The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BACKGROUND, AND BASIS OF PRESENTATION
Guided Therapeutics, Inc. (formerly SpectRx, Inc.), together with its wholly owned subsidiary, InterScan, Inc. (formerly Guided Therapeutics, Inc.), collectively referred to herein as the “Company”, is a medical technology company focused on developing innovative medical devices that have the potential to improve healthcare. The Company’s primary focus is the continued commercialization of its LuViva non-invasive cervical cancer detection device and extension of its cancer detection technology into other cancers, including esophageal. The Company’s technology, including products in research and development, primarily relates to biophotonics technology for the non-invasive detection of cancers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934. The December 31, 2022 balances reported herein are derived from the audited consolidated financial statements for the year ended December 31, 2022. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Company as of March 31, 2023 and December 31, 2022, and the consolidated results of operations and cash flows for the three-month periods ended March 31, 2023 and 2022 have been included.
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, 2023, it had an accumulated deficit of approximately $148.3 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.
The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment. The Company’s principal decision maker is the Chief Executive Officer and acting Chief Financial Officer. Management believes that its business operates as one reportable segment because: a) the Company measures profit and loss as a whole; b) the principal decision makers do not review information based on any operating segment; c) the Company does not maintain discrete financial information on any specific segment; d) the Company has not chosen to organize its business around different products and services, and e) the Company has not chosen to organize its business around geographic areas.
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, 2023, the Company had a negative working capital of approximately $1.5 million, accumulated deficit of $148.3 million, and incurred a net loss including preferred dividends of $1.0 million for the three months then ended. Stockholders’ deficit totaled approximately $2.9 million at March 31, 2023, primarily due to recurring net losses from operations.
During the three months ended March 31, 2023, the Company raised $195 thousand from warrant exercises. During the year ended December 31, 2022, the Company raised $3.2 million from the sale of common stock and warrants (net of expenses), and $495 thousand of proceeds from warrant exercises. The Company will need to continue to raise capital in order to provide funding for its operations and FDA approval process. If sufficient capital cannot be raised, 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.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant areas where estimates are used include 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.
Accounting Standard Updates
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. This amendment was adopted effective January 1, 2023 with no impact to our financial statements.
A variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect, if any that the implementation of such proposed standards would have on the Company’s consolidated financial statements.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be a cash equivalent.
Accounts Receivable
The Company performs periodic credit evaluations of its distributors’ financial conditions and generally does not require collateral. The Company reviews all outstanding accounts receivable for collectability on a quarterly basis. An allowance for doubtful accounts is recorded for any amounts deemed uncollectable. Uncollectibility is determined based on the determination that a distributor will not be able to make payment and the time frame has exceeded one year. The Company does not accrue interest receivables on past due accounts receivable.
Concentrations of Credit Risk
The Company maintains a cash balance in a financial institution that is insured by the Federal Deposit Insurance Corporation up to certain federal limitations. At times, the Company’s cash balance exceeds these federal limitations. The amount in excess of insured limitations was approximately $1,591,276 and $2,064,772 as of March 31, 2023 and December 31, 2022, respectively.
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. As of March 31, 2023 and December 31, 2022, our inventories were as follows:
| | (in thousands) | |
| | March 31, | | | December 31, | |
| | 2023 | | | 2022 | |
| | | | | | |
| Raw materials | | $ | 1,292 | | | $ | 1,260 | |
| Work-in-progress | | | 73 | | | | 68 | |
| Finished goods | | | 38 | | | | 38 | |
| Inventory reserve | | | (818 | ) | | | (818 | ) |
| | | | | | | | |
| Total inventory | | $ | 585 | | | $ | 548 | |
The company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements are amortized at the shorter of the useful life of the asset or the remaining lease term. Depreciation and amortization expense are included in general and administrative expense on the statement of operations. Expenditures for repairs and maintenance are expensed as incurred. Property and equipment are summarized as follows at March 31, 2023 and December 31, 2022:
| | (in thousands) | |
| | March 31, | | | December 31, | |
| | 2023 | | | 2022 | |
| | | | | | |
| Equipment | | $ | 1,083 | | | $ | 1,083 | |
| Software | | | 656 | | | | 656 | |
| Furniture and fixtures | | | 41 | | | | 41 | |
| Leasehold improvements | | | 12 | | | | 12 | |
| | | | | | | | |
| Subtotal | | | 1,792 | | | | 1,792 | |
| Less accumulated depreciation | | | (1,752 | ) | | | (1,750 | ) |
Property, equipment and leasehold improvements, net | | $ | 40 | | | $ | 42 | |
Depreciation expense related to property and equipment for the three months ended March 31, 2023 and 2022 was not material.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized over the term of the associated debt. Debt issuance costs are presented in the balance sheet as a direct deduction from the carrying amount of the debt liability consistent with the debt discount.
Patent Costs (Principally Legal Fees)
Costs incurred in filing, prosecuting, and maintaining patents are recurring, and expensed as incurred. Maintaining patents are expensed as incurred as the Company has not yet received U.S. FDA approval and recovery of these costs is uncertain. Such costs were not material for the three months ended March 31, 2023 and 2022.
Leases
A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.
Where an operating lease contains extension options that the Company is reasonably certain to exercise, the extension period is included in the calculation of the right-of-use assets and lease liabilities.
The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. Right-of-use assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both right-of-use assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. See Note 7 – “Commitments and Contingencies.”
Accrued Liabilities
Accrued liabilities as of March 31, 2023 and December 31, 2022 are summarized as follows:
| | (in thousands) | |
| | March 31,
2023 | | | December 31,
2022 | |
| | | | | | |
| Compensation | | $ | 399 | | | $ | 444 | |
| Professional fees | | | 178 | | | | 285 | |
| Stock Subscription Payable | | | 10 | | | | 36 | |
| Interest | | | 112 | | | | 189 | |
| Vacation | | | 44 | | | | 41 | |
| Preferred dividends | | | 178 | | | | 231 | |
| Other accrued expenses | | | 7 | | | | 21 | |
| | | | | | | | |
| Total | | $ | 928 | | | $ | 1,247 | |
Stock Subscription Payable
Cash received from investors for shares of common stock that have not yet been issued is recorded as a liability, which is presented within Accrued Liabilities on the consolidated balance sheet.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers, establishes a single and comprehensive framework which sets out how much revenue is to be recognized, and when. The core principle is that a vendor should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. Revenue will now be recognized by a vendor when control over the goods or services is transferred to the customer. The application of the core principle in ASC 606 is carried out in five steps:
| · | Step 1 – Identify the contract with a customer: a contract is defined as an agreement (including oral and implied), between two or more parties, that creates enforceable rights and obligations and sets out the criteria for each of those rights and obligations. The contract needs to have commercial substance and it is probable that the entity will collect the consideration to which it will be entitled. |
| | |
| · | Step 2 – Identify the performance obligations in the contract: a performance obligation in a contract is a promise (including implicit) to transfer a good or service to the customer. Each performance obligation should be capable of being distinct and is separately identifiable in the contract. |
| | |
| · | Step 3 – Determine the transaction price: transaction price is the amount of consideration that the entity can be entitled to, in exchange for transferring the promised goods and services to a customer, excluding amounts collected on behalf of third parties. |
| | |
| · | Step 4 – Allocate the transaction price to the performance obligations in the contract: for a contract that has more than one performance obligation, the entity will allocate the transaction price to each performance obligation separately, in exchange for satisfying each performance obligation. The acceptable methods of allocating the transaction price include adjusted market assessment approach, expected cost plus a margin approach, and the residual approach in limited circumstances. Discounts given should be allocated proportionately to all performance obligations unless certain criteria are met and reallocation of changes in standalone selling prices after inception is not permitted. |
| | |
| · | Step 5 – Recognize revenue as and when the entity satisfies a performance obligation: the entity should recognize revenue at a point in time, except if it meets any of the three criteria, which will require recognition of revenue over time: the entity’s performance creates or enhances an asset controlled by the customer, the customer simultaneously receives and consumes the benefit of the entity’s performance as the entity performs, and the entity does not create an asset that has an alternative use to the entity and the entity has the right to be paid for performance to date. |
The Company did not recognize material revenues during the three-month periods ended March 31, 2023 or 2022. The Company’s revenues do not require significant estimates or judgments. The Company is not party to contracts that include multiple performance obligations or material variable consideration.
Contract Balances
The Company defers payments received as revenue until earned based on the related contracts and applying ASC 606 as required. As of March 31, 2023 and December 31, 2022, deferred revenue totaled $487,882 and $509,101, respectively.
Significant Customers
As of March 31, 2023, accounts receivable outstanding was $55,314, the outstanding amount was netted against a $48,172 allowance, leaving a balance of $7,142, which was from one customer. As of December 31, 2022, accounts receivable outstanding was $54,484; the outstanding amount was netted against a $48,172 allowance, leaving a balance of $6,312, which was from one customer.
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 provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has filed for an extension for its 2022 federal and state corporate tax returns. 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, 2023, the Company had approximately $65.6 million of net operating losses carryforward available. 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.
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.
Warrants
The Company has issued warrants, which allow the warrant holder to purchase one share of stock at a specified price for a specified period of time. The Company records equity instruments including warrants based on the fair value at the date of issue. The fair value of warrants classified as equity instruments at the date of issuance is estimated using the Black-Scholes Model. The fair value of warrants classified as liabilities at the date of issuance is estimated using the Monte Carlo Simulation or Binomial model.
Stock Based Compensation
The Company accounts for its stock-based awards in accordance with ASC Subtopic 718, “Compensation – Stock Compensation”, which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made to employees and directors. The Company determines the fair value of stock options using the Black-Scholes model. The fair value of restricted stock awards is based upon the quoted market price of the shares of common stock on the date of grant. The fair value of stock-based awards is expensed over the requisite service periods of the awards. The Company accounts for forfeitures of stock-based awards as they occur.
The Black-Scholes option pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future.
Derivatives
The Company reviews the terms of convertible debt issued to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value. The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, ASC 820, Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy based upon observable and non-observable inputs as follow:
| · | Level 1–Quoted market prices in active markets for identical assets and liabilities; |
| · | Level 2–Inputs, other than level 1 inputs, either directly or indirectly observable; and |
| · | Level 3–Unobservable inputs developed using internal estimates and assumptions (there is little or no market date) which reflect those that market participants would use. |
The Company records its derivative activities at fair value. There was no movement of instruments between fair value hierarchy tiers during the three months ended March 31, 2023. Derivative liabilities measured on a recurring basis were not material as of March 31, 2023. The following tables present the fair value of derivative liabilities measured on a recurring basis as of December 31, 2022:
| | Fair Value at December 31, 2022 (in thousands) | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | |
Derivative liability/bifurcated conversion option in connection with Auctus $326,016 loan on December 17, 2019 | | | - | | | | - | | | | (5 | ) | | | (5 | ) |
| | | | | | | | | | | | | | | | |
Total long-term liabilities at fair value | | $ | - | | | $ | - | | | $ | (5 | ) | | $ | (5 | ) |
The following is a summary of changes to Level 3 instruments during the three months ended March 31, 2023:
| | (in thousands) | |
| | Derivative | |
| | | |
Balance, December 31, 2022 | | $ | (5 | ) |
Change in fair value during the period | | | 5 | |
| | | | |
Balance, March 31, 2023 | | $ | - | |
4. STOCKHOLDERS’ DEFICIT
Common Stock
The Company has authorized 500,000,000 shares of common stock with $0.001 par value. As of March 31, 2023 and December 31, 2022, 50,814,258 and 48,595,715 shares of common stock were issued and outstanding, respectively.
During the three months ended March 31, 2023, the Company issued 2,218,543 shares of common stock, as summarized below:
| | Number of Shares | |
|
Common stock warrants exercised | | | 1,071,794 | |
Issuance of common stock for payment of Series D preferred dividends | | | 25,635 | |
Issuance of common stock for payment of Series E preferred dividends | | | 25,729 | |
Issuance of common stock for payment of Series F preferred dividends | | | 232,889 | |
Issuance of common stock for payment of Series F-2 preferred dividends | | | 84,575 | |
Issuance of common stock for payment of interest | | | 177,921 | |
Issuance of common stock to consultants | | | 400,000 | |
Conversion of Series E preferred stock to common stock | | | 20,000 | |
Conversion of Series F preferred stock to common stock | | | 120,000 | |
Conversion of Series F-2 preferred stock to common stock | | | 60,000 | |
Issued during the three months ended March 31, 2023 | | | 2,218,543 | |
| | | | |
Summary table of common stock share transactions: | | | | |
Shares outstanding at December 31, 2022 | | | 48,595,715 | |
Common shares issued during the three months ended March 31, 2023 | | | 2,218,543 | |
Common shares outstanding at March 31, 2023 | | | 50,814,258 | |
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock with a $0.001 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.
Series C Convertible Preferred Stock
The board designated 9,000 shares of preferred stock as Series C Convertible Preferred Stock, (the “Series C Preferred Stock”). Pursuant to the Series C certificate of designations, shares of Series C Preferred Stock are convertible into common stock by their holder at any time and may be mandatorily convertible upon the achievement of specified average trading prices for the Company’s common stock. At March 31, 2023 and December 31, 2022, there were 286 shares outstanding with a conversion price of $0.50 per share, such that each share of Series C Preferred Stock would convert into approximately 2,000 shares of the Company’s common stock; for a total of 572,000 shares of 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. Unpaid accrued dividends were $120,120 as of March 31, 2023 and December 31, 2022. Upon conversion of the Series C Preferred Stock prior to the Dividend End Date, the Company will also pay to the converting holder a “make-whole payment” equal to the number of unpaid dividends through the Dividend End Date on the converted shares. At March 31, 2023 and December 31, 2022, the “make-whole payment” for a converted share of Series C Preferred Stock would convert to 200 shares of the Company’s common stock.
The Series C Preferred Stock generally has no voting rights except as required by Delaware law. Upon the Company’s liquidation or sale to or merger with another corporation, each share will be entitled to a liquidation preference of $1,000, plus any accrued but unpaid dividends.
Series C1 Convertible Preferred Stock
The board designated 20,250 shares of preferred stock as Series C1 Preferred Stock, of which 1,049.25 shares were issued and outstanding at March 31, 2023 and December 31, 2022. In addition, some holders separately agreed to exchange each share of the Series C1 Preferred Stock held for one (1) share of the Company’s newly created Series C2 Preferred Stock. In total, for 3,262.25 shares of Series C1 Preferred Stock to be surrendered, the Company issued 3,262.25 shares of Series C2 Preferred Stock.
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.
At March 31, 2023 and December 31, 2022, there were 1,049.25 shares outstanding with a conversion price of $0.50 per share, such that each share of Series C1 Preferred Stock would convert into approximately 2,000 shares of the Company’s common stock, for a total of 2,098,500 shares of common stock.
Series C2 Convertible Preferred Stock
On August 31, 2018, the Company entered into agreements with certain holders of the Company’s Series C1 Preferred Stock, including the chairman of the Company’s board of directors, and the Chief Operating Officer and a director of the Company pursuant to which those holders separately agreed to exchange each share of the Series C1 Preferred Stock held for one (1) share of the Company’s newly created Series C2 Preferred Stock. In total, for 3,262.25 shares of Series C1 Preferred Stock to be surrendered, the Company issued 3,262.25 shares of Series C2 Preferred Stock.
The terms of the Series C2 Preferred Stock are substantially the same as the Series C1 Preferred Stock, except that (i) shares of Series C1 Preferred Stock may not be convertible into the Company’s common stock by their holder for a period of 180 days following the date of the filing of the Certificate of Designation (the “Lock-Up Period”); (ii) the Series C2 Preferred Stock has the right to vote as a single class with the Company’s common stock on an as-converted basis, notwithstanding the Lock-Up Period; and (iii) the Series C2 Preferred Stock will automatically convert into that number of securities sold in the next Qualified Financing (as defined in the Exchange Agreement) determined by dividing the stated value ($1,000 per share) of such share of Series C2 Preferred Stock by the purchase price of the securities sold in the Qualified Financing.
At March 31, 2023 and December 31, 2022, there were 2,700 shares outstanding, each with a conversion price of $0.50 per share, such that each share of Series C preferred stock would convert into approximately 2,000 shares of the Company’s common stock; for a total of 5,400,000 shares of common stock.
Series D Convertible Preferred Stock
The Board designated 6,000 shares of preferred stock as Series D Preferred Stock, 438 of which remained outstanding as of March 31, 2023 and December 31, 2022. On January 8, 2021, the Company entered into a Stock Purchase Agreement with certain accredited investors (“the Series D Investors”) pursuant to all obligations under the Series D Certificate of Designation. The Series D Investors included the Chief Executive Officer, Chief Operating Officer and a director of the Company. In total, for $763,000 the Company issued 763 shares of Series D Preferred Stock, 1,526,000 shares of common stock, 1,526,000 common stock warrants, exercisable at $0.25, and 1,526,000 common stock warrants, exercisable at $0.75. Each Series D Preferred Stock is convertible into 3,000 shares of common stock. The Series D Preferred Stock have cumulative dividends at the rate per share of 10% per annum. Each share of Series D Preferred Stock has a par value of $0.001 per share and a Stated Value equal to $750.
Each share of Series D Preferred is convertible, at any time for a period of 5 years after issuance, into that number of shares of Common Stock, determined by dividing the Stated Value by $0.25, subject to certain adjustments set forth in the Series D Certificate of Designation (the “Series D Conversion Price”). The conversion of Series D Preferred is subject to a 4.99% beneficial ownership limitation, which may be increased to 9.99% at the election of the holder of the Series D Preferred. If the average of the VWAPs (as defined in the Series D Certificate of Designation) for any consecutive 5 trading day period (“Measurement Period”) exceeds 200% of the then Series D Conversion Price and the average daily trading volume of the Common Stock on the primary trading market exceeds 1,000 shares per trading day during the Measurement Period (subject to adjustments), the Company may redeem the then outstanding Series D Preferred, for cash in an amount equal to aggregate Stated Value then outstanding plus accrued but unpaid dividends.
During the three months ended March 31, 2023, the Company issued 25,635 shares of common stock for the payment of accrued Series D Preferred Stock dividends. As of March 31, 2023 and December 31, 2022, the Company had accrued dividends for the Series D Preferred Stock of $8,360 and $8,213, respectively.
Series E Convertible Preferred Stock
The Board designated 5,000 shares of preferred stock as Series E Preferred Stock, 883 and 888 of which remained outstanding as of March 31, 2023 and December 31, 2022, respectively. Each share of Series E Preferred is convertible, at any time for a period of 5 years after issuance, into that number of shares of Common Stock, determined by dividing the Stated Value by $0.25, subject to certain adjustments set forth in the Series E Certificate of Designation (the “Series E Conversion Price”). The conversion of Series E Preferred is subject to a 4.99% beneficial ownership limitation, which may be increased to 9.99% at the election of the holder of the Series E Preferred. If the average of the VWAPs (as defined in the Series E Certificate of Designation) for any consecutive 5 trading day period (“Measurement Period”) exceeds 200% of the then Series E Conversion Price and the average daily trading volume of the Common Stock on the primary trading market exceeds 1,000 shares per trading day during the Measurement Period (subject to adjustments), the Company may redeem the then outstanding Series E Preferred, for cash in an amount equal to aggregate Stated Value then outstanding plus accrued but unpaid dividends. Each share of Series E Preferred Stock has a par value of $0.001 per share and a Stated Value equal to $1,000, subject to increase set forth in its Certificate of Designation.
Each holder of Series E Preferred Stock is entitled to receive cumulative dividends of 8% per annum, payable annually in cash or, following the listing of the Company’s common stock on certain Canadian trading markets and at the option of the Company, shares of common stock.
During the three months ended March 31, 2023, the Company issued 20,000 shares of common stock for the conversion of 5 shares of Series E Convertible Preferred Stock and 25,729 shares of common stock for the payment of accrued Series E Preferred Stock dividends. As of March 31, 2023 and December 31, 2022, the Company had accrued dividends of $39,932 and $30,414 for the Series E Preferred Stock, respectively.
Series F Convertible Preferred Stock
The Board designated 1,500 shares of preferred stock as Series F Preferred Stock, 1,026 and 1,056 of which were issued and outstanding as of March 31, 2023 and December 31, 2022, respectively. During 2021, the Company entered into a Stock Purchase Agreement with certain accredited investors (“the Series F Investors”). In total, for $1,436,000 the Company issued 1,436 shares of Series F Preferred Stock. Each Series F Preferred Stock is convertible into 4,000 shares of common stock. The Series F Preferred Stock is entitled to cumulative dividends at the rate per share of 6% per annum. The stated value on the Series F Preferred Stock is $1,000.
Each share of Series F Preferred Stock is convertible, at any time for a period of 5 years after issuance, into that number of shares of Common Stock, determined by dividing the Stated Value by $0.25, subject to certain adjustments set forth in the Series F Certificate of Designation (the “Series F Conversion Price”). The conversion of Series F Preferred is subject to a 4.99% beneficial ownership limitation, which may be increased to 9.99% at the election of the holder of the Series F Preferred. If the average of the VWAPs (as defined in the Series F Certificate of Designation) for any consecutive 5 trading day period (“Measurement Period”) exceeds 200% of the then Series F Conversion Price and the average daily trading volume of the Common Stock on the primary trading market exceeds 1,000 shares per trading day during the Measurement Period (subject to adjustments), the Company may redeem the then outstanding Series F Preferred, for cash in an amount equal to aggregate Stated Value then outstanding plus accrued but unpaid dividends.
During the three months ended March 31, 2023, the Company issued 120,000 shares of common stock for the conversion of 30 shares of Series F Convertible Preferred Stock and 232,889 shares of common stock for the payment of annual Series F Preferred Stock dividends. As of March 31, 2023 and December 31, 2022, the Company had accrued dividends for Series F preferred shares of $855 and $48,400, respectively.
Series F-2 Convertible Preferred Stock
The Company was oversubscribed for its Series F Convertible Preferred Stock, resulting in the requirement to file an additional Certificate of Designation for Series F-2 Convertible Preferred Stock with substantially the same terms as the Series F Convertible Preferred Stock. The Board designated 3,500 shares of preferred stock as Series F-2 Preferred Stock, 520 and 535 of which were issued and outstanding as of March 31, 2022 and December 31, 2021. During 2021, the Company entered into a Stock Purchase Agreement with certain accredited investors (“the Series F-2 Investors”). In total, for $678,000 the Company issued 678 shares of Series F-2 Preferred Stock. In addition, the Company exchanged outstanding debt of $2,559,000 for 2,559 shares of Series F-2 Preferred Stock. Each Series F-2 Preferred Stock is convertible into 4,000 shares of common stock. The Series F-2 Preferred Stock will have cumulative dividends at the rate per share of 6% per annum. The stated value on the Series F-2 Preferred Stock is $1,000.
Each share of Series F-2 Preferred is convertible, at any time for a period of 5 years after issuance, into that number of shares of Common Stock, determined by dividing the Stated Value by $0.25, subject to certain adjustments set forth in the Series F-2 Certificate of Designation (the “Series F-2 Conversion Price”). The conversion of Series F-2 Preferred is subject to a 4.99% beneficial ownership limitation, which may be increased to 9.99% at the election of the holders of the Series F-2 Preferred. If the average of the VWAPs (as defined in the Series F-2 Certificate of Designation) for any consecutive 5 trading day period (“Measurement Period”) exceeds 200% of the then Series F-2 Conversion Price and the average daily trading volume of the Common Stock on the primary trading market exceeds 1,000 shares per trading day during the Measurement Period (subject to adjustments), the Company may redeem the then outstanding Series F-2 Preferred, for cash in an amount equal to aggregate Stated Value then outstanding plus accrued but unpaid dividends.
During the three months ended March 31, 2023, the Company issued 60,000 shares of common stock for the conversion of 15 shares of Series F-2 Convertible Preferred Stock and 84,575 shares of common stock for the payment of annual Series F-2 Preferred Stock dividends. As of March 31, 2023 and December 31, 2022, the Company had accrued dividends for Series F-2 preferred shares of $9,179 and $24,267, respectively.
Warrants
The following table summarizes transactions involving the Company’s outstanding warrants to purchase common stock for the three months ended March 31, 2023:
| | Warrants (Underlying Shares) | | | Weighted-Average Exercise Price Per Share | |
| | | | |
Outstanding, December 31, 2022 | | | 35,586,980 | | | $ | 0.46 | |
Warrants issued | | | 1,873,750 | | | | 0.25 | |
Warrants exchanged | | | (1,025,000 | ) | | | 0.25 | |
Warrants expired | | | (7,410,000 | ) | | | 0.20 | |
Warrants exercised | | | (973,750 | ) | | $ | 0.20 | |
Outstanding, March 31, 2023 | | | 28,051,980 | | | $ | 0.54 | |
During the three months ended March 31, 2023, the Company entered into various agreements with holders of the Company’s $0.20 strike price warrants, pursuant to which each holder separately agreed to exchange 1,025,000 common stock warrants with a strike price of $0.25 for 973,750 common stock warrants with a strike price of $0.20. During the three months ended March 31, 2023, the Company received approximately $194,750 from the holders for the exercise of the 973,750 warrants, of which $9,500 was included in Accrued Liabilities as of March 31, 2023, pending issuance of 47,500 shares of common stock. The Company measured the effect of the exchange as the excess of fair value of the exchanged instruments over the fair value of the original instruments and recorded a deemed dividend of approximately $65,296.
During the three months ended March 31, 2023, the Company issued 900,000 warrants to Richard Blumberg, a related party, pursuant to a consulting agreement. See Note 7, “Commitments and Contingencies” for additional information.
Management estimated the fair value of the warrants issued utilizing the Black-Scholes Option Pricing model with the following assumptions:
| | March 31, | |
| | 2023 | |
Expected term (years) | | | 1.47 | |
Volatility | | | 140.4 | % |
Risk-free interest rate | | | 3.8 | % |
Dividend yield | | | 0.0 | % |
5. STOCK OPTIONS
The Company’s Stock Plan (the “Plan”) allows for the issuance of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price of options was determined by the Company’s board of directors, but incentive stock options were granted at an exercise price equal to the fair market value of the Company’s common stock as of the grant date. Options historically granted have generally become exercisable over four years and expire ten years from the date of grant. The plan provides for stock options to be granted up to 10% of the outstanding shares of common stock.
On February 10, 2023, the Company granted 925,000 stock options to employees, executives and directors of the Company. The stock options, which have exercise prices of $0.2629, will expire on February 9, 2033. One fourth of the stock options vested immediately, while the remaining options will vest over a period of 33 months, beginning on May 10, 2023.
On March 7, 2023, the Company granted 100,000 stock options, which have exercise prices of $0.27 and will expire on March 6, 2033, to Alan Grujic, upon appointing him to the Board of Directors. One fourth of the stock options vested immediately, while the remaining options will vest over a period of 33 months, beginning on June 7, 2023.
During the three months ended March 31, 2023 and 2022, the Company recognized stock-based compensation expense of $107,068 and $43,912, respectively. There was no stock option activity during the three months ended March 31, 2022. The following table summarizes the Company’s stock option activity and related information for the three months ended March 31, 2023 and 2022:
| | Number of Shares | | | Weighted-Average Exercise Price Per Share | | | Weighted-Average Remaining Contractual Life | | Aggregate Intrinsic Value of In-the-Money Options (in thousands) | |
| | | | | | |
Options outstanding as of December 31, 2022 | | | 1,500,000 | | | $ | 0.49 | | | 7.5 years | | $ | - | |
Options granted | | | 1,025,000 | | | $ | 0.26 | | | | | | | |
Options forfeited | | | (186,364 | ) | | $ | 0.31 | | | | | | | |
Options outstanding as of March 31, 2023 | | | 2,338,636 | | | $ | 0.41 | | | 6.9 years | | $ | - | |
Options exercisable as of March 31, 2023 | | | 1,656,205 | | | $ | 0.45 | | | 5.8 years | | $ | - | |
| | Number of Shares | | | Weighted-Average Exercise Price Per Share | | | Weighted-Average Remaining Contractual Life | | Aggregate Intrinsic Value of In-the-Money Options (in thousands) | |
| | | | | | |
Options outstanding as of March 31, 2022 | | | 1,500,000 | | | $ | 0.49 | | | 8.3 years | | $ | 240 | |
Options exercisable as of March 31, 2022 | | | 1,045,227 | | | $ | 0.49 | | | 8.3 years | | $ | 167 | |
The aggregate intrinsic value is calculated as the difference between the Company’s closing stock price as of March 31, 2023 and the exercise price, multiplied by the number of options. As of March 31, 2023, there was $193,947 of unrecognized stock-based compensation expense. Such costs are expected to be recognized over a weighted average period of approximately two years. The weighted-average fair value of awards granted was $0.26 and nil during the three months ended March 31, 2023 and 2022, respectively.
The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period. The Black-Scholes option pricing model and the following weighted-average assumptions were used to estimate the fair value of awards granted during the three months ended March 31, 2023:
| | March 31, | |
| | 2023 | |
Expected term (years) | | | 10.0 | |
Volatility | | | 366.4 | % |
Risk-free interest rate | | | 3.8 | % |
Dividend yield | | | 0.0 | % |
6. LITIGATION AND CLAIMS
From time to time, the Company may be involved in various legal proceedings and claims arising in the ordinary course of business. Management believes that the dispositions of these matters, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial condition. However, depending on the amount and timing of such disposition, an unfavorable resolution of some or all of these matters could materially affect the future results of operations or cash flows in a particular year.
As of March 31, 2023, and December 31, 2022, there was no accrual recorded for any potential losses related to pending litigation.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The below table presents total operating lease right-of-use assets and lease liabilities as of March 31, 2023 and December 31, 2022:
| | (in thousands) | |
| | March 31, 2023 | | | December 31, 2022 | |
Operating lease right-of-use assets | | $ | 285 | | | $ | 303 | |
Operating lease liabilities | | $ | 307 | | | $ | 325 | |
The table below presents the maturities of operating lease liabilities as of March 31, 2023:
| | (in thousands) | |
| | Operating | |
| | Leases | |
2023 (remaining) | | $ | 84 | |
2024 | | | 115 | |
2025 | | | 118 | |
2026 | | | 50 | |
Total future lease payments | | | 367 | |
Less: discount | | | (60 | ) |
Total lease liabilities | | $ | 307 | |
The table below presents the weighted-average remaining lease term and discount rate used in the calculation of operating lease right-of-use assets and lease liabilities as of March 31, 2023 and December 31, 2022:
| | (in thousands) | |
| | March 31, 2023 | | | December 31, 2022 | |
Weighted average remaining lease term (years) | | | 3.2 | | | | 3.4 | |
Weighted average discount rate | | | 11.4 | % | | | 11.4 | % |
Related Party Contracts
On June 5, 2016, the Company entered into a license agreement with Shenghuo Medical, LLC pursuant to which the Company granted Shenghuo an exclusive license to manufacture, sell and distribute LuViva in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Shenghuo was already the Company’s exclusive distributor in China, Macau and Hong Kong, and the license extended to manufacturing in those countries as well. Under the terms of the license agreement, once Shenghuo was capable of manufacturing LuViva in accordance with ISO 13485 for medical devices, Shenghuo would pay the Company a royalty equal to $2.00 or 20% of the distributor price (subject to a discount under certain circumstances), whichever is higher, per disposable distributed within Shenghuo’s exclusive territories. In connection with the license grant, Shenghuo was to underwrite the cost of securing approval of LuViva with Chinese Food and Drug Administration. At its option, Shenghuo also would provide up to $1.0 million in furtherance of the Company’s efforts to secure regulatory approval for LuViva from the U.S. Food and Drug Administration, in exchange for the right to receive payments equal to 2% of the Company’s future sales in the United States, up to an aggregate of $4.0 million. Pursuant to the license agreement, Shenghuo had the option to have a designee appointed to the Company’s board of directors (current director Richard Blumberg is the designee).
On 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).
On January 22, 2020, the Company entered into a promotional agreement with Blumberg & Bowles Consulting, LLC (“BB”), which is partially owned by Mr. Blumberg (a related party), to provide investor and public relations services for a period of two years. As compensation for these services, the Company agreed to issue a total of 5,000,000 warrants, broken into four tranches of 1,250,000. The warrants have a strike price of $0.25 and are subject to vesting based upon the close of the Series D offering and a minimum share price based on the 30-day VWAP. If the minimum share price per the terms of the agreement is not achieved, the warrants will expire three years after the issuance date. The fair value of the warrants was estimated utilizing the Black-Scholes option pricing model on the grant date of January 22, 2020. As a result of this agreement, the Company recognized nil and $79,444 of consulting expense during the three months ended March 31, 2023 and 2022, respectively. Unrecognized consulting expense to be recognized under this agreement was nil as of March 31, 2023.
On March 10, 2021, the Company entered into a consulting agreement with Richard Blumberg. As a result of the consulting agreement Mr. Blumberg provided $350,000, which was recorded to subscription receivable, to the Company in exchange for the following: (1) on September 26, 2021, 900,000 3-year warrants with an exercise price of $0.30 and 400,000 shares of common stock; (2) on March 26, 2022, 900,000 3-year warrants with an exercise price of $0.40 and 400,000 shares of common stock; (3) on September 26, 2022, 900,000 3-year warrants with an exercise price of $0.50 and 400,000 shares of common stock; and (4) on March 26, 2023, 900,000 3-year warrants with an exercise price of $0.60 and 400,000 shares of common stock. The Company estimated the fair value of the warrants using the Black-Scholes option pricing model and the following assumptions:
Expected term | | 3.0 Years | |
Volatility | | | 108.7 | % |
Risk-free interest rate | | | 4.3 | % |
Dividend yield | | | 0.0 | % |
During the three months ended March 31, 2023 and 2022, the Company recognized $295,420 and nil expense for the warrants issued to Mr. Blumberg, respectively. Total unrecognized expense for the warrants was $445,097 as of March 31, 2022. During the three months ended March 31, 2023 and 2022, the Company recognized $65,611 and nil expense for the shares of common stock due to Mr. Blumberg. As the remaining shares had not been issued as of March 31, 2023, the Company estimated the total amount of expense using the closing price of the Company’s stock as of March 31, 2023.
During the year ended December 31, 2021, the consulting agreement was amended to clarify that $350,000 is not intended to be debt and will not be required to be repaid in cash. The Company confirmed an obligation to provide Mr. Blumberg with 950,000 fully transferrable warrants, which will expire on January 1, 2024 and have an exercise price of $0.25. Issuance of the warrants owed to Mr. Blumberg for his services was predicated on the Company receiving funding receipts of $1,000,000, whether from a financing, series of financing, or gross sales. The amended agreement clarified that the warrants issued to Mr. Blumberg are compensation for services which involve investor relations, marketing services and assisting the Company with obtaining financing. During the year ended December 31, 2022, the Company obtained the requisite funding receipts and estimated the fair value of the warrants using the Black-Scholes option pricing model with the following assumptions:
Expected term | | 1.3 Years | |
Volatility | | | 164.6 | % |
Risk-free interest rate | | | 4.1 | % |
Dividend yield | | | 0.0 | % |
During the three months ended March 31, 2023 and 2022, expense recorded for the warrants was nil. Unrecognized expense to be recognized for the warrants was nil as of March 31, 2023.
On August 24, 2022, the Company entered into an agreement with Ironstone Capital Corp. and Alan Grujic (the “Advisory Group”) whereby the Advisory Group agreed to perform marketing and investor relations services over a term of twelve months, commencing on the closing of a financing of at least $2.5 million. In consideration for these services, the Company issued 800,000 warrants with an exercise price of $0.50 to Mr. Grujic, which were due within 10 business days of closing the financing transaction (the “Transaction”) that took place in September 2022. In the event the Company’s 20 trading day variable weighted average price (“VWAP”) exceeds $1.00 within one year of the closing of the financing, the Company will issue 600,000 warrants with an exercise price of $0.75 to Mr. Grujic. In the event the Company’s 20 trading day VWAP exceeds $1.50, the Company will issue an additional 600,000 warrants to Mr. Grujic. Once issued, the warrants vest immediately and will expire two years from the date of issuance. If the Company’s U.S. clinical study is not completed and filed with the U.S. FDA or if the Chinese NMPA (formerly Chinese FDA) approval is not granted by each due date for reaching each respective pricing milestone, then the due date for reaching each milestone shall be extended by six months. Pursuant to the agreement, the Company also agreed to pay the Advisory Group $2,000 per month for 12 months, starting the month after the closing of the Transaction.
The Company estimated the fair value of the 800,000 warrants issued in September of 2022 using the Black-Scholes option pricing model. Unrecognized expense for the warrants was nil as of March 31, 2023. Expense recorded for the warrants was nil during the three months ended March 31, 2023 and 2022.
The Company estimated the fair value of the warrants with market conditions using the Binomial Lattice model and recognized expense of $45,172 for the warrants (representing the pro rata expense over the expected term of the warrants) during the three months ended March 31, 2023.
Other Commitments
On July 24, 2019, the Company agreed to grant Shandong Yaohua Medical Instrument Corporation (“SMI”) (1) exclusive manufacturing rights, excepting the disposable cervical guides for the Republic of Turkey, and the final assembly rights for Hungary, and (2) exclusive distribution and sales for LuViva in jurisdictions, subject to the terms and conditions described below.
First, SMI shall complete the payment for parts, per the purchase order, for five additional LuViva devices. Second, in consideration for the $885,144 that the Company received, SMI will receive 12,147 shares of common stock. Third, SMI shall honor all existing purchase orders it has executed to date with the Company, in order to maintain jurisdiction sales and distribution rights. If SMI needs to purchase cervical guides, then it will do so at a cost including labor, plus ten percent markup. The Company will provide 200 cervical guides at no cost for the clinical trials. Fourth, the Company and SMI will make best efforts to sell devices after CFDA approval. With an initial estimate of year one sales of 200 LuViva devices; year two sales of 500 LuViva devices; year three sales of 1,000 LuViva devices; and year four sales of 1,250 LuViva devices. Fifth, SMI shall pay for entire costs of securing approval of LuViva with the Chinese FDA. Sixth, SMI shall arrange, at its sole cost, for a manufacturer in China to build tooling to support manufacturing. In addition, SMI retains the right to manufacture for China, Hong Kong, Macau and Taiwan, where SMI has distribution and sales rights. For each single-use cervical guide sold by SMI in the jurisdictions, SMI shall transfer funds to escrow agent at a rate of $1.90 per device chip. If within 18 months of the license’s effective date, SMI fails to achieve commercialization of LuViva in China, SMI shall no longer have any rights to manufacture, distribute or sell LuViva. Commercialization is defined as: filing an application with the Chinese FDA for the approval of LuViva; any assembly or manufacture of the devices or disposables that begins in China; and purchase of at least 10 devices and disposables for clinical evaluations and regulatory use and or sales in the jurisdictions.
On August 12, 2021, the Company executed an amendment to its agreement with SMI. Under the terms of the amended agreement, the parties agreed that if by October 30, 2022, SMI fails to achieve commercialization of LuViva in China, SMI shall no longer have any rights to manufacture, distribute or sell LuViva. On March 3, 2023, the Company entered into a third amendment with SMI pursuant to which the Company extended the deadline for SMI to achieve commercialization of LuViva in China to April 30, 2024.
Contingencies
The current outbreak of the Coronavirus SARS-CoV-2, the pathogen responsible for COVID-19, which has already had an impact on financial markets, could result in additional repercussions to the Company’s operating business, including but not limited to, the sourcing of materials for product candidates, manufacture of supplies for preclinical and/or clinical studies, delays in clinical operations, which may include the availability or the continued availability of patients for trials due to such things as quarantines, conduct of patient monitoring and clinical trial data retrieval at investigational study sites.
The future impact of the outbreak is highly uncertain and cannot be predicted, and the Company cannot provide any assurance that the outbreak will not have a material adverse impact on the Company’s operations or future results or filings with regulatory health authorities. The extent of the impact to the Company, if any, will depend on future developments, including actions taken to contain the coronavirus.
The Russia-Ukraine conflict and the sanctions imposed in response to this crisis could result in repercussions to our operating business, including delays in obtaining regulatory approval to market our products in Russia. The future impact of the conflict is highly uncertain and cannot be predicted, and we cannot provide any assurance that the conflict will not have a material adverse impact on our operations or future results or filings with regulatory health authorities.
8. NOTES PAYABLE
Short Term Notes Payable
On July 4, 2022, the Company entered into a premium finance agreement to finance its insurance policies totaling $123,889. Monthly payments of $11,409 are due on the note, including interest incurred at a rate of 5.0%. The note, which matures on May 4, 2023, had an outstanding balance of $22,770 and $56,569 as of March 31, 2023 and December 31, 2022, respectively.
During 2019, the Company issued promissory notes to Mr. Cartwright totaling $45,829. The notes were initially issued with 0% interest, however interest increased to 6.0% interest 90 days after the Company received $1,000,000 in financing proceeds. As of March 31, 2023, the notes had been repaid in full.
The following table summarizes short-term notes payable, including related parties:
| | Short-term notes payable, including related parties | |
| | March 31, 2023 | | | December 31, 2022 | |
Dr. Cartwright | | $ | - | | | $ | 1 | |
Premium Finance (insurance) | | | 23 | | | | 57 | |
Short-term notes payable | | $ | 23 | | | $ | 58 | |
As of March 31, 2023 and December 31, 2022, the short-term notes payable due to related parties was nil and $619, respectively.
9. AUCTUS CONVERTIBLE DEBT
On December 17, 2019, the Company entered into a securities purchase agreement and convertible note with Auctus. The convertible note issued to Auctus was for a total of $2.4 million. The note may not have been prepaid in whole or in part except as otherwise explicitly allowed. Any amount of principal or interest on the note which was not paid when due shall bore interest at the rate of the lessor of 24% or the maximum permitted by law (the “default interest”). The variable conversion prices equaled the lesser of: (i) the lowest trading price on the issue date, and (ii) the variable conversion price. The variable conversion price was 95% multiplied by the market price (the market price means the average of the five lowest trading prices during the period beginning on the issue date and ending on the maturity date), minus $0.04 per share, provided however that in no event could the variable conversion price be less than $0.15. If an event of default under this note occurred and/or the note was not extinguished in its entirety prior to December 17, 2020, the $0.15 price floor no longer applied.
On September 1, 2022, the Company agreed to exchange certain debt and equity owned by Auctus pursuant to an Exchange Agreement between the Company and Auctus (the “Exchange Agreement”). Immediately prior to the Exchange Agreement, Auctus held $1,228,183 of debt, including an early prepayment penalty of $350,000, default premiums of $281,256, and $91,555 in interest payable. Auctus agreed to reduce the amount owed to $710,911 and to revert the May 27, 2020 note to its original term. Additionally, Auctus agreed to exchange 8,775,000 warrants that were priced between $0.15 and $0.20 and the $350,000 prepayment penalty for 3,900,000 shares of common stock, warrants to purchase 3,900,000 shares of common stock at $0.50 per share and warrants to purchase 3,900,000 shares of common stock at $0.65 per share (the “Exchange”). As a result of the Exchange Agreement, Auctus forgave a default penalty of $225,444. Following the Exchange and Repayment, the Company will make payments to Auctus in four installments, over an 18-month period.
The total balance of Auctus convertible debt outstanding was $224,528 and $326,016 as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023, the balance is included within “Short-term convertible notes payable” on the unaudited consolidated balance sheet. As of December 31, 2022, $230,482 is included within “Short-term convertible notes payable” and $95,534 is included within “Long-term convertible debt” on the consolidated balance sheet.
10. LONG-TERM DEBT
Long-term Debt – Related Parties
On July 14, 2018, the Company entered into an exchange agreement with Dr. Faupel, whereby Dr. Faupel agreed to exchange outstanding amounts due to him for loans, interest, bonus, salary and vacation pay in the amount of $660,895 for a $207,111 promissory note dated September 4, 2018. On July 20, 2018, the Company entered into an exchange agreement with Dr. Cartwright, whereby Dr. Cartwright agreed to exchange outstanding amounts due to him for loans, interest, bonus, salary and vacation pay in the amount of $1,621,499 for a $319,000 promissory note dated September 4, 2018 that incurs interest at a rate of 6% per annum.
On July 24, 2019, Dr. Faupel and Mr. Cartwright agreed to an addendum to the debt restructuring exchange agreement. Pursuant to this modification Dr. Faupel and Mr. Cartwright agreed to extend the note to be due in full on the third anniversary of that agreement.
On February 19, 2021, the Company entered into new promissory notes replacing the original notes from September 4, 2018, with Mark Faupel and Gene Cartwright. For Dr. Cartwright the principal amount on the new note was $267,085, matures on February 18, 2023, and will accrue interest at a rate of 6.0%. For Dr. Faupel the principal amount on the new note was $153,178, matures on February 18, 2023, and will accrue interest at a rate of 6.0%. The modifications extended the maturity date on both of the notes.
On February 19, 2021, the Company exchanged $100,000 and $85,000 of long-term debt for Dr. Cartwright and Dr. Faupel in exchange for 100 and 85 shares of Series F-2 Preferred Stock, respectively.
On February 18, 2023, the Company amended the terms of the promissory notes held by Mark Faupel and Gene Cartwright. Under the terms of the new agreements, the promissory notes will mature on February 18, 2025.
The tables below summarize the outstanding balance of long-term debt owed to Dr. Faupel and Dr. Cartwright:
For Dr. Faupel: | | | |
| | | |
Salary | | $ | 134 | |
Bonus | | | 20 | |
Vacation | | | 95 | |
Interest on compensation | | | 67 | |
Loans to Company | | | 196 | |
Interest on loans | | | 149 | |
Total outstanding prior to exchange | | | 661 | |
| | | | |
Amount forgiven in prior years | | | (454 | ) |
Amount exchanged for Series F-2 Preferred Stock | | | (85 | ) |
Total interest accrued through December 31, 2022 | | | 48 | |
Balance outstanding at December 31, 2022 | | $ | 170 | |
| | | | |
Interest accrued through March 31, 2023 | | | 2 | |
Balance outstanding at March 31, 2023 | | $ | 172 | |
For Dr.Cartwright | | | |
| | | |
Salary | | $ | 337 | |
Bonus | | | 675 | |
Loans to Company | | | 528 | |
Interest on loans | | | 81 | |
Total outstanding prior to exchange | | | 1,621 | |
| | | | |
Amount forgiven in prior years | | | (1,302 | ) |
Amount exchanged for Series F-2 Preferred Stock | | | (100 | ) |
Total interest accrued through December 31, 2022 | | | 78 | |
Balance outstanding at December 31, 2022 | | $ | 297 | |
| | | | |
Payments on outstanding debt | | | (10 | ) |
Interest accrued through March 31, 2023 | | | 4 | |
Balance outstanding at March 31, 2023 | | $ | 291 | |
On March 22, 2021, the Company entered into an exchange agreement with Richard Fowler. As of December 31, 2020, the Company owed Mr. Fowler $546,214 ($412,624 in deferred salary and $133,590 in accrued interest). The Company exchanged $50,000 of the amount owed of $546,214 for 50 share of Series F-2 Preferred Shares (convertible into 200,000 shares of common stock), and a $150,000 unsecured note. The note accrues interest at the rate of 6% (18% in the event of default) beginning on March 22, 2022 and is payable in monthly installments of $3,580 for four years, with the first payment due on March 15, 2022. The effective interest rate of the note is 6.18%.
During the three months ended March 31, 2023, Mr. Fowler forgave $17,721 of the outstanding balance of deferred compensation and, as of March 31, 2023, may forgive up to $180,889 of the remaining deferred compensation if the Company complies with the repayment plan described above. The reductions in the outstanding balance met the criteria for troubled debt because the future undiscounted cash flows under the new terms are less than the carrying value of the original debt. The basic criteria are that the borrower is troubled, i.e., they are having financial difficulties, and a concession is granted by the creditor. As of March 31, 2023, the outstanding principal amount owed on the note was $110,811, of which $37,382 is included in “Current portion of long-term debt, related parties” and the remainder is included in “Long-term debt, related parties” within the unaudited consolidated balance sheets. As of December 31, 2022, the outstanding principal amount owed on the note was $119,814, of which $36,830 is included in “Current portion of long-term debt, related parties” and the remainder is included in “Long-term debt, related parties” within the unaudited consolidated balance sheets.
Future debt obligations at March 31, 2023 for debt owed to related parties is as follows:
Year | | Amount | |
2023 (remaining) | | | 28 | |
2024 | | | 39 | |
2025 | | | 504 | |
2026 | | | 3 | |
Total | | $ | 574 | |
10% Senior Unsecured Convertible Debenture
On May 17, 2021, the Company issued 10% Senior Unsecured convertible debentures to investors, which mature on May 17, 2024 (the “Maturity Date”). The Company subscribed $1,130,000 of the $1,000 convertible debentures. The terms of the debentures are as follows: 1) the principal amount of some or all of the convertible debentures and accrued interest are convertible into shares of common stock at the holder’s option, at a price of $0.50 per common stock share (the “conversion price”), subject to adjustment in certain events, at any time prior to maturity date; 2) upon successful uplist to a U.S. National Exchange, the note will automatically convert into the uplisting financing; 3) each debenture unit will have a right to 1,000 warrants for shares of common stock, warrants have an exercise price of $0.80 and an expiration date of May 17, 2023; 4) if a Change of Control (as defined in the Convertible Debenture Certificate) occurs prior to the Maturity Date, unless the holder elects in writing to convert the Convertible Debentures into shares of common stock, the Company will repay in cash upon the closing of such Change of Control all outstanding principal and accrued interest under each Convertible Debenture plus a Change of Control premium equal to an additional 3% of the outstanding principal sum under such Convertible Debenture. Prior to the closing of an Change of Control, in lieu of repayment as set forth in the preceding sentence, the holder has the right to elect in writing to convert, effective immediately prior to the effective date of such Change of Control, all outstanding principal and accrued Interest under the Convertible Debentures into shares of common stock at the Conversion Price; 5) Subject to a holder’s option of electing conversion prior to the Redemption Date (as such term is defined below), on or after the date that is 24 months from the Closing Date if the daily volume weighted average trading price of the shares of common stock is $1.50 per share of common stock or more for each trading day over a 30 consecutive trading day period, the Company may, at any time (the “Redemption Date”), at its option, redeem all, or any portion of the Convertible Debentures for either: (i) a cash payment (in the form of a certified cheque or bank draft) that is equal to all outstanding principal and accrued interest under each Convertible Debenture up to the Redemption Date; or (ii) by issuing and delivering shares of common stock to the holders of Convertible Debentures at a deemed price of $0.50 per share of common stock that is equal to all outstanding principal and accrued interest under each Convertible Debenture up to the Redemption Date, or any combination of (i) or (ii), upon not less than 30 days and not more than 60 days prior written notice in the manner provided in the Debenture Certificate, to the holder of Convertible Debentures.
At March 31, 2023 and December 31, 2022, the balance due on the 10% Senior Secured Convertible Debenture was $1,130,000 and total accrued interest was $29,712 and $58,494, respectively. The bond payable discount and unamortized debt issuance costs as of March 31, 2023 and December 31, 2022 are presented below (in thousands):
| | March 31, 2023 | | | December 31, 2022 | |
10% Senior Unsecured Convertible Debentures | | $ | 1,130 | | | $ | 1,130 | |
Debt Issuance costs to be amortized | | | (33 | ) | | | (40 | ) |
Debt Discount | | | (115 | ) | | | (140 | ) |
Senior Secured Convertible Debenture | | $ | 982 | | | $ | 950 | |
As of March 31, 2023 and December 31, 2022, the entire balance of the Senior Secured Convertible Debenture is included in “Long-term convertible debt” within the consolidated balance sheets.
6% Unsecured Promissory Note
On July 9, 2020, we entered into an exchange agreement with Mr. Bill Wells, a former employee. In lieu of agreeing to dismiss approximately half of what was owed to him, or $220,000, Mr. Wells received the following: (i) cash payment totaling $20,000; (ii) an unsecured promissory note in the amount of $90,000, to be executed within 30 days of completing new financing(s) totaling at least $3.0 million and (iii) 66,000 common stock options that vest at a rate of 3,667 per month and have a $0.49 exercise price (if two consecutive payments in (ii) are not made the stock options will be canceled and a cash payment will be required). Pursuant to the agreement, Mr. Wells agreed that the total amount forgiven of $110,000 shall be prorated according to the amount paid to him.
During the year ended December 31, 2021, the Company closed a financing round that exceeded the $3.0 million threshold and issued an unsecured promissory note in the amount of $97,052 to Mr. Wells. The note, for which monthly installment payments of $5,000 are due, matures 18 months after the issuance date and incurs interest at a rate of 6.0% per annum. During the three months ended March 31, 2023 and 2022, the Company made principal payments of $17,052 and $35,000 to Mr. Wells, respectively. As a result of these payments, Mr. Wells forgave equivalent amounts of the remaining amount of compensation. The reductions in the outstanding balance met the criteria for troubled debt because the future undiscounted cash flows under the new terms are less than the carrying value of the original debt. The basic criteria are that the borrower is troubled, i.e., they are having financial difficulties, and a concession is granted by the creditor.
As of March 31, 2023 and December 31, 2022, the outstanding principal balance on the note was nil and $17,052, respectively. As of December 31, 2022, the balance is included in “Current portion of long-term debt” within the consolidated balance sheet. As of March 31, 2023 and December 31, 2022, accrued interest on the note was nil and $5,139, respectively.
11. INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic net income (loss) per share attributable to common stockholders, amounts are computed by dividing the net income (loss) plus preferred stock dividends and deemed dividends on preferred stock by the weighted average number of shares outstanding during the year.
Diluted net income (loss) per share attributable to common stockholders amounts are computed by dividing the net income (loss) plus preferred stock dividends, deemed dividends on preferred stock, after-tax interest on convertible debt and convertible dividends by the weighted average number of shares outstanding during the year, plus Series C, Series D, Series E, Series F and Series F-2 convertible preferred stock, convertible debt, convertible preferred dividends and warrants convertible into shares of common stock.
The following table sets forth pertinent data relating to the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except for per-share data):
| | March 31, | |
| | 2023 | | | 2022 | |
| | | | | | |
Net loss | | | (969 | ) | | | (1,055 | ) |
Basic weighted average number of shares outstanding | | | 49,297 | | | | 20,683 | |
Net loss per share (basic) | | | (0.02 | ) | | | (0.05 | ) |
Diluted weighted average number of shares outstanding | | | 49,297 | | | | 20,683 | |
Net loss per share (diluted) | | | (0.02 | ) | | | (0.05 | ) |
| | | | | | | | |
Dilutive equity instruments (number of equivalent units): | | | | | | | | |
Stock options | | | 2,092 | | | | 917 | |
Preferred stock | | | 1,373 | | | | 15,572 | |
Convertible debt | | | 203 | | | | 2,018 | |
Warrants | | | - | | | | 13,609 | |
Total Dilutive instruments | | | 3,668 | | | | 32,116 | |
For periods of net loss, basic and diluted earnings per share are the same as the assumed exercise of warrants and the conversion of convertible debt are anti-dilutive.
12. SUBSEQUENT EVENTS
On April 3, 2023, the Company issued 5,888 common shares for Preferred Series F-2 dividends.
On April 10, 2023, the Company issued 29,821 common shares for Preferred Series F-2 dividends.
On April 14, 2023, the Company issued 47,500 common shares for warrant exercises.
On April 18, 2023, the Company issued 32,693 common shares for Series D dividends.
On April 26, 2023, the Company issued 40,000 common shares for the conversion of 10 Series F Preferred shares and 206 common shares for accrued Series F Preferred dividends.
On April 27, 2023, the Company issued 40,000 common shares for the conversion of 10 Series F Preferred shares and 213 common shares for accrued Series F Preferred dividends.