,315,085 were issued and outstanding as of March 31, 2018. As of December 31,
2017, there were 1,000,000,000 authorized shares of common stock, of which 49,562,810 were issued and outstanding.
A 1:800 reverse stock split of all our issued
and outstanding common stock was implemented on November 7, 2016. As a result of the reverse stock split, every 800 shares of issued
and outstanding common stock 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. On February 24, 2016,
the Company had also implemented a 1:100 reverse stock split of its issued and outstanding common stock. The number of the authorized
shares did not change.
For the three months ended March 31, 2018,
the Company issued 88,752,275 shares of common stock as listed below:
Series C Preferred Stock Conversions
|
|
25,523,606
|
Series C Preferred Stock Dividends
|
|
11,704,861
|
Convertible Debt Conversions
|
|
51,523,808
|
Total
|
|
88,752,275
|
On January 22, 2017, the Company entered into
a license agreement with Shandong Yaohua Medical Instrument Corporation, or SMI, pursuant to which the Company granted SMI an exclusive
global license to manufacture the LuViva device and related disposables (subject to a carve-out for manufacture in Turkey) and
exclusive distribution rights in the Peoples Republic of China, Macau, Hong Kong and Taiwan. In exchange for the license, SMI will
pay a $1.0 million licensing fee, payable in five installments through November 2017, as well as a royalty on each disposable sold
in the territories. As of March 31, 2018, SMI had paid $750,000. SMI will also underwrite the cost of securing approval of LuViva
with the Chinese Food and Drug Administration, or CFDA. Pursuant to the SMI agreement, SMI must become capable of manufacturing
LuViva in accordance with ISO 13485 for medical devices by the second anniversary of the SMI agreement, or else forfeit the license.
Based on the agreement, SMI must purchase no fewer than ten devices (with up to two devices pushed to 2018 if there is a delay
in obtaining approval from the CFDA). SMI purchased five devices in 2017 and have not purchased any in 2018. In the three years
following CFDA approval, SMI must purchase a minimum of 3,500 devices (500 in the first year, 1,000 in the second, and 2,000 in
the third) or else forfeit the license. As manufacturer of the devices and disposables, SMI will be obligated to sell each to us
at costs no higher than our current costs. As partial consideration for, and as a condition to, the license, and to further align
the strategic interests of the parties, the Company agreed to issue $1.0 million in shares of its common stock to SMI, in five
installments through October 2017, at a price per share equal to the lesser of the average closing price for the five days prior
to issuance and $1.25. These shares have not been issued as of March 31, 2018.
In order to facilitate the SMI agreement, immediately
prior to its execution the Company entered into an agreement with Shenghuo Medical, LLC, regarding its previous license to Shenghuo
(see Note 7, Commitments and Contingencies). Under the terms of the new agreement, Shenghuo agreed to relinquish its manufacturing
license and its distribution rights in SMI’s territories, and to waive its rights under the original Shenghuo agreement,
all for as long as SMI performs under the SMI agreement. As consideration, the Company agreed to split with Shenghuo the licensing
fees and net royalties from SMI that the Company will receive under the SMI agreement. Should the SMI agreement be terminated,
the Company have agreed to re-issue the original license to Shenghuo under the original terms. The Company’s COO and director,
Mark Faupel, is a shareholder of Shenghuo, as well as Dr. John Imhoff, a director and another director, Richard Blumberg, are a
managing member of Shenghuo
.
Preferred Stock
The Company has authorized 5,000,000 shares
of preferred stock with a $.001 par value. The board of directors has the authority to issue these shares and to set dividends,
voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions. The board of directors
designated 525,000 shares of preferred stock as redeemable convertible preferred stock, none of which remain outstanding; 33,000
shares of preferred stock as Series B Preferred Stock, none of which remained outstanding, 9,000 shares of preferred stock as Series
C Convertible Preferred Stock, of which 686 and 970 were issued and outstanding at March 31, 2018 and December 31, 2017, respectively,
and 20,250 shares of Series C1 Convertible Preferred Stock, of which 4,312 were issued and outstanding at March 31, 2018 and December
31, 2017.
Series B Convertible Preferred Stock
Holders of the Series
B Preferred Stock were entitled to quarterly dividends at an annual rate of 10.0%, payable in cash or, subject to certain conditions,
common stock, at the Company’s option.
The Series B Preferred
Stock were issued with Tranche A warrants to purchase 24 shares of common stock and Tranche B warrants purchasing 7,539 shares
of common stock, at an exercise price of $8,364 and $75 per share, respectively.
At December 31, 2015,
as a result of the operation of certain anti-dilution provisions, the Tranche B warrants were convertible into 1 shares of common
stock. These warrants were re-measured based upon their fair value each reporting period and classified as a liability on the Balance
Sheet. Between June 13, 2016 and June 14, 2016, the Company entered into various agreements with holders of the Company’s
“Series B Tranche B” warrants, pursuant to which each holder separately agreed to exchange the warrants for either
(1) shares of common stock equal to 166% of the number of shares of common stock underlying the surrendered warrants, or (2) new
warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections
included with the surrendered warrants.
Series C Convertible
Preferred Stock
On June 29, 2015, the
Company entered into a securities purchase agreement with certain accredited investors, including John Imhoff and Mark Faupel,
members of the Board, for the issuance and sale of an aggregate of 6,737 shares of Series C convertible preferred stock, at a purchase
price of $750 per share and a stated value of $1,000 per share. On September 3, 2015 the Company entered into an interim agreement
amending the securities purchase agreement to provide for certain of the investors to purchase an additional aggregate of 1,166
shares. Total cash and non-cash expenses were valued at $853,000, resulting in net proceeds of $3,698,000.
Pursuant to the Series
C certificate of designations, shares of Series C preferred stock are convertible into common stock by their holder at any time,
and may be mandatorily convertible upon the achievement of specified average trading prices for the Company’s common stock.
At March 31, 2018, there were 686 shares outstanding with a conversion price of $0.007296 per share, such that each share of Series
C preferred stock would convert into approximately 137,061 shares of the Company’s common stock, subject to customary adjustments,
including for any accrued but unpaid dividends and pursuant to certain anti-dilution provisions, as set forth in the Series C certificate
of designations. The conversion price will automatically adjust downward to 80% of the then-current market price of the Company’s
common stock 15 trading days after any reverse stock split of the Company’s common stock, and 5 trading days after any conversions
of the Company’s outstanding convertible debt.
Holders of the Series
C preferred stock are entitled to quarterly cumulative dividends at an annual rate of 12.0% until 42 months after the original
issuance date (the “Dividend End Date”), payable in cash or, subject to certain conditions, the Company’s common
stock. In addition, upon conversion of the Series C preferred stock prior to the Dividend End Date, the Company will also pay to
the converting holder a “make-whole payment” equal to the amount of unpaid dividends through the Dividend End Date
on the converted shares. At March 31, 2018, the “make-whole payment” for a converted share of Series C preferred stock
would convert to 57,566 shares of the Company’s common stock. The Series C preferred stock generally has no voting rights
except as required by Delaware law. Upon the Company’s liquidation or sale to or merger with another corporation, each share
will be entitled to a liquidation preference of $1,000, plus any accrued but unpaid dividends.
In addition, the purchasers
of the Series C preferred stock received, on a pro rata basis, warrants exercisable to purchase an aggregate of approximately 150
shares of Company’s common stock. The warrants contain anti-dilution adjustments in the event that the Company issues shares
of common stock, or securities exercisable or convertible into shares of common stock, at prices below the exercise price of such
warrants. As a result of the anti-dilution protection, the Company is required to account for the warrants as a liability recorded
at fair value each reporting period. At March 31, 2018, the exercise price per share was $640.
On May 23, 2016, an investor
canceled certain of these warrants, exercisable into 903 shares of common stock. The same investor also transferred certain of
these warrants, exercisable for 150 shares of common stock, to two investors who also had participated in the 2015 Series C financing.
Series C1 Convertible
Preferred Stock
Between April 27, 2016
and May 3, 2016, the Company entered into various agreements with certain holders of Series C preferred stock, including directors
John Imhoff and Mark Faupel, pursuant to which those holders separately agreed to exchange each share of Series C preferred stock
held for 2.25 shares of the Company’s newly created Series C1 preferred stock and 12 (9,600 pre-split) shares of the Company’s
common stock (the “Series C Exchanges”). In connection with the Series C Exchanges, each holder also agreed to roll
over the $1,000 stated value per share of the holder’s shares of Series C1 preferred stock into the next qualifying financing
undertaken by the Company on a dollar-for-dollar basis and, except in the event of an additional $50,000 cash investment in the
Company by the holder, to execute a customary “lockup” agreement in connection with the financing. In total, for 1,916
shares of Series C preferred stock surrendered, the Company issued 4,312 shares of Series C1 preferred stock and 22,996 shares
of common stock. At March 31, 2018, there were 4,312 shares outstanding with a conversion price of $0.007296 per share, such that
each share of Series C preferred stock would convert into approximately 137,061 shares of the Company’s common stock.
The Series C1 preferred
stock has terms that are substantially the same as the Series C preferred stock, except that the Series C1 preferred stock does
not pay dividends (unless and to the extent declared on the common stock) or at-the-market “make-whole payments” and,
while it has the same anti-dilution protections afforded the Series C preferred stock, it does not automatically reset in connection
with a reverse stock split or conversion of our outstanding convertible debt.
Warrants
The following table summarizes transactions
involving the Company’s outstanding warrants to purchase common stock for the quarter ended March 31, 2018:
|
|
Warrants
(Underlying Shares)
|
Outstanding, January 1, 2018
|
|
|
294,089,138
|
|
Issuances
|
|
|
372,622,233
|
|
Canceled / Expired
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
Outstanding, March 31, 2018
|
|
|
666,711,371
|
|
The Company had the following shares reserved for the warrants as
of March 31, 2018:
Warrants
(Underlying Shares)
|
|
Exercise
Price
|
Expiration
Date
|
24
|
(1)
|
$8,368.00 per share
|
May 23, 2018
|
7,542
|
(2)
|
$75.00 per share
|
June 14, 2021
|
3
|
(3)
|
$40,000.00 per share
|
April 23, 2019
|
8
|
(4)
|
$36,000.00 per share
|
May 22, 2019
|
3
|
(5)
|
$30,400.00 per share
|
September 10, 2019
|
5
|
(6)
|
$36,864.80 per share
|
September 27, 2019
|
10
|
(7)
|
$22,504.00 per share
|
December 2, 2019
|
105
|
(8)
|
$7,200.00 per share
|
December 2, 2020
|
105
|
(9)
|
$8,800.00 per share
|
December 2, 2020
|
25
|
(11)
|
$20,400.00 per share
|
March 30, 2018
|
22
|
(12)
|
$9,504.00 per share
|
June 29, 2020
|
659
|
(10)
|
$640.00 per share
|
June 29, 2020
|
343
|
(11)
|
$640.00 per share
|
September 4, 2020
|
362
|
(12)
|
$640.00 per share
|
September 21, 2020
|
7
|
(13)
|
$9,504.00 per share
|
September 4, 2020
|
198
|
(14)
|
$640.00 per share
|
October 23, 2020
|
7
|
(15)
|
$9,504.00 per share
|
October 23, 2020
|
630,482,456
|
(16)
|
$0.00228 per share
|
June 14, 2021
|
30,263,158
|
(17)
|
$0.00228 per share
|
February 21, 2021
|
17,239
|
(18)
|
$13.92 per share
|
June 6, 2021
|
200,000
|
(19)
|
$0.00228 per share
|
February 13, 2022
|
20,000
|
(20)
|
$0.18 per share
|
May 16, 2022
|
550,000
|
(21)
|
$0.019 per share
|
November 16, 2020
|
200,000
|
(22)
|
$0.029 per share
|
December 28, 2020
|
1,500,000
|
(23)
|
$0.0201 per share
|
January 10, 2021
|
60,000
|
(24)
|
$0.011 per share
|
March 19, 2021
|
3,409,090
|
(25)
|
$0.00228 per share
|
March 20, 2021
|
666,711,371
*
|
|
|
|
*
However, please refer to
Footnote
10 - CONVERTIBLE DEBT IN DEFAULT
in the paragraph: Debt Restructuring for more information regarding our warrants.
(1)
|
|
Issued in June 2015 in exchange for warrants originally issued as part of a May
2013 private placement.
|
(2)
|
|
Issued in June 2015 in exchange for warrants originally issued as part of a May 2013 private placement.
|
(3)
|
|
Issued to a placement agent in conjunction with an April 2014 private placement.
|
(4)
|
|
Issued to a placement agent in conjunction with a September 2014 private placement
|
(5)
|
|
Issued as part of a September 2014 Regulation S offering.
|
(6)
|
|
Issued to a placement agent in conjunction with a 2014 public offering.
|
(7)
|
|
Issued in June 2015 in exchange for warrants originally issued as part of a 2014 public offering.
|
(8)
|
|
Issued as part of a March 2015 private placement.
|
(9)
|
|
Issued to a placement agent in conjunction with a June 2015 private placement
|
(10)
|
|
Issued as part of a June 2015 private placement.
|
(11)
|
|
Issued as part of a June 2015 private placement.
|
(12)
|
|
Issued as part of a June 2015 private placement.
|
(13)
|
|
Issued to a placement agent in conjunction with a June 2015 private placement
|
(14)
|
|
Issued as part of a June 2015 private placement.
|
(15)
|
|
Issued to a placement agent in conjunction with a June 2015 private placement
|
(16)
|
|
Issued as part of a February 2016 private placement.
|
(17)
|
|
Issued to a placement agent in conjunction with a February 2016 private placement
|
(18)
|
|
Issued pursuant to a strategic license agreement.
|
(19)
|
|
Issued as part of a February 2017 private placement.
|
(20)
|
|
Issued as part of a May 2017 private placement.
|
(21)
|
|
Issued to investors for a loan in November 2017.
|
(22)
|
|
Issued to investors for a loan in December 2017.
|
(23)
|
|
Issued to investors for a loan in January 2018.
|
(24)
|
|
Issued to investors for a loan in March 2018.
|
(25)
|
|
Issued to investors for a loan in March 2018.
|
All outstanding warrant
agreements provide for anti-dilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations,
stock dividends, stock splits or other changes in the Company’s corporate structure; except for (9). In addition, warrants
subject to footnotes (2) and (10)-(12), (14), and (16) – (25) in the table above are subject to “lower price issuance”
anti-dilution provisions that automatically reduce the exercise price of the warrants (and, in the cases of warrants subject to
footnote (2), (16) and (17) in the table above, increase the number of shares of common stock issuable upon exercise), to the offering
price in a subsequent issuance of the Company’s common stock, unless such subsequent issuance is exempt under the terms of
the warrants.
For the warrants to footnote
(16), the Company further agreed to amend the warrant issued with the original senior secured convertible note, to adjust the number
of shares issuable upon exercise of the warrant to equal the number of shares that will initially be issuable upon conversion of
the new convertible note (without giving effect to any beneficial ownership limitations set forth in the terms of the new convertible
note).
The warrants subject
to footnote (2) are subject to a mandatory exercise provision. This provision permits the Company, subject to certain limitations,
to require exercise of such warrants at any time following (a) the date that is the 30th day after the later of the Company’s
receipt of an approvable letter from the U.S. FDA for LuViva and the date on which the common stock achieves an average market
price for 20 consecutive trading days of at least $1,040.00 with an average daily trading volume during such 20 consecutive trading
days of at least 250 shares, or (b) the date on which the average market price of the common stock for 20 consecutive trading days
immediately prior to the date the Company delivers a notice demanding exercise is at least $129,600 and the average daily trading
volume of the common stock exceeds 250 shares for such 20 consecutive trading days. If these warrants are not timely exercised
upon demand, they will expire. Upon the occurrence of certain events, the Company may be required to repurchase these warrants,
as well as the warrants subject to footnote (2) in the table above.
The warrants subject
to footnote (5) in the table above are also subject to a mandatory exercise provision. This provision permits the Company, subject
to certain limitations; to require the exercise of such warrants should the average trading price of its common stock over any
30-consecutive day trading period exceed $92.16.
The warrants subject
to footnote (7) in the table above are also subject to a mandatory exercise provision. This provision permits the Company, subject
to certain limitations, to require exercise of 50% of the then-outstanding warrants if the trading price of its common stock is
at least two times the initial warrant exercise price for any 20-day trading period. Further, in the event that the trading price
of the Company’s common stock is at least 2.5 times the initial warrant exercise price for any 20-day trading period, the
Company will have the right to require the immediate exercise of 50% of the then-outstanding warrants. Any warrants not exercised
within the prescribed time periods will be canceled to the extent of the number of shares subject to mandatory exercise.
The holders of the warrants
subject to footnote (2) in the table above have agreed to surrender the warrants, upon consummation of a qualified public financing,
for new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution
protections included with the surrendered warrants.
Series B Tranche B
Warrants
As discussed in Note 3, Fair Value Measurements,
between June 13, 2016 and June 14, 2016, the Company entered into various agreements with holders of the Company’s “Series
B Tranche B” warrants, pursuant to which each holder separately agreed to exchange the warrants for either (1) shares of
common stock equal to 166% of the number of shares of common stock underlying the surrendered warrants, or (2) new warrants exercisable
for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with
the surrendered warrants. In total, for surrendered warrants then-exercisable for an aggregate of 1,185,357 shares of common stock
(but subject to exponential increase upon operation of certain anti-dilution provisions), the Company issued or is obligated to
issue 16,897 shares of common stock and new warrants that, if exercised as of the date hereof, would be exercisable for an aggregate
of 216,707 shares of common stock. As of March 31, 2018, the Company had issued 14,766 shares of common stock and rights to common
stock shares for 2,131. In certain circumstances, in lieu of presently issuing all the shares (for each holder that opted for shares
of common stock), the Company and the holder further agreed that the Company will, subject to the terms and conditions set forth
in the applicable warrant exchange agreement, from time to time, be obligated to issue the remaining shares to the holder. No additional
consideration will be payable in connection with the issuance of the remaining shares. The holders that elected to receive shares
for their surrendered warrants have agreed that they will not sell shares on any trading day in an amount, in the aggregate, exceeding
20% of the composite aggregate trading volume of the common stock for that trading day. The holders that elected to receive new
warrants will be required to surrender their old warrants upon consummation of the Company’s next financing resulting in
net cash proceeds to the Company of at least $1 million. The new warrants will have an initial exercise price equal to the exercise
price of the surrendered warrants as of immediately prior to consummation of the financing, subject to customary “downside
price protection” for as long as the Company’s common stock is not listed on a national securities exchange, and will
expire five years from the date of issuance.
5. STOCK OPTIONS
The Company’s 1995 Stock Plan (the “Plan”)
has expired pursuant to its terms, so zero shares remained available for issuance at March 31, 2018. The Plan allowed for the issuance
of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price of options was determined
by the Company’s board of directors, but incentive stock options were granted at an exercise price equal to the fair market
value of the Company’s common stock as of the grant date. Options historically granted have generally become exercisable
after four years and expire ten years from the date of grant.
As of March 31, 2018, the Company has issued
and outstanding options to purchase a total of 116 shares of common stock pursuant to the Plan, at a weighted average exercise
price of $37,090 per share.
The fair value of stock options is estimated
using the Black-Scholes option pricing model. No options were issued during the period ended March 31, 2018.
Stock option activity for March 31, 2018 as
follows:
|
|
2018
|
|
|
|
|
Weighted Average
|
|
|
Shares
|
|
Exercise Price
|
Outstanding at beginning of year
|
|
|
116
|
|
|
$
|
37,090
|
|
Options granted
|
|
|
—
|
|
|
$
|
—
|
|
Options exercised
|
|
|
—
|
|
|
$
|
—
|
|
Options expired/forfeited
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at end of the period
|
|
|
116
|
|
|
$
|
37,090
|
|
6. LITIGATION AND CLAIMS
From time to time, the Company may be involved
in various legal proceedings and claims arising in the ordinary course of business. Management believes that the dispositions of
these matters, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial
condition. However, depending on the amount and timing of such disposition, an unfavorable resolution of some or all of these matters
could materially affect the future results of operations or cash flows in a particular period.
As of March 31, 2018, and December 31, 2017,
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, Norcross, Georgia 30092. The Company leased approximately 23,000 square feet under a lease that expired in June 2017.
In July 2017, the Company leased the offices on a month to month basis. On February 23, 2018, the Company modified its lease to
reduce its occupancy to 12,835 square feet. The fixed monthly lease expense will be: $13,859 each month for the period beginning
January 1, 2018 and ending March 31, 2018; $8,022 each month for the period beginning April 1, 2018 and ending March 31, 2019;
$8,268 each month for the period beginning April 1, 2019 and ending March 31, 2020; and $8,514 each month for the period beginning
April 1, 2020 and ending March 31, 2021. The Company recognizes rent expense on a straight-line basis over the estimated lease
term. Future minimum rental payments at March 31, 2018 under non-cancellable operating leases for office space and equipment are
as follows (in thousands):
Year
|
|
Amount
|
|
2018
|
|
|
|
85
|
|
|
2019
|
|
|
|
98
|
|
|
2020
|
|
|
|
101
|
|
|
2021
|
|
|
|
26
|
|
Related Party Contracts
On June 5, 2016, the Company entered into a
license agreement with Shenghuo Medical, LLC pursuant to which the Company granted Shenghuo an exclusive license to manufacture,
sell and distribute LuViva in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
Shenghuo was already the Company’s exclusive distributor in China, Macau and Hong Kong, and the license extended to manufacturing
in those countries as well. Under the terms of the license agreement, once Shenghuo was capable of manufacturing LuViva in accordance
with ISO 13485 for medical devices, Shenghuo would pay the Company a royalty equal to $2.00 or 20% of the distributor price (subject
to a discount under certain circumstances), whichever is higher, per disposable distributed within Shenghuo’s exclusive territories.
In connection with the license grant, Shenghuo was to underwrite the cost of securing approval of LuViva with Chinese Food and
Drug Administration. At its option, Shenghuo also would provide up to $1.0 million in furtherance of the Company’s efforts
to secure regulatory approval for LuViva from the U.S. Food and Drug Administration, in exchange for the right to receive payments
equal to 2% of the Company’s future sales in the United States, up to an aggregate of $4.0 million. Pursuant to the license
agreement, Shenghuo had the option to have a designee appointed to the Company’s board of directors (director Richard Blumberg
is that designee). As partial consideration for, and as a condition to, the license, and to further align the strategic interests
of the parties, the Company agreed to issue a convertible note to Shenghuo, in exchange for an aggregate cash investment of $200,000.
The note will provide for a payment to Shenghuo of $300,000, expected to be due the earlier of 90 days from issuance and consummation
of any capital raising transaction by the Company with net cash proceeds of at least $1.0 million. The note will accrue interest
at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares of the Company’s common
stock at a conversion price per share of $13.92, subject to customary anti-dilution adjustment. The note will be unsecured, and
is expected to provide for customary events of default. The Company will also issue Shenghuo a five-year warrant exercisable immediately
for approximately 21,549 shares of common stock at an exercise price equal to the conversion price of the note, subject to customary
anti-dilution adjustment. On January 22, 2017, the Company entered into a license agreement with Shandong Yaohua Medical Instrument
Corporation, or SMI, pursuant to which the Company granted SMI an exclusive global license to manufacture the LuViva device and
related disposables (subject to a carve-out for manufacture in Turkey) and exclusive distribution rights in the Peoples Republic
of China, Macau, Hong Kong and Taiwan. In order to facilitate the SMI agreement, immediately prior to its execution the Company
entered into an agreement with Shenghuo Medical, LLC, regarding its previous license to Shenghuo. Under the terms of the new agreement,
Shenghuo agreed to relinquish its manufacturing license and its distribution rights in SMI’s territories, and to waive its
rights under the original Shenghuo agreement, all for as long as SMI performs under the SMI agreement.
On September 6, 2016, the Company entered into
a royalty agreement with one of its directors, John Imhoff, and another stockholder, Dolores Maloof, pursuant to which the Company
sold to them a royalty of future sales of single-use cervical guides for LuViva. Under the terms of the royalty agreement, and
for consideration of $50,000, the Company will pay them an aggregate perpetual royalty initially equal to $0.10, and from and after
October 2, 2016, equal to $0.20, for each disposable that the Company sells (or that is sold by a third party pursuant to a licensing
arrangement with the Company).
8. NOTES PAYABLE
Short Term Notes Payable
Notes Payable in Default
At March 31,
2018 and December 31, 2017, the Company maintained notes payable and accrued interest to both related and non-related parties totaling
$1,114,000 and $1,091,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry annual interest
rates between 5% and 10%
and have default rates as high a 18.0%.
The
Company is accruing interest at the default rate of 18.0%.
Short Term Notes Payable
At March 31, 2018 and December 31, 2017, the
Company maintained short term notes payable and accrued interest to both related and non-related parties totaling $508,000 and
$354,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry annual interest rates between
5% and 10%.
In July 2017, the Company entered into a premium
finance agreement to finance its insurance policies totaling $206,293. The note requires monthly payments of $18,766, including
interest at 4.89% and matures in May 2018. The balance due on this note totaled $37,000 and $93,000 at March 31, 2018 and December
31, 2017, respectively.
9. SHORT-TERM CONVERTIBLE DEBT
Related Party Convertible
Note Payable – Short-Term
On June 5, 2016, the
Company entered into a license agreement with a distributor pursuant to which the Company granted the distributor an exclusive
license to manufacture, sell and distribute the Company’s LuViva Advanced Cervical Cancer device and related disposables
in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The distributor was already
the Company’s exclusive distributor in China, Macau and Hong Kong, and the license will extend to manufacturing in those
countries as well.
As partial consideration
for, and as a condition to, the license, and to further align the strategic interests of the parties, the Company agreed to issue
a convertible note to the distributor, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment
to the distributor of $240,000, due upon consummation of any capital raising transaction by the Company within 90 days and with
net cash proceeds of at least $1.0 million. As of March 31, 2018, the Company had a note due of $436,106 compared to a note due
of $417,160 for the period ended December 31, 2017. The note accrues interest at 20% per year on any unpaid amounts due after that
date. The note will be convertible into shares of the Company’s common stock at a conversion price per share of $13.92, subject
to customary anti-dilution adjustment. The note is unsecured, and is expected to provide for customary events of default. The Company
will also issue the distributor a five-year warrant exercisable immediately for 17,239 shares of common stock at an exercise price
equal to the conversion price of the note, subject to customary anti-dilution adjustment.
Convertible Note
Payable – Short-Term
On February 13, 2017,
the Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $170,000
in aggregate principal amount of a 12% convertible promissory note for an aggregate purchase price of $156,400 (representing a
$13,600 original issue discount). On February 13, 2017, the Company issued the note to Auctus. Pursuant to the purchase agreement,
the Company also issued to Auctus a warrant exercisable to purchase an aggregate of 200,000 shares of the Company’s common
stock. The warrant is exercisable at any time, at an exercise price per share equal to $0.00228 (110% of the closing price of the
common stock on the day prior to issuance), subject to certain customary adjustments and price-protection provisions contained
in the warrant. The warrant has a five-year term. The note matured nine months from the date of issuance and, in addition to the
original issue discount, accrues interest at a rate of 12% per year. The Company could have prepaid the note, in whole or in part,
for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any
time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance
to 180 days from issuance. After six months from the date of issuance, Auctus converted the note, at any time, in whole or in part,
into shares of the Company’s common stock, at a conversion price equal to the lower of the price offered in the Company’s
next public offering or a 40% discount to the average of the two lowest trading prices of the common stock during the 20 trading
days prior to the conversion, subject to certain customary adjustments and price-protection provisions contained in the note. The
note includes customary events of default provisions and a default interest rate of 24% per year. Upon the occurrence of an event
of default, Auctus required the Company to redeem the note (or convert it into shares of common stock) at 150% of the outstanding
principal balance plus accrued and unpaid interest. In connection with the transaction, the Company agreed to reimburse Auctus
for $30,000 in legal and diligence fees, of which we paid $10,000 in cash and $20,000 in restricted shares of common stock, valued
at $0.40 per share (a 42.86% discount to the closing price of the common stock on the day prior to issuance). The Company allocated
proceeds of $90,000 to the warrants and common stock issued in connection with the financing. As of March 31, 2018, the Company
has net debt and interest of $30,800 as compared to net debt and interest of $76,664 for the period ended December 31, 2017.
On March 20, 2018,
the Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $150,000
in aggregate principal amount of a 12% convertible promissory note for an aggregate purchase price of $135,000 (representing a
$15,000 original issue discount). On March 20, 2018, the Company issued the note to Auctus. Pursuant to the purchase agreement,
the Company also issued to Auctus a warrant exercisable to purchase an aggregate of 3,409,090 shares of the Company’s common
stock. The warrant is exercisable at any time, at an exercise price per share equal to $0.00228 (110% of the closing price of the
common stock on the day prior to issuance), subject to certain customary adjustments and price-protection provisions contained
in the warrant. The warrant has a five-year term. The note matures nine months from the date of issuance and, in addition to the
original issue discount, accrues interest at a rate of 12% per year. The Company could have prepaid the note, in whole or in part,
for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any
time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance
to 180 days from issuance. After six months from the date of issuance, Auctus may convert the note, at any time, in whole or in
part, into shares of the Company’s common stock, at a conversion price equal to the lower of the price offered in the Company’s
next public offering or a 40% discount to the average of the two lowest trading prices of the common stock during the 20 trading
days prior to the conversion, subject to certain customary adjustments and price-protection provisions contained in the note. The
note includes customary events of default provisions and a default interest rate of 24% per year. Upon the occurrence of an event
of default, Auctus may require the Company to redeem the note (or convert it into shares of common stock) at 150% of the outstanding
principal balance plus accrued and unpaid interest. As of March 31, 2018, the Company has net debt of $99,000 including unamortized
debt issuance costs of $31,500 and reduction related to the allocated value of the warrants of $19,500.
On May 17, 2017, the
Company entered into a securities purchase agreement with Eagle Equities, LLC (“Eagle”), providing for the purchase
by Eagle of two convertible redeemable notes in the aggregate principal amount of $88,000, with the first note being in the amount
of $44,000, and the second note being in the amount of $44,000. The first note was fully funded on May 19, 2017, upon which the
Company received $40,000 of net proceeds (net of a 10% original issue discount). The second note was issued on December 21, 2017
and was initially paid for by the issuance of an offsetting $40,000 secured note issued by Eagle. Eagle was required to pay the
principal amount of its secured note in cash and in full prior to executing any conversions under the second note the Company issued.
The notes bear an interest rate of 8%, and are due and payable on May 17, 2018. The notes may be converted by Eagle at any time
after five months from issuance into shares of our common stock (as determined in the notes) calculated at the time of conversion,
except for the second note, which also requires full payment by Eagle of the secured note it issued to us before conversions may
be made. The conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior
trading days including the day upon which the Company receive a notice of conversion. The notes may be prepaid in accordance with
the terms set forth in the notes. The notes also contain certain representations, warranties, covenants and events of default including
if the Company are delinquent in our periodic report filings with the SEC, and increases in the amount of the principal and interest
rates under the notes in the event of such defaults. In the event of default, at Eagle’s option and in its sole discretion,
Eagle may consider the notes immediately due and payable. As of March 31, 2018, the notes had been converted and no balance remained
outstanding, as compared to net debt of $41,322, including unamortized original issue discount of $5,214, unamortized and debt
issuance costs of $11,160 for the period ended December 31, 2017.
On March 12, 2018,
the Company entered into a securities purchase agreement with Eagle Equities, LLC, providing for the purchase by Eagle of a convertible
redeemable note in the principal amount of $66,667. The note was fully funded on March 14, 2018, upon which the Company received
$51,000 of net proceeds (net of a 10% original issue discount and other expenses). The note bears an interest rate of 8%, and are
due and payable on May 12, 2019. The note may be converted by Eagle at any time after twelve months from issuance into shares of
our common stock (as determined in the notes) calculated at the time of conversion, except for the second note, which also requires
full payment by Eagle of the secured note it issued to us before conversions may be made. The conversion price of the notes will
be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which the
Company receive a notice of conversion. The notes may be prepaid in accordance with the terms set forth in the notes. The notes
also contain certain representations, warranties, covenants and events of default including if the Company are delinquent in our
periodic report filings with the SEC, and increases in the amount of the principal and interest rates under the notes in the event
of such defaults. In the event of default, at Eagle’s option and in its sole discretion, Eagle may consider the notes immediately
due and payable. As of March 31, 2018, the outstanding balance was $51,816, including unamortized debt issuance costs of $8,532
and unamortized discount of $6,319.
On May 17, 2017, the
Company entered into a securities purchase agreement with Adar Bays, LLC(“Adar”), providing for the purchase by Adar
of two convertible redeemable notes in the aggregate principal amount of $88,000, with the first note being in the amount of $44,000,
and the second note being in the amount of $44,000. The first note was fully funded on May 19, 2017, upon which the Company received
$40,000 of net proceeds (net of a 10% original issue discount). The second note was issued on December 21, 2017 and was initially
paid for by the issuance of an offsetting $40,000 secured note issued by Adar. Adar was required to pay the principal amount of
its secured note in cash and in full prior to executing any conversions under the second note the Company issued. The notes bear
an interest rate of 8%, and are due and payable on May 17, 2018. The notes may be converted by Adar at any time after five months
from issuance into shares of our common stock (as determined in the notes) calculated at the time of conversion, except for the
second note, which also requires full payment by Adar of the secured note it issued to us before conversions may be made. The conversion
price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including
the day upon which the Company receive a notice of conversion. The notes may be prepaid in accordance with the terms set forth
in the notes. The notes also contain certain representations, warranties, covenants and events of default including if the Company
are delinquent in our periodic report filings with the SEC, and increases in the amount of the principal and interest rates under
the notes in the event of such defaults. In the event of default, at Adar’s option and in its sole discretion, Adar may consider
the notes immediately due and payable. As of March 31, 2018, the notes had been converted and no balance remained outstanding,
as compared to net debt of $42,216, including unamortized original issue discount of $5,214, unamortized and debt issuance costs
of $11,160 for the period ended December 31, 2017.
On February 12, 2018,
the Company entered into a securities purchase agreement with Adar Bays, LLC, providing for the purchase by Adar of three convertible
redeemable notes in the aggregate principal amount of $285,863, with the first note being in the amount of $95,288, and the second
and third note being in the same amount. The first note was fully funded on February 13, 2018, upon which the Company received
$75,000 of net proceeds (net of a 10% original issue discount). The notes bear an interest rate of 8%, and are due and payable
on October 12, 2018. The notes may be converted by Adar at any time after eight months from issuance into shares of our common
stock (as determined in the notes) calculated at the time of conversion, except for the second note, which also requires full payment
by Adar of the secured note it issued to us before conversions may be made. The conversion price of the notes will be equal to
60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which the Company receive
a notice of conversion. The notes may be prepaid in accordance with the terms set forth in the notes. The notes also contain certain
representations, warranties, covenants and events of default including if the Company are delinquent in our periodic report filings
with the SEC, and increases in the amount of the principal and interest rates under the notes in the event of such defaults. In
the event of default, at Adar’s option and in its sole discretion, Adar may consider the notes immediately due and payable.
As of March 31, 2018, the Company has a net debt of $76,626, including unamortized debt issuance costs of $11,672 and unamortized
discount of $6,890.
On May 18, 2017, the
Company entered into a securities purchase agreement with GHS Investments, LLC, an existing investor, providing for the purchase
by GHS of a convertible promissory note in the aggregate principal amount of $66,000, for $60,000 in net proceeds (representing
a 10% original issue discount). The transaction closed on May 19, 2017. The note matures upon the earlier of our receipt of $100,000
from revenues, loans, investments, or any other means (other than the Eagle and Adar bridge financings) and December 31, 2017.
In addition to the 10% original issue discount, the note accrues interest at a rate of 8% per year. The Company may prepay the
note, in whole or in part, for 110% of outstanding principal and interest until 30 days from issuance, for 120% of outstanding
principal and interest at any time from 31 to 60 days from issuance and for 140% of outstanding principal and interest at any time
from 61 days to 180 days from issuance. The note may not be prepaid after 180 days. After six months from the date of issuance,
the note will become convertible, at any time thereafter, in whole or in part, at the holder’s option, into shares of our
common stock, at a conversion price equal to 60% of the lowest trading price during the 25 trading days prior to conversion. The
note includes customary event of default provisions and a default interest rate of the lesser of 20% per year or the maximum amount
permitted by law. Upon the occurrence of an event of default, the holder of the note may require us to redeem the note (or convert
it into shares of common stock) at 150% of the outstanding principal balance. As of March 31, 2018, the Company has net debt of
$66,000 and interest of $6,793 as compared to net debt of $66,000 for the period ended December 31, 2017.
On August 18, 2017,
the Company entered into a securities purchase agreement with Power Up Lending Group Ltd., providing for the purchase by Power
Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%,
and is due and payable on May 19, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares
of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common
stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging
from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events
of default, including if the Company is delinquent in its periodic report filings with the SEC, and provides for increases in principal
and interest in the event of such defaults. As of March 31, 2018, the notes had been converted and no balance remained outstanding
as compared to a net debt of $46,405, including unamortized debt issuance costs of $6,595 of December 31, 2017.
On October 12, 2017,
the Company entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for
the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an
interest rate of 12%, and is due and payable on July 20, 2018. The note may be converted by Power Up at any time after 180 days
from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day
trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its
terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties,
covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC, and provides
for increases in principal and interest in the event of such defaults. As of March 31, 2018, the Company has a net debt of $49,840,
including unamortized debt issuance costs of $3,160 as compared to net debt of $47,288, including unamortized debt issuance costs
of $5,722 for the period ended December 31, 2017.
On December 11, 2017,
the Company entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for
the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an
interest rate of 12%, and is due and payable on September 20, 2018. The note may be converted by Power Up at any time after 180
days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest
two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance
with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations,
warranties, covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC,
and provides for increases in principal and interest in the event of such defaults. As of March 31, 2018, the Company has a net
debt of $48,110, including unamortized debt issuance costs of $4,890 as compared to net debt of $45,565, including unamortized
debt issuance costs of $7,435 for the period ended December 31, 2017.
On February 8, 2018,
the Company entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for
the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an
interest rate of 12%, and is due and payable on November 30, 2018. The note may be converted by Power Up at any time after 180
days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest
two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance
with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations,
warranties, covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC,
and provides for increases in principal and interest in the event of such defaults. As of March 31, 2018, the Company has net debt
of $46,102, including unamortized debt issuance cost of $6,898.
On December 28, 2016,
the Company entered into a securities purchase agreement with an investor for the issuance and sale to investor of up to $330,000
in aggregate principal amount of 10% original issuance discount convertible promissory notes, for an aggregate purchase price of
$300,000. On that date, the Company issued to the investor a note in the principal amount of $222,000, for a purchase price of
$200,000. The note matures six months from their date of issuance and, in addition to the 10% original issue discount, accrue interest
at a rate of 10% per year. The Company may prepay the notes, in whole or in part, for 115% of outstanding principal and interest
until 30 days from issuance, for 125% of outstanding principal and interest at any time from 31 to 60 days from issuance, and for
130% of outstanding principal and interest at any time from 61 days from issuance until immediately prior to the maturity date.
After six months from the date of issuance (i.e., if the Company fails to repay all principal and interest due under the notes
at the maturity date), the investor may convert the notes, at any time, in whole or in part, into shares of the Company’s
common stock, at a conversion price equal to 60% of the lowest volume weighted average price of our common stock during the 20
trading days prior to conversion, subject to certain customary adjustments and anti-dilution provisions contained in the note.
As of March 31, 2018, the Company has fully amortized debt issuance costs $30,000 and original issue discount of $22,000. As of
March 31, 2018, the balance due to the investor for the December 28, 2016 note, is zero.
10. CONVERTIBLE DEBT IN DEFAULT
Secured Promissory
Note.
On September 10, 2014,
the Company sold a secured promissory note to an accredited investor with an initial principal amount of $1,275,000, for a purchase
price of $700,000 (an original issue discount of $560,000). The Company may prepay the note at any time. The note is secured by
the Company’s current and future accounts receivable and inventory, pursuant to a security agreement entered into in connection
with the sale. On March 10, 2015, May 4, 2015, June 1, 2015, June 16, 2015, June 29, 2015, January 21, 2016, January 29, 2016,
and February 12, 2016 the Company amended the terms of the note to extend the maturity ultimately until August 31, 2016. During
the extension, interest accrues on the note at a rate of the lesser of 18% per year or the maximum rate permitted by applicable
law. On February 11, 2016, the Company consented to an assignment of the note to two accredited investors. In connection with
the assignment, the holders waived an ongoing event of default under the notes related to the Company’s minimum market capitalization,
and agreed to eliminate the requirement going forward. Pursuant to the terms of the amended note, the holder may convert the outstanding
balance into shares of common stock at a conversion price per share equal to the lower of (1) $25.0 or (2) 75% of the lowest daily
volume weighted average price of the common stock during the five days prior to conversion. If the conversion price at the time
of any conversion is lower than $15.00, the Company has the option of delivering the conversion amount in cash in lieu of shares
of common stock. On March 7, 2016, the Company further amended the note to eliminate the volume limitations on sales of common
stock issued or issuable upon conversion. On July 13, 2016, the Company consented to the assignment by one of the accredited investors
of its portion of the note of to a third accredited investor.
The balance due on the
note was $159,698 and $184,245 at March 31, 2018 and December 31, 2017, respectively. The balance was reduced by $306,863 as part
of a debt restructuring on December 7, 2016.
Total debt issuance costs
as originally capitalized were approximately $130,000. This amount was amortized over nine months and was fully amortized as of
December 31, 2015. The original issue discount of $560,000 was fully amortized as of December 31, 2015.
On November 2, 2016,
the Company entered into a lockup and exchange agreement with GHS Investments, LLC, holder of approximately $221,000 in outstanding
principal amount of the Company’s secured promissory note and all the outstanding shares of the its Series C preferred stock.
Pursuant to the agreement, upon the effectiveness of the 1:800 reverse stock split and continuing for 45 days after, GHS and its
affiliates were prohibited from converting any portion of the secured promissory note or any of the shares of Series C preferred
stock or selling any of the Company’s securities that they beneficially owned. The Company agreed that, upon consummation
of its next financing, the Company would use $260,000 of net cash proceeds first, to repay GHS’s portion of the secured promissory
note and second, with any remaining amount from the $260,000, to repurchase a portion of GHS’s shares of Series C preferred
stock. In addition, GHS has agreed to exchange the stated value per share (plus any accrued but unpaid dividends) of its remaining
shares of Series C preferred stock for new securities of the same type that the Company separately issue in the next qualifying
financing it undertakes, on a dollar-for-dollar basis in a private placement exchange.
Senior Secured Promissory
Note
On February 11, 2016,
the Company entered into a securities purchase agreement with GPB Debt Holdings II LLC for the issuance and sale on February 12,
2016 of $1.4375 million in aggregate principal amount of a senior secured convertible note for an aggregate purchase price of
$1.15 million (a 20% original issue discount of $287,500) and a discount for debt issuance costs paid at closing of $121,000 for
a total of $408,500. In addition, GPB received a warrant exercisable to purchase an aggregate of approximately 2,246 shares of
the Company’s common stock. The Company allocated proceeds totaling $359,555 to the fair value of the warrants at issuance.
This was recorded as an additional discount on the debt. The convertible note matures on the second anniversary of issuance and,
in addition to the 20% original issue discount, accrues interest at a rate of 17% per year. The Company is required to pay monthly
interest coupons and beginning nine months after issuance, the Company is required to pay amortized quarterly principal payments.
If the Company does not receive, on or before the first anniversary after issuance, an aggregate of at least $3.0 million from
future equity or debt financings or non-dilutive grants, then the holder will have the option of accelerating the maturity date
to the first anniversary of issuance. The Company may prepay the convertible note, in whole or in part, without penalty, upon
20 days’ prior written notice. Subject to resale restrictions under Federal securities laws and the availability of sufficient
authorized but unissued shares of the Company’s common stock, the convertible note is convertible at any time, in whole
or in part, at the holder’s option, into shares of the Company’s common stock, at a conversion price equal to the
lesser of $0.80 per share or 70% of the average closing price per share for the five trading days prior to issuance, subject to
certain customary adjustments and anti-dilution provisions contained in the convertible note. On May 28, 2016, in exchange for
an additional $87,500 in cash from GPB to the Company, the principal balance was increased by the same amount. The Company is
currently in default as they are past due on the required monthly interest payments. In the event of default, the Company shall
accrue interest at a rate the lesser of 22% or the maximum permitted by law. The Company has accrued $117,000 for past due interest
payments at December 31, 2016. Upon the occurrence of an event of default, the holder may require the Company to redeem the convertible
note at 120% of the outstanding principal balance (but as of March 31, 2018, had not done so). As of March 31, 2018, the balance
due on the convertible debt was $2,136,863 as the Company has fully amortized debt issuance costs of $47,675 and the debt discount
of $768,055 and recorded a 20% penalty totaling $305,000. In addition, the Company has accrued $451,031 of interest expense. The
convertible note is secured by a lien on all the Company’s assets, including its intellectual property, pursuant to a security
agreement entered into by the Company and GPB.
The warrant is exercisable
at any time, pending availability of sufficient authorized but unissued shares of the Company’s common stock, at an exercise
price per share equal to the conversion price of the convertible note, subject to certain customary adjustments and anti-dilution
provisions contained in the warrant. The warrant has a five-year term. As of March 31, 2018, the exercise price had been adjusted
to $0.00228 and the number of common stock shares exchangeable for was 630,482,456. As of March 31, 2018, the effective interest
rate considering debt costs was 29%.
The Company used a placement
agent in connection with the transaction. For its services, the placement agent received a cash placement fee equal to 4% of the
aggregate gross proceeds from the transaction and a warrant to purchase shares of common stock equal to an aggregate of 6% of the
total number of shares underlying the securities sold in the transaction, at an exercise price equal to, and terms otherwise identical
to, the warrant issued to the investor. Finally, the Company agreed to reimburse the placement agent for its reasonable out-of-pocket
expenses.
In connection with the
transaction, on February 12, 2016, the Company and GPB entered into a four-year consulting agreement, pursuant to which the investor
will provide management consulting services to the Company in exchange for a royalty payment, payable quarterly, equal to 3.5%
of the Company’s revenues from the sale of products. As of March 31, 2018, GPB had earned approximately $29,000 in royalties.
Debt Restructuring
On
December 7, 2016, the Company entered into an exchange agreement with GPB with regard to the $1,525,000 in outstanding principal
amount of senior secured convertible note originally issued to GPB on February 11, 2016, and the $306,863 in outstanding principal
amount of the Company’s secured promissory note that GPB holds (see “—Secured Promissory Note”). Pursuant
to the exchange agreement, upon completion of the next financing resulting in at least $1 million in cash proceeds, GPB will exchange
both securities for a new convertible note in principal amount of $1,831,863. The new convertible note will mature on the second
anniversary of issuance and will accrue interest at a rate of 19% per year. The Company will pay monthly interest coupons and,
beginning one year after issuance, will pay amortized quarterly principal payments. Subject to resale restrictions under Federal
securities laws and the availability of sufficient authorized but unissued shares of the Company’s common stock, the new
convertible note will be convertible at any time, in whole or in part, at the holder’s option, into shares of common stock,
at a conversion price equal to the price offered in the qualifying financing that triggers the exchange, subject to certain customary
adjustments and anti-dilution provisions contained in the new convertible note. The new convertible note will include customary
event of default provisions and a default interest rate of the lesser of 21% or the maximum amount permitted by law. Upon the occurrence
of an event of default, GPB will be entitled to require the Company to redeem the new convertible note at 120% of the outstanding
principal balance. The new convertible note will be secured by a lien on all the Company’s assets, including its intellectual
property, pursuant to the security agreement entered into by the Company and GPB in connection with the issuance of the original
senior secured convertible note.
Additionally, the Company further agreed to amend the warrant
issued with the original senior secured convertible note, to adjust the number of shares issuable upon exercise of the warrant
to equal the number of shares that will initially be issuable upon conversion of the new convertible note (without giving effect
to any beneficial ownership limitations set forth in the terms of the new convertible note). As an inducement to GPB to enter into
these transactions, the Company agreed to increase the royalty payable to GPB pursuant to its consulting agreement with us on December
7, 2016 from 3.5% to 3.85% of revenues from the sales of the Company’s products.
On August 7, 2017, the Company entered into
a forbearance agreement with GPB, with regard to the senior secured convertible note. Under the forbearance agreement, GPB has
agreed to forbear from exercising certain of its rights and remedies (but not waive such rights and remedies), arising as a result
of the Company’s failure to pay the monthly interest due and owing on the note. In consideration for the forbearance, the
Company agreed to waive, release, and discharge GPB from all claims against GPB based on facts existing on or before the date of
the forbearance agreement in connection with the note, or the dealings between the Company and GPB, or the Company’s equity
holders and GPB, in connection with the note. Pursuant to the forbearance agreement, the Company has reaffirmed its obligations
under the note and related documents and executed a confession of judgment regarding the amount due under the note, which GPB may
file upon any future event of default by the Company. During the forbearance period, the Company must continue to comply will all
the terms, covenants, and provisions of the note and related documents.
The “Forbearance Period” shall
mean the period beginning on the date hereof and ending on the earliest to occur of: (i) the date on which Lender delivers to Company
a written notice terminating the Forbearance Period, which notice may be delivered at any time upon or after the occurrence of
any Forbearance Default (as hereinafter defined), and (ii) the date Company repudiates or asserts any defense to any Obligation
or other liability under or in respect of this Agreement or the Transaction Documents or applicable law, or makes or pursues any
claim or cause of action against Lender; (the occurrence of any of the foregoing clauses (i) and (ii), a “Termination Event”).
As used herein, the term “Forbearance Default” shall mean: (A) the occurrence of any Default or Event of Default other
than the Specified Default; (B) the failure of Company to timely comply with any material term, condition, or covenant set forth
in this Agreement; (C) the failure of any representation or warranty made by Company under or in connection with this Agreement
to be true and complete in all material respects as of the date when made; or (D) Lender’s reasonable belief that Company:
(1) has ceased or is not actively pursuing mutually acceptable restructuring or foreclosure alternatives with Lender; or (2) is
not negotiating such alternatives in good faith. Any Forbearance Default will not be effective until one (1) Business Day after
receipt by Company of written notice from Lender of such Forbearance Default. Any effective Forbearance Default shall constitute
an immediate Event of Default under the Transaction Documents.
11. INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share attributable
to common stockholders amounts are computed by dividing the net income (loss) plus preferred stock dividends and deemed dividends
on preferred stock by the weighted average number of shares outstanding during the 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 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.
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
1,027
|
|
|
$
|
(206
|
)
|
Basic weighted average number of shares outstanding
|
|
|
88,577
|
|
|
|
946
|
|
Net income (loss) per share (basic)
|
|
$
|
0.012
|
|
|
$
|
(0.22
|
)
|
Diluted weighted average number of shares outstanding
|
|
|
1,994,293
|
|
|
|
946
|
|
Net income (loss) per share (diluted)
|
|
|
0.001
|
|
|
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
Dilutive equity instruments (number of equivalent units):
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
Preferred stock
|
|
|
410,357
|
|
|
|
—
|
|
Convertible debt
|
|
|
950,338
|
|
|
|
—
|
|
Warrants
|
|
|
545,041
|
|
|
|
|
|
Total Dilutive instruments
|
|
|
1,905,736
|
|
|
|
—
|
|
12. SUBSEQUENT EVENTS
During April and May 2018, the Company entered
into short-term convertible notes similar to those detailed in Note 9 - Short-Term Convertible Debt. The note with Power-Up was
for $103,000 and K2 Medical of $5,000. The Company also received $42,000 from Shandong Medical as part of their agreement with
the Company.