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.
Basis of Presentation
All information and footnote disclosures included
in the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States.
A 1:800 reverse stock
split of all of the Company’s issued and outstanding common stock was implemented on March 29, 2019. As a result of the reverse
stock split, every 800 shares of issued and outstanding common stock were converted into 1 share of common stock. All fractional
shares created by the reverse stock split were rounded to the nearest whole share. The number of authorized shares of common stock
did not change. The reverse stock split decreased the Company’s issued and outstanding shares of common stock from 2,652,309,322
shares to 3,319,486 shares as of that date with rounding. See Note 4, Stockholders’ Deficit. Unless otherwise specified,
all per share amounts are reported on a post-stock split basis, as of March 31, 2019.
The Company’s prospects must be considered
in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry
is characterized by an increasing number of participants, intense competition and a high failure rate. The Company has experienced
net losses since its inception and, as of March 31, 2019, it had an accumulated deficit of approximately $137.9 million. To date,
the Company has engaged primarily in research and development efforts and the early stages of marketing its products. The Company
may not be successful in growing sales for its products. Moreover, required regulatory clearances or approvals may not be obtained
in a timely manner, or at all. The Company’s products may not ever gain market acceptance and the Company may not ever generate
significant revenues or achieve profitability. The development and commercialization of the Company’s products requires substantial
development, regulatory, sales and marketing, manufacturing and other expenditures. The Company expects operating losses to continue
for the foreseeable future as it continues to expend substantial resources to complete development of its products, obtain regulatory
clearances or approvals, build its marketing, sales, manufacturing and finance capabilities, and conduct further research and development.
Certain prior year amounts have been reclassified
in order to conform to the current year presentation.
Going Concern
The Company’s consolidated financial
statements have been prepared and presented on a basis assuming it will continue as a going concern. The factors below raise substantial
doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments
that might be necessary from the outcome of this uncertainty.
At March 31, 2019, the Company had a negative
working capital of approximately $11.5 million, accumulated deficit of $137.9 million, and incurred a net loss of $0.2 million
for the three months then ended. Stockholders’ deficit totaled approximately $16.0 million at March 31, 2019, primarily due
to recurring net losses from operations, deemed dividends on warrants and preferred stock, offset by proceeds from the exercise
of options and warrants and proceeds from sales of stock.
The Company’s capital-raising efforts
are ongoing and the Company has taken the following steps to increase the likelihood of a successful financing: 1) Debt has been
significantly reduced and additional agreements are in place, contingent on a successful financing, to reduce debt even further
either by forgiveness of debt and/or exchanges of debt for equity 2) Monthly operating expenses have been reduced by nearly 50%
since the beginning of 2017 and 3) Variable rate loans for the most part have either been paid off or converted to equity. If sufficient
capital cannot be raised during 2019, 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
37.7 million shares of its common stock outstanding at March 31, 2019 with exercise prices ranging between $0.04 and $32.0 million
per share. The Company estimates that only a portion of these warrants would be exercisable given the high exercise prices and
would generate a total of approximately $1.5 million in cash, assuming full exercise, although the Company cannot be assured that
holders will exercise any warrants. Management may obtain additional funds through the public or private sale of debt or equity,
and grants, if available. However, please refer to Footnote 10 - CONVERTIBLE DEBT IN DEFAULT in the paragraph: Debt Restructuring
for more information regarding our warrants.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting
policies were set forth in the audited financial statements and notes thereto for the year ended December 31, 2018 included in
its annual report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”).
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant areas where estimates are used include the allowance for doubtful accounts, inventory valuation
and input variables for Black-Scholes, Monte Carlo simulations and binomial calculations. The Company uses the Monte Carlo simulations
and binomial calculations in the calculation of the fair value of the warrant liabilities and the valuation of embedded conversion
options and freestanding warrants.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of Guided Therapeutics, Inc. and its wholly owned subsidiary. All intercompany transactions are eliminated.
Accounting Standard Updates
Implemented
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)” that requires lessees to recognize on the balance sheet the assets and liabilities associated
with the rights and obligations created by those leases. Under the new guidance, a lessee 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.
The
a
doption did not have a material effect on the Company’s consolidated financial statements.
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 customer contracts, including significant judgments and changes in judgments and assets
recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Deferral of
the Effective Date”, which amends ASU 2014-09. As a result, the effective date will be the first quarter of fiscal year 2018
with early adoption permitted in the first quarter of fiscal year 2017. Subsequently, the FASB has issued the following standards
related to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with 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 has evaluated the adoption of this guidance and has taken a modified retrospective approach to
the presentation of revenue from contracts with distributors. The Company adopted this standard on January 1, 2018, using the modified
retrospective method, with no impact on its 2018 financial statements. The cumulative effect of initially applying the new guidance
had no impact on its financial statements in future periods.
In February
2018, the FASB issued ASU
2018-02,
Income Statement – Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
.
The amendment of ASU
2018-02
states an entity may elect to reclassify the
income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Cuts and Jobs Act”) on items within accumulated other
comprehensive income to retained earnings. The amendments in this update are effective for annual periods, and interim periods
within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The a
doption did not have
a material effect on the Company’s consolidated financial statements.
Not Implemented
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 January 2017, the FASB issued ASU 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”).
ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects
from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment. The effective
date will be the first quarter of fiscal year 2020, with early adoption permitted in 2017. Adoption is not expected to have a material
effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair
Value Measurement (Topic 820)
. The new standard modifies the disclosure requirements on fair value measurements in Topic 820,
Fair Value Measurement, including removals of, modification to, and additional disclosure requirements from Topic 820. The amendment
of ASU 2018-13 removes disclosure requirements from Topic 820 in the areas of (1) the amount of and reasons for
transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between
levels, and (3) the valuation processes for Level 3 fair value measurements. The amendments in this update are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Except for certain amendments
related to Level 3 fair value measurements, all the other amendments should be applied retrospectively to all periods presented
upon their effective date. Early adoption is permitted upon issuance of the ASU 2018-13. The Company believes that the
adoption of this new standard will have no material impact on its consolidated financial position or results of operations and
has not elected to early adopt the amendment.
In August 2018, the FASB issued ASU 2018-15,
Intangibles
– Goodwill and Other – Internal-Use Software (Subtopic 350-40), Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract
(or ASU 2018-15). ASU 2018-15
requires a customer that is a party to a cloud computing service contract to follow the internal-use software guidance
in Subtopic 350-40 to determine which implementation costs to capitalize and which costs to expense. The amendments in
this update are effective for annual reporting periods beginning after December 15, 2019, and interim periods within those
fiscal years. Early adoption of the amendments in this update is permitted. The amendments in this update should
be
applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
The Company
believes that the adoption of this new standard will have no material impact on its consolidated financial position or results
of operations and has not elected to early adopt the amendment.
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.
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, 2019 and December 31, 2018,
our inventories were as follows (in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Raw materials
|
|
$
|
781
|
|
|
$
|
783
|
|
Work in process
|
|
|
81
|
|
|
|
81
|
|
Finished goods
|
|
|
17
|
|
|
|
17
|
|
Inventory reserve
|
|
|
(767
|
)
|
|
|
(767
|
)
|
Total
|
|
$
|
112
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
The Company
maintains reserves for excess and obsolete inventories to reflect inventory at
stated at lower of cost or net realizable
value
. The Company’s estimate for excess and obsolete inventory is based upon the assumptions
about future demand and market conditions. The establishment of a reserve for excess and obsolete inventory establishes a new cost
basis in the inventory. Such reserves are not reduced until the product is sold. If the Company was able to sell such inventory
any related reserves would be reversed in the period of sale.
Property and Equipment
Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements
are amortized at the shorter of the useful life of the asset or the remaining lease term. Depreciation and amortization expense
are included in general and administrative expense on the statement of operations. Expenditures for repairs and maintenance are
expensed as incurred. Property and equipment are summarized as follows at March 31, 2019 and December 31, 2018 (in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Equipment
|
|
$
|
1,363
|
|
|
$
|
1,378
|
|
Software
|
|
|
740
|
|
|
|
740
|
|
Furniture and fixtures
|
|
|
124
|
|
|
|
124
|
|
Leasehold Improvement
|
|
|
199
|
|
|
|
199
|
|
|
|
|
2,426
|
|
|
|
2,441
|
|
Less accumulated depreciation and amortization
|
|
|
(2,410
|
)
|
|
|
(2,420
|
)
|
Total
|
|
$
|
16
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
Debt issuance costs are capitalized and amortized
over the term of the associated debt. Debt issuance costs are presented in the balance sheet as a direct deduction from the carrying
amount of the debt liability consistent with the debt discount.
Other Assets
Other assets primarily consist of a deposit
for the corporate office.
Patent Costs (Principally Legal Fees)
Costs incurred in filing, prosecuting, and
maintaining patents are recurring, and expensed as incurred. Maintaining patents are expensed as incurred as the Company has not
yet received U.S. FDA approval and recovery of these costs is uncertain. Such costs aggregated approximately $7,000 and $6,000
for the three months ended March 31, 2019 and 2018, respectively.
Leases
With the implementation of ASU 2016-02, “Leases
(Topic 842)”, the Company recorded a lease asset-right and a lease liability. The implementation required the analysis of
certain criteria in determining its treatment. The Company determined that its corporate office lease met those criteria. The Company
implemented the guidance using the alternative transition method. Under this alternative, the effective date would be the date
of initial application. The Company analyzed the lease at its effective date and calculated an initial lease payment amount of
$267,380 with a present value of $213,000 using a 20% discount. As of March 31, 2019, the balance of the lease asset – right
and lease liability was $202,000.
The cumulative effect of initially applying
the new guidance had an immaterial impact on the opening balance of retained earnings, The Company does not expect the guidance
to have a material impact on its consolidated net earnings in future periods. The Company elected the Practical expedients permitted
under the transition guidance within the new standards, which allowed the Company to carry forward the historical lease classification.
Accrued Liabilities
Accrued liabilities are summarized as follows (in thousands):
|
|
March 31,
2019
|
|
December 31,
2018
|
Compensation
|
|
$
|
1,018
|
|
|
$
|
1,030
|
|
Professional fees
|
|
|
241
|
|
|
|
203
|
|
Interest
|
|
|
1,101
|
|
|
|
892
|
|
Warranty
|
|
|
2
|
|
|
|
2
|
|
Vacation
|
|
|
54
|
|
|
|
53
|
|
Preferred dividends
|
|
|
129
|
|
|
|
120
|
|
Stock subscription for licenses
|
|
|
692
|
|
|
|
692
|
|
Other accrued expenses
|
|
|
160
|
|
|
|
204
|
|
Total
|
|
$
|
3,397
|
|
|
$
|
3,156
|
|
Revenue Recognition
The Company follows, ASC 606 Revenue from Contracts
with Customers establishes a single and comprehensive framework which sets out how much revenue is to be recognized, and when.
The core principle is that a vendor should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services.
Revenue will now be recognized by a vendor when control over the goods or services is transferred to the customer. In contrast,
Revenue based revenue recognition around an analysis of the transfer of risks and rewards; this now forms one of a number of criteria
that are assessed in determining whether control has been transferred. The application of the core principle in ASC 606 is carried
out in five steps: Step 1 – Identify the contract with a customer: a contract is defined as an agreement (including oral
and implied), between two or more parties, that creates enforceable rights and obligations and sets out the criteria for each of
those rights and obligations. The contract needs to have commercial substance and it is probable that the entity will collect the
consideration to which it will be entitled. Step 2 – Identify the performance obligations in the contract: a performance
obligation in a contract is a promise (including implicit) to transfer a good or service to the customer. Each performance obligation
should be capable of being distinct and is separately identifiable in the contract. Step 3 – Determine the transaction price:
transaction price is the amount of consideration that the entity can be entitled to, in exchange for transferring the promised
goods and services to a customer, excluding amounts collected on behalf of third parties. Step 4 – Allocate the transaction
price to the performance obligations in the contract: for a contract that has more than one performance obligation, the entity
will allocate the transaction price to each performance obligation separately, in exchange for satisfying each performance obligation.
The acceptable methods of allocating the transaction price include adjusted market assessment approach, expected cost plus a margin
approach, and, the residual approach in limited circumstances. Discounts given should be allocated proportionately to all performance
obligations unless certain criteria are met and reallocation of changes in standalone selling prices after inception is not permitted.
Step 5 – Recognize revenue as and when the entity satisfies a performance obligation: the entity should recognize revenue
at a point in time, except if it meets any of the three criteria, which will require recognition of revenue over time: the entity’s
performance creates or enhances an asset controlled by the customer, the customer simultaneously receives and consumes the benefit
of the entity’s performance as the entity performs, and the entity does not create an asset that has an alternative use to
the entity and the entity has the right to be paid for performance to date.
Revenue by product line (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Devices
|
|
$
|
—
|
|
|
$
|
—
|
|
Disposables
|
|
|
2
|
|
|
|
—
|
|
Other
|
|
|
15
|
|
|
|
4
|
|
Warranty
|
|
|
1
|
|
|
|
—
|
|
Total
|
|
$
|
18
|
|
|
$
|
4
|
|
Revenue by geographic location (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Asia
|
|
$
|
3
|
|
|
$
|
—
|
|
Africa
|
|
|
—
|
|
|
|
—
|
|
Europe
|
|
|
15
|
|
|
|
4
|
|
North America
|
|
|
—
|
|
|
|
—
|
|
South America
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
18
|
|
|
$
|
4
|
|
Significant Distributors
During the three months ended March 31, 2019,
all the Company’s revenues were from two distributors and for extended warranties. Revenue from these distributors totaled
$18,000 for the period ended March 31, 2019. Accounts receivable were from one distributor and represents 100% of the balance for
the period ended March 31, 2019. During the three months ended March 31, 2018, revenues were from two distributors, that totaled
approximately $4,000.
Deferred revenue
The Company defers payments received as revenue
until earned based on the related contracts and applying ASC 606 as required. As of March 31, 2019, and December 31, 2018, the
Company did not have deferred revenue, respectively.
Customer deposits
The Company follows the same principal as explained
in Revenue Recognition and ASC 606. As of March 31, 2019, and December 31, 2018, the Company has received prepayments for devices
and disposables and recorded this as customer deposits in the amount of $100,000 and $66,000, 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 into an agreed upon payment plan with the IRS for delinquent payroll taxes. The Company
is currently in process of setting up a payment arrangement for its delinquent state income taxes with the State of Georgia and
the returns are currently under review by state authorities. Although the Company has been experiencing recurring losses, it is
obligated to file tax returns for compliance with IRS regulations and that of applicable state jurisdictions. At December 31, 2018,
the Company has approximately $77.2 million of net operating losses. This net operating loss will be eligible to be carried forward
for tax purposes at federal and applicable states level. A full valuation allowance has been recorded related the deferred tax
assets generated from the net operating losses.
Corporate
tax rates in the U.S. have decreased from 34% to 21%.
Uncertain Tax Positions
The
Company assesses each income tax position is assessed using a two-step process. A determination is first made as to whether it
is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing
authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial
statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At March 31,
2019 and December 31, 2018, there were no uncertain tax positions.
Warrants
The Company has issued warrants, which allow
the warrant holder to purchase one share of stock at a specified price for a specified period of time. The Company records equity
instruments including warrants issued to non-employees based on the fair value at the date of issue. The fair value of warrants
classified as equity instruments at the date of issuance is estimated using the Black-Scholes Model. The fair value of warrants
classified as liabilities at the date of issuance is estimated using the Monte Carlo Simulation or Binomial model.
Stock Based Compensation
The Company records compensation expense related
to options granted to employees and non-employees based on the fair value of the award.
Compensation cost is recorded as earned for
all unvested stock options outstanding at the beginning of the first year based upon the grant date fair value estimates, and for
compensation cost for all share-based payments granted or modified subsequently based on fair value estimates.
For the three months ended March 31, 2019 and
2018 share-based compensation for options attributable to employees, non-emplolyees, officers and Board members were approximately
$5,000 and $13,000. These amounts have been included in the Company’s statements of operations. Compensation costs for stock
options which vest over time are recognized over the vesting period. As of March 31, 2019, the Company had approximately $2,000
of unrecognized compensation costs related to granted stock options that will be recognized over the remaining vesting period of
approximately one year.
Beneficial Conversion Features of Convertible
Securities
Conversion options that are not bifurcated
as a derivative pursuant to ASC 815 and not accounted for as a separate equity component under the cash conversion guidance are
evaluated to determine whether they are beneficial to the investor at inception (a beneficial conversion feature) or may become
beneficial in the future due to potential adjustments. The beneficial conversion feature guidance in ASC 470-20 applies to convertible
stock as well as convertible debt which are outside the scope of ASC 815. A beneficial conversion feature is defined as a nondetachable
conversion feature that is in the money at the commitment date. The beneficial conversion feature guidance requires recognition
of the conversion option’s in-the-money portion, the intrinsic value of the option, in equity, with an offsetting reduction
to the carrying amount of the instrument. The resulting discount is amortized as a dividend over either the life of the instrument,
if a stated maturity date exists, or to the earliest conversion date, if there is no stated maturity date. If the earliest conversion
date is immediately upon issuance, the dividend must be recognized at inception. When there is a subsequent change to the conversion
ratio based on a future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion
feature on occurrence.
Derivatives
The Company reviews the terms of convertible
debt issued to determine whether there are embedded derivative instruments, including embedded conversion options, which are required
to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains
more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated
derivative instruments are accounted for as a single, compound derivative instrument
Bifurcated embedded derivatives are initially
recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income
or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and
accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative
instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those
instruments being recorded at a discount from their face value. The discount from the face value of the convertible debt, together
with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, ASC
820, Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for
measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would
be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the measurement date. The Company uses a three-tier
fair value hierarchy based upon observable and non-observable inputs as follow:
|
·
|
Level 1 – Quoted market prices in active markets for identical assets and liabilities;
|
|
·
|
Level 2 – Inputs, other than level 1 inputs, either directly or indirectly observable; and
|
|
·
|
Level 3 – Unobservable inputs developed using internal estimates and assumptions
(there is little or no market date) which reflects those that market participants would use.
|
The Company records its derivative activities
at fair value, which consisted of warrants as of March 31, 2019. The fair value of the warrants was estimated using the Binomial
Simulation model. Gains and losses from derivative contracts are included in net gain (loss) from derivative contracts in the statement
of operations. The fair value of the Company’s derivative warrants is classified as a Level 3 measurement, since unobservable
inputs are used in the valuation.
The following table presents the fair value
for those liabilities measured on a recurring basis as of March 31, 2019 and December 31, 2018:
FAIR VALUE MEASUREMENTS (In Thousands)
The following is summary of items that
the Company measures at fair value on a recurring basis:
|
|
Fair Value at March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Distributor Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(114
|
)
|
|
$
|
(114
|
)
|
|
Warrants issued in connection with Senior Secured Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,204
|
)
|
|
|
(4,204
|
)
|
|
Warrants issued in connection with Short-Term Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4,319
|
)
|
|
$
|
(4,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Distributor Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(114
|
)
|
|
$
|
(114
|
)
|
Warrants issued in connection with Senior Secured Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,614
|
)
|
|
|
(4,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4,728
|
)
|
|
$
|
(4,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of changes to
Level 3 instruments during the three months ended March 31, 2019:
|
|
Distributor Debt
|
|
Short-Term Loan
|
|
Senior Secured Debt
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
|
$
|
(4,614
|
)
|
|
$
|
(4,728
|
)
|
Change in fair value during the period
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
410
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
$
|
(114
|
)
|
|
$
|
(1
|
)
|
|
$
|
(4,204
|
)
|
|
$
|
(4,319
|
)
|
As of March 31, 2019, the fair value of
warrants was approximately $4.3 million. A net change of approximately $0.4 million has been recorded to the accompanying statement
of operations for the three months ended March 31, 2019.
4. STOCKHOLDERS’ DEFICIT
Common Stock
The Company has authorized 3,000,000,000 shares
of common stock with $0.001 par value, of which 3,319,486 were issued and outstanding as of March 31, 2019. As of December 31,
2018, there were 1,000,000,000 authorized shares of common stock, of which 2,669,348 were issued and outstanding.
For the three months ended March 31, 2019,
the Company issued 650,138 shares of common stock as listed below:
Convertible Debt Conversions
|
|
650,138
|
Summary table of common stock share transactions:
Balance at December 31, 2018
|
|
2,669,348
|
Issued in 2019
|
|
650,138
|
Balance at March 31, 2019
|
|
3,319,486
|
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, 2019, 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, which would have caused
the forfeiture of the license. The Company has granted an extension of the forfeiture expiration date and is currently negotiating
the terms with SMI. 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 or $1.25. These shares have not been issued as of March 31, 2019.
In order to facilitate the SMI agreement, immediately
prior to its execution the Company entered into an agreement with Shenghuo Medical, LLC, regarding its previous license to Shenghuo
(see Note 7, Commitments and Contingencies). Under the terms of the new agreement, Shenghuo agreed to relinquish its manufacturing
license and its distribution rights in SMI’s territories, and to waive its rights under the original Shenghuo agreement,
all for as long as SMI performs under the SMI agreement. As consideration, the Company agreed to split with Shenghuo the licensing
fees and net royalties from SMI that the Company will receive under the SMI agreement. Should the SMI agreement be terminated,
the Company have agreed to re-issue the original license to Shenghuo under the original terms. The Company’s COO and director,
Mark Faupel, is a shareholder of Shenghuo, and a former director, Richard Blumberg, is a managing member of Shenghuo.
During 2018, the Company had exercised its
rights under the $10,000,000 GHS Equity Financing Agreement entered into on March 1, 2018, to exercise puts of $47,320 for the
issuance of 87,500 common stock shares. Pursuant to the agreement a put maybe executed for a price that is 80% of the “market
price” which is the average of the two lowest volume weighted average prices of the Company’s common stock for 15 consecutive
trading days preceding the put date.
Preferred Stock
The Company has authorized 5,000,000 shares
of preferred stock with a $.001 par value. The board of directors has the authority to issue these shares and to set dividends,
voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions. The board of directors
designated 525,000 shares of preferred stock redeemable convertible preferred stock, none of which remain outstanding, 33,000 shares
of preferred stock as Series B Preferred Stock, none of which remain outstanding, 9,000 shares of preferred stock as Series C Convertible
Preferred Stock, (the “Series C Preferred Stock”), of which 286 were issued and outstanding at March 31, 2019 and December
31, 2018, respectively and 20,250 shares of preferred stock as Series C1 Preferred Stock, of which 1,050 shares were issued and
outstanding at March 31, 2019 and December 31, 2018, respectively.
On August 31, 2018, the Company entered
into agreements with certain holders of the Company’s Series C1 Preferred Stock, including the chairman of the Company’s
board of directors, and the Chief Operating Officer and a director of the Company (the “Exchange Agreements”), pursuant
to which those holders separately agreed to exchange each share of the Series C1 Preferred Stock held for one (1) share of the
Company’s newly created Series C2 preferred stock, par value $0.001 per share (the “Series C2 Preferred Stock”).
In total, for 3,262.25 shares of Series C1 Preferred Stock to be surrendered, the Company issued 3,262.25 shares of Series C2 Preferred
Stock.
Series C Convertible Preferred Stock
On June 29, 2015, the
Company entered into a securities purchase agreement with certain accredited investors, including John Imhoff and Mark Faupel,
members of the Board, for the issuance, exchange and sale of an aggregate of 6,737 shares of Series C convertible preferred stock,
at a purchase price of $750 per share and a stated value of $1,000 per share. Additionally, during October 2015 the Company entered
into an interim agreement amending the securities purchase agreement to provide for certain of the investors to purchase an additional
aggregate of 1,166 shares. For a total of Series C convertible preferred stock issued of 7,903 shares. Of the 7,903 Series C convertible
preferred stock issued, 1,835 were issued in exchange of Series B convertible preferred stock. Therefore 6,068 Series C preferred
stock were issued at a purchase price of $750 for gross proceeds of $4,551,000. The Company received net cash proceeds of $3,698,000,
after cash and non-cash expenses of $853,000.
Pursuant to the Series
C certificate of designations, shares of Series C preferred stock are convertible into common stock by their holder at any time
and may be mandatorily convertible upon the achievement of specified average trading prices for the Company’s common stock.
At March 31, 2019, there were 286 shares outstanding with a conversion price of $2.099 per share, such that each share of Series
C preferred stock would convert into approximately 476 shares of the Company’s common stock, subject to customary adjustments,
including for any accrued but unpaid dividends and pursuant to certain anti-dilution provisions, as set forth in the Series C certificate
of designations. The conversion price will automatically adjust downward to 80% of the then-current market price of the Company’s
common stock 15 trading days after any reverse stock split of the Company’s common stock, and 5 trading days after any conversions
of the Company’s outstanding convertible debt.
Holders of the Series
C preferred stock are entitled to quarterly cumulative dividends at an annual rate of 12.0% until 42 months after the original
issuance date (the “Dividend End Date”), payable in cash or, subject to certain conditions, the Company’s common
stock. In addition, upon conversion of the Series C preferred stock prior to the Dividend End Date, the Company will also pay to
the converting holder a “make-whole payment” equal to the number of unpaid dividends through the Dividend End Date
on the converted shares. At March 31, 2019, the “make-whole payment” for a converted share of Series C preferred stock
would convert to 200 shares of the Company’s common stock. The Series C preferred stock generally has no voting rights except
as required by Delaware law. Upon the Company’s liquidation or sale to or merger with another corporation, each share will
be entitled to a liquidation preference of $1,000, plus any accrued but unpaid dividends. In addition, the purchasers of the Series
C preferred stock received, on a pro rata basis, warrants exercisable to purchase an aggregate of approximately 1 share of Company’s
common stock. The warrants contain anti-dilution adjustments in the event that the Company issues shares of common stock, or securities
exercisable or convertible into shares of common stock, at prices below the exercise price of such warrants. As a result of the
anti-dilution protection, the Company is required to account for the warrants as a liability recorded at fair value each reporting
period. At March 31, 2019, the exercise price per share was $512,000.
On May 23, 2016, an investor
canceled certain of these warrants, exercisable into 903 shares of common stock. The same investor also transferred certain of
these warrants, exercisable for 150 shares of common stock, to two investors who also had participated in the 2015 Series C financing.
Series C1 Convertible
Preferred Stock
Between April 27, 2016
and May 3, 2016, the Company entered into various agreements with certain holders of Series C preferred stock, including directors
John Imhoff and Mark Faupel, pursuant to which those holders separately agreed to exchange each share of Series C preferred stock
held for 2.25 shares of the Company’s newly created Series C1 Preferred Stock and 12 (9,600 pre-split) shares of the Company’s
common stock (the “Series C Exchanges”). In connection with the Series C Exchanges, each holder also agreed to roll
over the $1,000 stated value per share of the holder’s shares of Series C1 Preferred Stock into the next qualifying financing
undertaken by the Company on a dollar-for-dollar basis and, except in the event of an additional $50,000 cash investment in the
Company by the holder, to execute a customary “lockup” agreement in connection with the financing. In total, for 1,916
shares of Series C preferred stock surrendered, the Company issued 4,312 shares of Series C1 Preferred Stock and 29 shares of common
stock. At March 31, 2019, there were 1,050 shares outstanding with a conversion price of $2.099 per share, such that each share
of Series C preferred stock would convert into approximately 381,098 shares of the Company’s common stock.
On August 31, 2018, 3,262.25 shares
of Series C1 Preferred Stock were surrendered, and the Company issued 3,262.25 shares of Series C2 Preferred Stock. At March 31,
2019, shares of Series C2 had a conversion price of $2.099 per share, such that each share of Series C preferred stock would convert
into approximately 476 shares of the Company’s common stock.
The Series C1 preferred
stock has terms that are substantially the same as the Series C preferred stock, except that the Series C1 preferred stock does
not pay dividends (unless and to the extent declared on the common stock) or at-the-market “make-whole payments” and,
while it has the same anti-dilution protections afforded the Series C preferred stock, it does not automatically reset in connection
with a reverse stock split or conversion of our outstanding convertible debt.
Series C2 Convertible
Preferred Stock
On August 31, 2018, the Company entered
into agreements with certain holders of the Company’s Series C1 Preferred Stock, including the chairman of the Company’s
board of directors, and the Chief Operating Officer and a director of the Company pursuant to which those holders separately agreed
to exchange each share of the Series C1 Preferred Stock held for one (1) share of the Company’s newly created Series C2 Preferred
Stock. In total, for 3,262.25 shares of Series C1 Preferred Stock to be surrendered, the Company issued 3,262.25 shares of Series
C2 Preferred Stock.
The terms of the Series C2 Preferred
Stock are substantially the same as the Series C1 Preferred Stock, except that (i) shares of Series C1 Preferred Stock may not
be convertible into the Company’s common stock by their holder for a period of 180 days following the date of the filing
of the Certificate of Designation (the “Lock-Up Period”); (ii) the Series C2 Preferred Stock has the right to vote
as a single class with the Company’s common stock on an as-converted basis, notwithstanding the Lock-Up Period; and (iii)
the Series C2 Preferred Stock will automatically convert into that number of securities sold in the next Qualified Financing (as
defined in the Exchange Agreement) determined by dividing the stated value ($1,000 per share) of such share of Series C2 Preferred
Stock by the purchase price of the securities sold in the Qualified Financing.
Warrants
The following table summarizes transactions
involving the Company’s outstanding warrants to purchase common stock for the three months ended March 31, 2019:
|
|
Warrants
(Underlying Shares)
|
Outstanding, January 1, 2019
|
|
|
23,551,857
|
|
Issuances
|
|
|
14,125,000
|
|
Canceled / Expired
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
Outstanding, March 31, 2019
|
|
|
37,676,857
|
|
The Company had the following shares reserved for the warrants as
of March 31, 2019:
Warrants
(Underlying Shares)
|
|
Exercise
Price
|
Expiration
Date
|
13
|
(1)
|
$60,000.00 per share
|
June 14, 2021
|
3
|
(2)
|
$32,000,000.00 per share
|
April 23, 2019
|
7
|
(3)
|
$28,800,000.00 per share
|
May 22, 2019
|
3
|
(4)
|
$24,320,000.00 per share
|
September 10, 2019
|
1
|
(5)
|
$29,491,840.00 per share
|
September 27, 2019
|
4
|
(6)
|
$18,003,200.00 per share
|
December 2, 2019
|
2
|
(7)
|
$5,760,000.00 per share
|
December 2, 2020
|
2
|
(8)
|
$7,040,000.00 per share
|
December 2, 2020
|
1
|
(9)
|
$7,603,200.00 per share
|
June 29, 2020
|
13
|
(9)
|
$512,000.00 per share
|
September 21, 2020
|
24
|
(10)
|
$512,000.00 per share
|
June 29, 2020
|
12
|
(11)
|
$512,000.00 per share
|
September 4, 2020
|
1
|
(12)
|
$7,603,200.00 per share
|
September 4, 2020
|
1
|
(13)
|
$512,000.00 per share
|
October 23, 2020
|
1
|
(14)
|
$7,603,200.00 per share
|
October 23, 2020
|
35,937,500
|
(15)
|
$0.04 per share
|
June 14, 2021
|
1,725,000
|
(16)
|
$0.04 per share
|
February 21, 2021
|
22
|
(17)
|
$11,137.28 per share
|
June 6, 2021
|
250
|
(18)
|
$0.04 per share
|
February 13, 2022
|
25
|
(19)
|
$144.00 per share
|
May 16, 2022
|
688
|
(20)
|
$15.20 per share
|
November 16, 2020
|
250
|
(21)
|
$15.20 per share
|
December 28, 2020
|
75
|
(22)
|
$16.08 per share
|
January 10, 2021
|
4,262
|
(23)
|
$0.04 per share
|
March 19, 2021
|
1,875
|
(24)
|
$16.08 per share
|
March 20, 2021
|
63
|
(25)
|
$48.00 per share
|
April 30, 2021
|
125
|
(26)
|
$48.00 per share
|
May 17, 2021
|
125
|
(27)
|
$48.00 per share
|
May 25, 2021
|
500
|
(28)
|
$48.00 per share
|
June 1, 2021
|
1,875
|
(29)
|
$200.00 per share
|
August 22, 2021
|
625
|
(30)
|
$200.00 per share
|
September 18, 2021
|
1,250
|
(31)
|
$1.12 per share
|
October 23, 2021
|
19
|
(32)
|
$0.64 per share
|
November 20, 2021
|
375
|
(33)
|
$0.32 per share
|
December 5, 2021
|
100
|
(34)
|
$0.16 per share
|
December 19, 2021
|
188
|
(35)
|
$0.24 per share
|
December 23, 2021
|
14
|
(36)
|
$0.24 per share
|
December 27, 2021
|
313
|
(37)
|
$0.24 per share
|
January 7, 2021
|
188
|
(38)
|
$0.21 per share
|
January 17, 2021
|
438
|
(39)
|
$0.16 per share
|
January 30, 2021
|
625
|
(40)
|
$0.16 per share
|
February 15, 2021
|
37,676,857*
*
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 to a placement agent in conjunction with an April 2014 private placement.
|
(3)
|
Issued to a placement agent in conjunction with a September 2014 private placement.
|
(4)
|
Issued as part of a September 2014 Regulation S offering.
|
(5)
|
Issued to a placement agent in conjunction with a 2014 public offering.
|
(6)
|
Issued in June 2015 in exchange for warrants originally issued as part of a 2014 public offering.
|
(7)
|
Issued as part of a March 2015 private placement.
|
(8)
|
Issued to a placement agent in conjunction with a June 2015 private placement.
|
(9)
|
Issued as part of a June 2015 private placement.
|
(10)
|
Issued as part of a June 2015 private placement.
|
(11)
|
Issued as part of a June 2015 private placement.
|
(12)
|
Issued to a placement agent in conjunction with a June 2015 private placement.
|
(13)
|
Issued as part of a June 2015 private placement.
|
(14)
|
Issued to a placement agent in conjunction with a June 2015 private placement.
|
(15)
|
Issued as part of a February 2016 private placement.
|
(16)
|
Issued to a placement agent in conjunction with a February 2016 private placement.
|
(17)
(18)
|
Issued pursuant to a strategic license agreement.
Issued as part of a February 2017 private placement.
|
(19)
|
Issued as part of a May 2017 private placement.
|
(20)
|
Issued to investors for a loan in November 2017.
|
(21)
|
Issued to investors for a loan in December 2017.
|
(22)
|
Issued to investors for a loan in January 2018.
|
(23)
|
Issued to investors for a loan in March 2018.
|
(24)
|
Issued to investors for a loan in March 2018.
|
(25)
|
Issued to investors for a loan in April 2018.
|
(26)
|
Issued to investors for a loan in May 2018.
|
(27)
|
Issued to investors for a loan in May 2018.
|
(28)
|
Issued to investors for a loan in June 2018
|
(29)
|
Issued to investors for a loan in August 2018
|
|
|
|
(30)
|
Issued to investors for a loan in September 2018
|
(31)
|
Issued to investors for a loan in October 2018
|
(32)
|
Issued to investors for a loan in November 2018
|
(33)
|
Issued to investors for a loan in December 2018
|
(34)
|
Issued to investors for a loan in December 2018
|
(35)
|
Issued to investors for a loan in December 2018
|
(36)
|
Issued to investors for a loan in December 2018
|
(37)
|
Issued to investors for a loan in January 2019
|
(38)
|
Issued to investors for a loan in January 2019
|
(39)
|
Issued to investors for a loan in January 2019
|
(40)
|
Issued to investors for a loan in February 2019
|
|
|
|
All outstanding warrant
agreements provide for anti-dilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations,
stock dividends, stock splits or other changes in the Company’s corporate structure; except for (8). In addition, warrants
subject to footnotes (1) and (9)-(11), (13), and (15) – (40) in the table above are subject to “lower price issuance”
anti-dilution provisions that automatically reduce the exercise price of the warrants (and, in the cases of warrants subject to
footnote (1), (15) and (16) in the table above, increase the number of shares of common stock issuable upon exercise), to the offering
price in a subsequent issuance of the Company’s common stock, unless such subsequent issuance is exempt under the terms of
the warrants.
For the warrants to footnote
(15), the Company further agreed to amend the warrant issued with the original senior secured convertible note, to adjust the number
of shares issuable upon exercise of the warrant to equal the number of shares that will initially be issuable upon conversion of
the new convertible note (without giving effect to any beneficial ownership limitations set forth in the terms of the new convertible
note).
The warrants subject to footnote (1) are subject
to a mandatory exercise provision. This provision permits the Company, subject to certain limitations, to require exercise of such
warrants at any time following (a) the date that is the 30th day after the later of the Company’s receipt of an approvable
letter from the U.S. FDA for LuViva and the date on which the common stock achieves an average market price for 20 consecutive
trading days of at least $832,000.00 with an average daily trading volume during such 20 consecutive trading days of at least 250
shares, or (b) the date on which the average market price of the common stock for 20 consecutive trading days immediately prior
to the date the Company delivers a notice demanding exercise is at least $103,680,000.00 and the average daily trading volume of
the common stock exceeds 250 shares for such 20 consecutive trading days. If these warrants are not timely exercised upon demand,
they will expire. Upon the occurrence of certain events, the Company may be required to repurchase these warrants, as well as the
warrants subject to footnote (1) in the table above. The holders of the warrants subject to footnote (1) in the table above have
agreed to surrender the warrants, upon consummation of a qualified public financing, for new warrants exercisable for 200% of the
number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered
warrants.
The warrants subject to footnote (4) 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 $73,728.00.
The warrants subject
to footnote (6) in the table above are also subject to a mandatory exercise provision. This provision permits the Company, subject
to certain limitations, to require exercise of 50% of the then-outstanding warrants if the trading price of its common stock is
at least two times the initial warrant exercise price for any 20-day trading period. Further, in the event that the trading price
of the Company’s common stock is at least 2.5 times the initial warrant exercise price for any 20-day trading period, the
Company will have the right to require the immediate exercise of 50% of the then-outstanding warrants. Any warrants not exercised
within the prescribed time periods will be canceled to the extent of the number of shares subject to mandatory exercise.
Series B Tranche B
Warrants
As discussed in Note 3, Fair Value Measurements,
between June 13, 2016 and June 14, 2016, the Company entered into various agreements with holders of the Company’s “Series
B Tranche B” warrants, pursuant to which each holder separately agreed to exchange the warrants for either (1) shares of
common stock equal to 166% of the number of shares of common stock underlying the surrendered warrants, or (2) new warrants exercisable
for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with
the surrendered warrants. In total, for surrendered warrants then-exercisable for an aggregate of 1,482 shares of common stock
(but subject to exponential increase upon operation of certain anti-dilution provisions), the Company issued or is obligated to
issue 21 shares of common stock and new warrants that, if exercised as of the date hereof, would be exercisable for an aggregate
of 271 shares of common stock. As of March 31, 2019, the Company had issued 18 shares of common stock and rights to common stock
shares for 3. In certain circumstances, in lieu of presently issuing all of the shares (for each holder that opted for shares of
common stock), the Company and the holder further agreed that the Company will, subject to the terms and conditions set forth in
the applicable warrant exchange agreement, from time to time, be obligated to issue the remaining shares to the holder. No additional
consideration will be payable in connection with the issuance of the remaining shares. The holders that elected to receive shares
for their surrendered warrants have agreed that they will not sell shares on any trading day in an amount, in the aggregate, exceeding
20% of the composite aggregate trading volume of the common stock for that trading day. The holders that elected to receive new
warrants will be required to surrender their old warrants upon consummation of the Company’s next financing resulting in
net cash proceeds to the Company of at least $1 million. The new warrants will have an initial exercise price equal to the exercise
price of the surrendered warrants as of immediately prior to consummation of the financing, subject to customary “downside
price protection” for as long as the Company’s common stock is not listed on a national securities exchange and will
expire five years from the date of issuance.
5. STOCK OPTIONS
The Company’s 1995 Stock Plan (the “Plan”)
has expired pursuant to its terms, so zero shares remained available for issuance at March 31, 2019 and December 31, 2018. The
Plan allowed for the issuance of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price
of options was determined by the Company’s board of directors, but incentive stock options were granted at an exercise price
equal to the fair market value of the Company’s common stock as of the grant date. Options historically granted have generally
become exercisable over four years and expire ten years from the date of grant.
Due to the 1:800 reverse stock split of all
of the Company’s issued and outstanding common stock was implemented on March 29, 2019. As a result of the reverse stock
split, every 800 shares of issued and outstanding common stock were converted into 1 share of common stock. This resulted in the
number of stock options outstanding to be zero.
6. LITIGATION AND CLAIMS
From time to time, the Company may be involved
in various legal proceedings and claims arising in the ordinary course of business. Management believes that the dispositions of
these matters, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial
condition. However, depending on the amount and timing of such disposition, an unfavorable resolution of some or all of these matters
could materially affect the future results of operations or cash flows in a particular year.
As of March 31, 2019, and December 31, 2018,
there was no accrual recorded for any potential losses related to pending litigation.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
In December 2009, the Company moved its offices,
which comprise its administrative, research and development, marketing and production facilities to 5835 Peachtree Corners East,
Suite B, 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 lease expense on a straight-line
basis over the estimated lease term and combine lease and non-lease components. Future minimum rental payments at March 31, 2019
under non-cancellable operating leases for office space and equipment are as follows (in thousands):
|
Year
|
|
Amount
|
|
|
2019
|
|
88
|
|
|
2020
|
|
120
|
|
|
2021
|
|
30
|
|
|
Total
|
|
238
|
|
|
Less: Interest
|
|
37
|
|
|
Present value of lease liability
|
|
201
|
|
Related Party Contracts
On June 5, 2016, the Company entered into a
license agreement with Shenghuo Medical, LLC pursuant to which the Company granted Shenghuo an exclusive license to manufacture,
sell and distribute LuViva in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
Shenghuo was already the Company’s exclusive distributor in China, Macau and Hong Kong, and the license extended to manufacturing
in those countries as well. Under the terms of the license agreement, once Shenghuo was capable of manufacturing LuViva in accordance
with ISO 13485 for medical devices, Shenghuo would pay the Company a royalty equal to $2.00 or 20% of the distributor price (subject
to a discount under certain circumstances), whichever is higher, per disposable distributed within Shenghuo’s exclusive territories.
In connection with the license grant, Shenghuo was to underwrite the cost of securing approval of LuViva with Chinese Food and
Drug Administration. At its option, Shenghuo also would provide up to $1.0 million in furtherance of the Company’s efforts
to secure regulatory approval for LuViva from the U.S. Food and Drug Administration, in exchange for the right to receive payments
equal to 2% of the Company’s future sales in the United States, up to an aggregate of $4.0 million. Pursuant to the license
agreement, Shenghuo had the option to have a designee appointed to the Company’s board of directors (former director Richard
Blumberg was the designee). As partial consideration for, and as a condition to, the license, and to further align the strategic
interests of the parties, the Company agreed to issue a convertible note to Shenghuo, in exchange for an aggregate cash investment
of $200,000. The note will provide for a payment to Shenghuo of $300,000, expected to be due the earlier of 90 days from issuance
and consummation of any capital raising transaction by the Company with net cash proceeds of at least $1.0 million. The note will
accrue interest at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares of the Company’s
common stock at a conversion price per share of $11,137, subject to customary anti-dilution adjustment. The note will be unsecured
and is expected to provide for customary events of default. The Company will also issue Shenghuo a five-year warrant exercisable
immediately for approximately 22 shares of common stock at an exercise price equal to the conversion price of the note, subject
to customary anti-dilution adjustment.
On 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
As of March 31, 2019, and December 31, 2018,
there have been no principal or interest payments; however, Dr. Faupel and Dr. Cartwright did forgive debt. In the July 24, 2018
exchange agreement, 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. In the July 20, 2018 exchange agreement, Dr, Cartwright, agreed to
exchange outstanding amounts due to him for loans, interest, bonus, salary and vacation pay in the amount of $1,621,499 for a $319,204
promissory note. Debt due to officers has been allocated to short-term and long-term debt, of which $298,088 and $266,286 was allocated
to short-term debt, for March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, $308,327 and
$340,129 was allocated to long-term debt, respectively. At March 31, 2019 and December 31, 2018, the total undiscounted cash flow
amount due was $349,590 for Dr. Cartwright and $256,825 for Dr. Faupel. The use of the undiscounted cash flow method required the
Company to recognize $30,386 for Dr. Cartwright and $51,714 for Dr. Faupel in interest. The schedule below summarizes the detail
of the outstanding amounts:
For Dr. Cartwright:
|
|
Accumulated Balance
March 31, 2019
|
Salary
|
|
$
|
337
|
|
Bonus
|
|
|
675
|
|
Vacation
|
|
|
—
|
|
Interest on compensation
|
|
|
59
|
|
Loans to Company
|
|
|
528
|
|
Interest on loans
|
|
|
22
|
|
Total outstanding
|
|
$
|
1,621
|
|
Amount forgiven
|
|
|
1,302
|
|
Promissory note issued in exchange
|
|
|
319
|
|
Allocated to short-term debt
|
|
|
162
|
|
Allocated to long-term debt
|
|
|
187
|
|
For Dr. Faupel:
|
|
Accumulated Balance
March 31, 2019
|
Salary
|
|
$
|
134
|
|
Bonus
|
|
|
20
|
|
Vacation
|
|
|
95
|
|
Interest on compensation
|
|
|
67
|
|
Loans to Company
|
|
|
196
|
|
Interest on loans
|
|
|
149
|
|
Total outstanding
|
|
$
|
661
|
|
Amount forgiven
|
|
|
454
|
|
Promissory note issued in exchange
|
|
|
207
|
|
Allocated to short-term debt
|
|
|
136
|
|
Allocated to long-term debt
|
|
|
121
|
|
Notes Payable in Default
At March 31, 2019 and December 31, 2018, the
Company maintained notes payable to both related and non-related parties totaling $706,000 and $700,000, respectively. These notes
are short term, straight-line amortizing notes. The notes carry annual interest rates between 0% and 10% and have default rates
as high a 20%. The Company is accruing interest at the default rate of 18.0% on two of the loans.
The following table summarizes the
Notes
payable in default, including related parties
:
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Dr. Imhoff
|
|
$
|
199
|
|
|
$
|
199
|
|
Dr. Cartwright
|
|
|
2
|
|
|
|
2
|
|
Dr. Faupel
|
|
|
—
|
|
|
|
—
|
|
Ms. Rosenstock
|
|
|
50
|
|
|
|
50
|
|
Mr. Fowler
|
|
|
26
|
|
|
|
26
|
|
Mr. Mermelstein
|
|
|
218
|
|
|
|
211
|
|
GHS
|
|
|
15
|
|
|
|
15
|
|
GPB
|
|
|
17
|
|
|
|
17
|
|
Aquarius
|
|
|
108
|
|
|
|
108
|
|
Mr. Blumberg
|
|
|
70
|
|
|
|
70
|
|
Mr. James
|
|
|
2
|
|
|
|
2
|
|
Notes payable in default, including related parties
|
|
$
|
706
|
|
|
$
|
700
|
|
Short Term Notes Payable
In July 2018, the Company entered into a premium
finance agreement to finance its insurance policies totaling $112,094. The note requires monthly payments of $12,711, including
interest at 4.91% and matures in May 2019. As of March 31, 2019, a balance of $12,711 remained. The balance due on insurance policies
totaled $50,535 at December 31, 2018.
On August 22, 2018,
the Company issued a promissory note to an investor for $150,000 in aggregate principal amount of a 6% promissory note for an aggregate
purchase price of $157,500 (representing a $7,500 original issue discount). Pursuant to the promissory note the entire unpaid principal
balance on the promissory note together with all accrued and unpaid interest and loan origination fees, if any, at the choice of
the investor, shall be due and payable in full from the funds received by the Company from a financing of at least $2,000,000,
or at the option of the investor, to be included in the Company’s financing under the same terms as the new investors with
the most favorable terms making a cash investment. If the Company does not complete a financing of at least $2,000,000 within 90
days of the execution of this promissory note, any unpaid amounts shall be due in full to the investor and shall accrue interest
at 12% (instead of 6%) per annum from the date thereof (90 days after execution), if not paid in full. In addition, the investor
will be granted 1,500,000 warrants under this promissory note. The warrants shall be issued and vest upon the financing of at least
$2,000,000 and expire on the third anniversary of said financing. The warrant exercise price shall be set at the same price as
for warrants granted to the investors with the most favorable terms as part of any $2,000,000 or more financing of the Company
or $0.25, whichever is lower. The warrants shall have standard anti-dilution features to protect the holder from dilution due to
down rounds of financing. As of March 31, 2019, and December 31, 2018, the Company had not repaid the note.
On September 19, 2018,
the Company issued a promissory note to an investor for $50,000 in aggregate principal amount of a 6% promissory note for an aggregate
purchase price of $52,500 (representing a $2,500 original issue discount). Pursuant to the promissory note the entire unpaid principal
balance on the promissory note together with all accrued and unpaid interest and loan origination fees, if any, at the choice of
the investor, shall be due and payable in full from the funds received by the Company from a financing of at least $2,000,000,
or at the option of the investor, to be included in the Company’s financing under the same terms as the new investors with
the most favorable terms making a cash investment. If the Company does not complete a financing of at least $2,000,000 within 90
days of the execution of this promissory note, any unpaid amounts shall be due in full to the investor and shall accrue interest
at 12% (instead of 6%) per annum from the date thereof (90 days after execution), if not paid in full. In addition, the investor
will be granted 500,000 warrants under this promissory note. The warrants shall be issued and vest upon the financing of at least
$2,000,000 and expire on the third anniversary of said financing. The warrant exercise price shall be set at the same price as
for warrants granted to the investors with the most favorable terms as part of any $2,000,000 or more financing of the Company
or $0.25, whichever is lower. The warrants shall have standard anti-dilution features to protect the holder from dilution due to
down rounds of financing. As of March 31, 2019, and December 31, 2018, the Company had not repaid the note and therefore the accrued
interest rate increased to 12%.
On February 15, 2019,
the Company issued a promissory note to an investor for $50,000 in aggregate principal amount of a 6% promissory note for an aggregate
purchase price of $52,500 (representing a $2,500 original issue discount). Pursuant to the promissory note the entire unpaid principal
balance on the promissory note together with all accrued and unpaid interest and loan origination fees, if any, at the choice of
the investor, shall be due and payable in full from the funds received by the Company from a financing of at least $2,000,000,
or at the option of the investor, to be included in the Company’s financing under the same terms as the new investors with
the most favorable terms making a cash investment. If the Company does not complete a financing of at least $2,000,000 within 90
days of the execution of this promissory note, any unpaid amounts shall be due in full to the investor and shall accrue interest
at 12% (instead of 6%) per annum from the date thereof (90 days after execution), if not paid in full. In addition, the investor
will be granted 500,000 warrants under this promissory note. The warrants shall be issued and vest upon the financing of at least
$2,000,000 and expire on the third anniversary of said financing. The warrant exercise price shall be set at the same price as
for warrants granted to the investors with the most favorable terms as part of any $2,000,000 or more financing of the Company
or $0.25, whichever is lower. The warrants shall have standard anti-dilution features to protect the holder from dilution due to
down rounds of financing. As of March 31, 2019, and December 31, 2018, the Company had not repaid the note.
On July 20, 2018, the Company entered into
an exchange agreement and promissory note with Dr. Cartwright. The agreements were entered into in order to extinguish and restructure
current amounts owed to Dr. Cartwright. In the exchange agreement Dr. Cartwright, agreed to exchange outstanding amounts due to
him for loans, interest, bonus, salary and vacation pay in the amount of $1,621,499 for $319,204 promissory note. Pursuant to the
exchange agreement the note will bear interest at 6%. In addition, Dr. Cartwright will receive 125 stock options, with 31 vesting
immediately and the remaining vesting monthly over three years. As a result of the exchange agreement, the Company recorded a gain
for extinguishment of debt of $840,391 and a capital contribution of $431,519 during the year ended December 31, 2018. As of March
31, 2019, and December 31, 2018, Dr. Cartwright’s total undiscounted cash flow amount due was approximately $349,590 including
interest.
On July 24, 2018, the Company entered into
an exchange agreement and promissory note with Dr. Faupel. The agreements were entered into in order to extinguish and restructure
current amounts owed to Dr. Faupel. In the exchange agreement 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 $207,111 promissory note. Pursuant to the exchange
agreement the note will bear interest at 6%. In addition, Dr. Faupel will receive 94 stock options, with 31 vesting immediately
and the remaining vesting monthly over three years. Dr. Faupel will also receive 560 options at $200.00 or market price, whichever
is less; contingent on shareholder vote and board approval. If the options are not granted, the Company shall owe Dr. Faupel $113,000.
As a result of the exchange agreement, the Company recorded a gain for extinguishment of debt of $199,079 and a capital contribution
of $234,990 during the year ended December 31, 2018. As of March 31, 2019, and December 31, 2018, Dr. Faupel’s total undiscounted
cash flow amount due was approximately $256,825 including interest.
On February 14, 2019, the Company entered into
a Purchase and Sale Agreement with Everest Business Funding for the sale of its accounts receivable. The transaction provided the
Company with $48,735 after $1,265 in debt issuance costs (bank costs) for a total purchase amount of $50,000, in which the Company
would have to repay $68,500. At a minimum the Company would need to pay $535.16 per day or 20.0% of the future collected accounts
receivable or “receipts.” The effective interest rate as calculated for this transaction is approximately 189%. As
of March 31, 2019, $14,449 had been paid, leaving a balance of $42,013, as well as a discount of $12,038 and unamortized debt issuance
costs of $956 remained.
At March 31, 2019 and December 31, 2018, the
Company also maintained short term notes payable to both related and non-related parties totaling $506,000 and $382,000, respectively.
These notes are short term, straight-line amortizing notes. The notes carry annual interest rates between 5% and 10%.
The following table summarizes the
Short-term
notes payable, including related parties
:
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Dr. Imhoff
|
|
$
|
138
|
|
|
$
|
135
|
|
Dr. Cartwright
|
|
|
169
|
|
|
|
144
|
|
Dr. Faupel
|
|
|
136
|
|
|
|
123
|
|
Mr. Maloof
|
|
|
25
|
|
|
|
25
|
|
Mr. Case
|
|
|
150
|
|
|
|
150
|
|
Mr. Mamula
|
|
|
15
|
|
|
|
—
|
|
Mr. Gould
|
|
|
100
|
|
|
|
50
|
|
K2 (Shenghuo)
|
|
|
177
|
|
|
|
177
|
|
Everest
|
|
|
42
|
|
|
|
—
|
|
Premium Finance (insurance)
|
|
|
14
|
|
|
|
50
|
|
Mr. Blumberg
|
|
|
151
|
|
|
|
45
|
|
Short-term notes payable, including related parties
|
|
$
|
1,117
|
|
|
$
|
899
|
|
The following table summarizes the
Long-term
notes payable, including related parties
:
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Dr. Cartwright
|
|
$
|
187
|
|
|
$
|
206
|
|
Dr. Faupel
|
|
|
121
|
|
|
|
134
|
|
Long-term notes payable, including related parties
|
|
$
|
308
|
|
|
$
|
340
|
|
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, 2019, and December 31, 2018, the Company had a note due of $432,000
and $450,000, respectively. The note accrues interest at 20% per year on any unpaid amounts due after that date. The note will
be convertible into shares of the Company’s common stock at a conversion price per share of $11,137.28, subject to customary
anti-dilution adjustment. The note will be unsecured and is expected to provide for customary events of default. The Company will
also issue the distributor a five-year warrant exercisable immediately for 22 shares of common stock at an exercise price equal
to the conversion price of the note, subject to customary anti-dilution adjustment.
Convertible Note
Payable – Short-Term
On 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 were 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, 2019, and December 31, 2018, the notes had been converted and no balance remained outstanding. In addition, at
December 31, 2018, the Company recorded a $63,525 beneficial conversion feature which was fully amortized at year end.
On February 22, 2018,
the Company entered into a securities purchase agreement with 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, 2019, and December 31, 2018, the notes had been converted and no balance
remained outstanding. In addition, at December 31, 2018, the Company recorded a $38,379 beneficial conversion feature which was
fully amortized at year end.
On March 12, 2018,
the Company entered into a securities purchase agreement with Eagle Equities, LLC, providing for the purchase by Eagle of a convertible
redeemable note in the principal amount of $66,667. The note was fully funded on March 14, 2018, upon which the Company received
$51,000 of net proceeds (net of a 10% original issue discount and other expenses). The note bears an interest rate of 8% and are
due and payable on March 12, 2019. The note may be converted by Eagle at any time after twelve months from issuance into shares
of our common stock (as determined in the notes) calculated at the time of conversion, except for the second note, which also requires
full payment by Eagle of the secured note it issued to us before conversions may be made. The conversion price of the notes will
be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which the
Company receive a notice of conversion. The notes may be prepaid in accordance with the terms set forth in the notes. The notes
also contain certain representations, warranties, covenants and events of default including if the Company are delinquent in our
periodic report filings with the SEC and increases in the amount of the principal and interest rates under the notes in the event
of such defaults. In the event of default, at Eagle’s option and in its sole discretion, Eagle may consider the notes immediately
due and payable. As of March 31, 2019, the notes had been converted and no balance remained outstanding. At December 31, 2018,
the outstanding balance was $3,095, including unamortized debt issuance costs of $1,751, and unamortized discount of $1,297 and
accrued interest of $177. In addition, as of March 31, 2019 the beneficial conversion feature had been fully amortized. At December
31, 2018, the Company recorded a $44,444 beneficial conversion feature which $35,701 was amortized leaving and unamortized balance
of $8,743.
On April 30, 2018,
the Company entered into a securities purchase agreement with Power Up, providing for the purchase by Power Up from the Company
of a convertible note in the aggregate principal amount of $103,000. The note bears an interest rate of 12% and is due and payable
on February 15, 2019. 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, 2019, and December 31, 2018, the notes had been converted and no balance
remained outstanding. In addition, at December 31, 2018, the Company recorded a $74,586 beneficial conversion feature which was
fully amortized at year end.
On June 7, 2018, the
Company entered into a securities purchase agreement with 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 March 30, 2019. 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, 2019, and December 31, 2018, the notes had been converted and no balance
remained outstanding. In addition, at December 31, 2018, the Company recorded a $38,379 beneficial conversion feature which was
fully amortized at year end.
On February 8, 2019, a note payable in default
as reported in the Company’s Form 10-K report -
Footnote 9: Notes payable – Note payable in default
, was exchanged
for a note with a convertible option. The note amount was for $145,544. At the sole discretion of the Company, rather than paying
the holder in cash, the note can be exchanged for equity in the new financing of at least $1,000,000. If the financing occurs the
Company will then have the option to exchange the debt for C3 preferred shares. If the Company elects to pay the balance in cash,
the note shall accrue simple interest of 6% per annum commencing on the date of the new financing of at least $1,000,000.
On March 29, 2019,
the Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $65,000 in
aggregate principal amount of a 12% convertible promissory note. However, funds were not received by the Company until April 5,
2019. The note matures on December 29, 2019 and accrues interest at a rate of 12% per year. The Company can prepay the note, in
whole or in part, for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal
and interest at any time from 31 to 60 days from issuance, for 135% of outstanding principal and interest at any time from 61 to
90 days from issuance and for 150% of outstanding principal and interest at any time from 91 days from issuance to 180 days from
issuance. The note may not be prepaid after the 180
th
day. After seven months from the date of issuance, Auctus may
convert the note, at any time, in whole or in part, into shares of the Company’s common stock, at a conversion price equal
to the lesser of: (i) the lowest trading price during the previous 25 trading days period ending on the latest complete trading
day prior to the date of this note, and (ii) the variable conversion price shall mean 50% multiplied by the market price on the
OTC Pink, OTCQB or applicable trading market, subject to certain customary adjustments and price-protection provisions contained
in the note. The note includes customary events of default provisions and a default interest rate of 24% per year. Upon the occurrence
of an event of default, Auctus may require the Company to redeem the note (or convert it into shares of common stock) at 150% of
the outstanding principal balance plus accrued and unpaid interest (unless the event default is due to an unfavorable OTC market
designation or unavailability of Rule 144. As of March 31, 2019, the Company only recorded the debt of $65,000. In the following
periods the Company will amortize $14,250 of debt issuance costs and $65,000 of a beneficial conversion feature.
The following table summarizes the
Convertible
notes payable
:
|
|
March 31, 2019
|
|
December 31, 2018
|
Shenghuo
|
|
$
|
450
|
|
|
$
|
432
|
|
Eagle
|
|
|
—
|
|
|
|
3
|
|
Debt credit amortized
|
|
|
3
|
|
|
|
(10
|
)
|
Debt Discount related to Beneficial Conversion
|
|
|
(8
|
)
|
|
|
(45
|
)
|
Convertible notes payable
|
|
$
|
445
|
|
|
$
|
380
|
|
10. CONVERTIBLE DEBT IN DEFAULT
Secured Promissory
Note.
On September 10, 2014,
the Company sold a secured promissory note to an accredited investor with an initial principal amount of $1,275,000, for a purchase
price of $700,000 (an original issue discount of $560,000). The Company may prepay the note at any time. The note is secured by
the Company’s current and future accounts receivable and inventory, pursuant to a security agreement entered into in connection
with the sale. On March 10, 2015, May 4, 2015, June 1, 2015, June 16, 2015, June 29, 2015, January 21, 2016, January 29, 2016,
and February 12, 2016 the Company amended the terms of the note to extend the maturity ultimately until August 31, 2016. During
the extension, interest accrues on the note at a rate of the lesser of 18% per year or the maximum rate permitted by applicable
law. On February 11, 2016, the Company consented to an assignment of the note to two accredited investors. In connection with the
assignment, the holders waived an ongoing event of default under the notes related to the Company’s minimum market capitalization
and agreed to eliminate the requirement going forward. Pursuant to the terms of the amended note, the holder may convert the outstanding
balance into shares of common stock at a conversion price per share equal to the lower of (1) $20,000.00 or (2) 75% of the lowest
daily volume weighted average price of the common stock during the five days prior to conversion. If the conversion price at the
time of any conversion is lower than $12,000.00, the Company has the option of delivering the conversion amount in cash in lieu
of shares of common stock. On March 7, 2016, the Company further amended the note to eliminate the volume limitations on sales
of common stock issued or issuable upon conversion. On July 13, 2016, the Company consented to the assignment by one of the accredited
investors of its portion of the note of to a third accredited investor.
The balance due on the
note was $158,813 and $151,974 at March 31, 2019 and December 31, 2018, respectively. The balance was reduced by $306,863 as part
of a debt restructuring on December 7, 2016.
Total debt issuance costs
as originally capitalized were approximately $130,000. This amount was amortized over nine months and was fully amortized as of
December 31, 2015. The original issue discount of $560,000 was fully amortized as of December 31, 2015.
On November 2, 2016,
the Company entered into a lockup and exchange agreement with GHS Investments, LLC, holder of approximately $221,000 in outstanding
principal amount of the Company’s secured promissory note and all the outstanding shares of the its Series C preferred stock.
Pursuant to the agreement, upon the effectiveness of the 1:800 reverse stock split and continuing for 45 days after, GHS and its
affiliates were prohibited from converting any portion of the secured promissory note or any of the shares of Series C preferred
stock or selling any of the Company’s securities that they beneficially owned. The Company agreed that, upon consummation
of its next financing, the Company would use $260,000 of net cash proceeds first, to repay GHS’s portion of the secured promissory
note and second, with any remaining amount from the $260,000, to repurchase a portion of GHS’s shares of Series C preferred
stock. In addition, GHS has agreed to exchange the stated value per share (plus any accrued but unpaid dividends) of its remaining
shares of Series C preferred stock for new securities of the same type that the Company separately issue in the next qualifying
financing it undertakes, on a dollar-for-dollar basis in a private placement exchange.
Senior Secured Promissory
Note
On February 11, 2016,
the Company entered into a securities purchase agreement with GPB Debt Holdings II LLC for the issuance and sale on February 12,
2016 of $1.4375 million in aggregate principal amount of a senior secured convertible note for an aggregate purchase price of $1.15
million (a 20% original issue discount of $287,500) and a discount for debt issuance costs paid at closing of $121,000 for a total
of $408,500. In addition, GPB received a warrant exercisable to purchase an aggregate of approximately 2,246 shares of the Company’s
common stock. The Company allocated proceeds totaling $359,555 to the fair value of the warrants at issuance. This was recorded
as an additional discount on the debt. The convertible note matures on the second anniversary of issuance and, in addition to the
20% original issue discount, accrues interest at a rate of 17% per year. The Company is required to pay monthly interest coupons
and beginning nine months after issuance, the Company is required to pay amortized quarterly principal payments. If the Company
does not receive, on or before the first anniversary after issuance, an aggregate of at least $3.0 million from future equity or
debt financings or non-dilutive grants, then the holder will have the option of accelerating the maturity date to the first anniversary
of issuance. The Company may prepay the convertible note, in whole or in part, without penalty, upon 20 days’ prior written
notice. Subject to resale restrictions under Federal securities laws and the availability of sufficient authorized but unissued
shares of the Company’s common stock, the convertible note is convertible at any time, in whole or in part, at the holder’s
option, into shares of the Company’s common stock, at a conversion price equal to the lesser of $640.00 per share or 70%
of the average closing price per share for the five trading days prior to issuance, subject to certain customary adjustments and
anti-dilution provisions contained in the convertible note. On May 28, 2016, in exchange for an additional $87,500 in cash from
GPB to the Company, the principal balance was increased by the same amount. The Company is currently in default as they are past
due on the required monthly interest payments. In the event of default, the Company shall accrue interest at a rate the lesser
of 22% or the maximum permitted by law. The Company has accrued $117,000 for past due interest payments at December 31, 2016. Upon
the occurrence of an event of default, the holder may require the Company to redeem the convertible note at 120% of the outstanding
principal balance (but as of March 31, 2019, had not done so). As of March 31, 2019, the balance due on the convertible debt was
$2,177,030 as the Company has fully amortized debt issuance costs of $47,675 and the debt discount of $768,055 and recorded a 20%
penalty totaling $366,373. In addition, the Company has accrued $830,137 of interest expense for the year ended March 31, 2019.
As of December 31, 2018, the balance due on the convertible debt was $2,198,236. In addition, the Company had accrued $699,743
of interest expense for the year ended December 31, 2018. The convertible note is secured by a lien on all the Company’s
assets, including its intellectual property, pursuant to a security agreement entered into by the Company and GPB.
The warrant is exercisable
at any time, pending availability of sufficient authorized but unissued shares of the Company’s common stock, at an exercise
price per share equal to the conversion price of the convertible note, subject to certain customary adjustments and anti-dilution
provisions contained in the warrant. The warrant has a five-year term. As of March 31, 2019, the exercise price had been adjusted
to $0.04 and the number of common stock shares exchangeable for was 35,937,500. As of March 31, 2019, and December 31, 2018, the
effective interest rate considering debt costs was 29%.
The Company used a placement
agent in connection with the transaction. For its services, the placement agent received a cash placement fee equal to 4% of the
aggregate gross proceeds from the transaction and a warrant to purchase shares of common stock equal to an aggregate of 6% of the
total number of shares underlying the securities sold in the transaction, at an exercise price equal to, and terms otherwise identical
to, the warrant issued to the investor. Finally, the Company agreed to reimburse the placement agent for its reasonable out-of-pocket
expenses.
In connection with the
transaction, on February 12, 2016, the Company and GPB entered into a four-year consulting agreement, pursuant to which the investor
will provide management consulting services to the Company in exchange for a royalty payment, payable quarterly, equal to 3.5%
of the Company’s revenues from the sale of products. As of March 31, 2019, and 2018, GPB had earned approximately $31,000
and $29,000 in royalties, respectively.
Debt Restructuring
On December 7, 2016,
the Company entered into an exchange agreement with GPB with regard to the $1,525,000 in outstanding principal amount of senior
secured convertible note originally issued to GPB on February 11, 2016, and the $306,863 in outstanding principal amount of the
Company’s secured promissory note that GPB holds (see “—Secured Promissory Note”). Pursuant to the exchange
agreement, upon completion of the next financing resulting in at least $1 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 8, 2017, the Company entered into
a forbearance agreement with GPB, with regard to the senior secured convertible note. Under the forbearance agreement, GPB has
agreed to forbear from exercising certain of its rights and remedies (but not waive such rights and remedies), arising as a result
of the Company’s failure to pay the monthly interest due and owing on the note. In consideration for the forbearance, the
Company agreed to waive, release, and discharge GPB from all claims against GPB based on facts existing on or before the date of
the forbearance agreement in connection with the note, or the dealings between the Company and GPB, or the Company’s equity
holders and GPB, in connection with the note. Pursuant to the forbearance agreement, the Company has reaffirmed its obligations
under the note and related documents and executed a confession of judgment regarding the amount due under the note, which GPB may
file upon any future event of default by the Company. During the forbearance period, the Company must continue to comply will all
the terms, covenants, and provisions of the note and related documents.
The “Forbearance Period” shall
mean the period beginning on the date hereof and ending on the earliest to occur of: (i) the date on which Lender delivers to Company
a written notice terminating the Forbearance Period, which notice may be delivered at any time upon or after the occurrence of
any Forbearance Default (as hereinafter defined), and (ii) the date Company repudiates or asserts any defense to any Obligation
or other liability under or in respect of this Agreement or the Transaction Documents or applicable law, or makes or pursues any
claim or cause of action against Lender; (the occurrence of any of the foregoing clauses (i) and (ii), a “Termination Event”).
As used herein, the term “Forbearance Default” shall mean: (A) the occurrence of any Default or Event of Default other
than the Specified Default; (B) the failure of Company to timely comply with any material term, condition, or covenant set forth
in this Agreement; (C) the failure of any representation or warranty made by Company under or in connection with this Agreement
to be true and complete in all material respects as of the date when made; or (D) Lender’s reasonable belief that Company:
(1) has ceased or is not actively pursuing mutually acceptable restructuring or foreclosure alternatives with Lender; or (2) is
not negotiating such alternatives in good faith. Any Forbearance Default will not be effective until one (1) Business Day after
receipt by Company of written notice from Lender of such Forbearance Default. Any effective Forbearance Default shall constitute
an immediate Event of Default under the Transaction Documents.
Other Convertible Debt in Default
On May 18, 2017, the
Company entered into a securities purchase agreement with GHS Investments, LLC, an existing investor, providing for the purchase
by GHS of a convertible promissory note in the aggregate principal amount of $66,000, for $60,000 in net proceeds (representing
a 10% original issue discount). The transaction closed on May 19, 2017. The note matures upon the earlier of our receipt of $100,000
from revenues, loans, investments, or any other means (other than the Eagle and Adar bridge financings) and December 31, 2017.
In addition to the 10% original issue discount, the note accrues interest at a rate of 8% per year. The Company may prepay the
note, in whole or in part, for 110% of outstanding principal and interest until 30 days from issuance, for 120% of outstanding
principal and interest at any time from 31 to 60 days from issuance and for 140% of outstanding principal and interest at any time
from 61 days to 180 days from issuance. The note may not be prepaid after 180 days. After 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, 2019, the Company’s total outstanding
amount was $83,094, (which includes $37,926 for a default penalty) and accrued interest of $2,185. GHS converted $12,700 of principal
and accrued interest payable for the three months ended March 31, 2019. This was compared with a total outstanding amount of $94,411,
(which includes $37,926 for a default penalty) and accrued interest of $517 as of December 31, 2018. GHS converted $29,642 of principal
and accrued interest payable for the period ended December 31, 2018.
On March 20, 2018, the Company entered into
a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $150,000 in aggregate principal amount
of a 12% convertible promissory note. On March 20, 2018, the Company issued the note to Auctus. Pursuant to the purchase agreement,
the Company also issued to Auctus a warrant exercisable to purchase an aggregate of 4,262 shares of the Company’s common
stock. The warrant is exercisable at any time, at an exercise price per share equal to $0.04, subject to certain customary adjustments
and price-protection provisions contained in the warrant. The warrant has a five-year term. The note matures nine months from the
date of issuance and accrues interest at a rate of 12% per year. The Company could have prepaid the note, in whole or in part,
for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any
time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance
to 180 days from issuance. After nine months from the date of issuance, Auctus may convert the note, at any time, in whole or in
part, into shares of the Company’s common stock, at a conversion price equal to the lower of the price offered in the Company’s
next public offering or a 40% discount to the average of the two lowest trading prices of the common stock during the 20 trading
days prior to the conversion, subject to certain customary adjustments and price-protection provisions contained in the note. The
note includes customary events of default provisions and a default interest rate of 24% per year. Upon the occurrence of an event
of default, Auctus may require the Company to redeem the note (or convert it into shares of common stock) at 150% of the outstanding
principal balance plus accrued and unpaid interest. As of March 31, 2019, the Company has a net debt of $192,267 (which includes
$70,931 for a default premium) and accrued interest of $10,380. Auctus converted $14,237 of principal and accrued interest payable
for the three months ended March 31, 2019. As of December 31, 2018, the Company had a net debt of $133,870 and accrued interest
of $635. Auctus converted $30,152 of principal and accrued interest payable for the period ended December 31, 2018. In addition,
at December 31, 2018, the Company recorded a $97,685 beneficial conversion feature which was fully amortized at year end. Upon
the occurrence of an event of default, Auctus may require the Company to redeem the note (or convert it into shares of common stock)
at 150% of the outstanding principal balance plus accrued and unpaid interest, this has not occurred as of the date of this Form
10-Q quarterly report.
On May 17, 2018, the
Company entered into a securities purchase agreement with GHS Investments, LLC, an existing investor, providing for the purchase
by GHS of a convertible promissory note in the aggregate principal amount of $9,250 (with $750 representing a 10% original issue
discount and $1,000 for transaction costs). The note matures on June 17, 2019. In addition to the 10% original issue discount,
the note accrues interest at a rate of 10% per year. The Company may prepay the note, in whole or in part, for 110% of outstanding
principal and interest until 30 days from issuance, for 120% of outstanding principal and interest at any time from 31 to 60 days
from issuance and for 140% of outstanding principal and interest at any time from 61 days to 180 days from issuance. The note may
not be prepaid after 180 days. After nine months from the date of issuance, the note will become convertible, at any time thereafter,
in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price equal to 30% of the lowest
trading price during the 25 trading days prior to conversion (if note cannot be converted due to issues with DTC then rate increases
to 40%). The note includes customary event of default provisions and a default interest rate of the lesser of 20% per year or the
maximum amount permitted by law. Upon the occurrence of an event of default, the holder of the note may require us to redeem the
note (or convert it into shares of common stock) at 150% of the outstanding principal balance. As of March 31, 2019, the Company
has a net debt of $14,187 (which includes $4,937 for a default penalty), including unamortized debt issuance costs of $197, unamortized
discount of $148, and accrued interest of $1,835. As of December 31, 2018, the Company had a net debt of $14,187 (which includes
$4,937 for a default penalty), including unamortized debt issuance costs of $424, unamortized discount of $318 and accrued interest
of $1,135. In addition, as of March 31, 2019 the beneficial conversion feature of $3,964 had an unamortized balance of $770. At
December 31, 2018, $2,280 was amortized leaving and unamortized balance of $1,685.
On June 22, 2018,
the Company entered into a securities purchase agreement with GHS Investments, LLC, an existing investor, providing for the purchase
by GHS of a convertible promissory note in the aggregate principal amount of $68,000 (with $6,000 representing a 10% original issue
discount and $2,000 for transaction costs). The note matures on June 22, 2019. In addition to the 10% original issue discount,
the note accrues interest at a rate of 10% per year. The Company may prepay the note, in whole or in part, for 110% of outstanding
principal and interest until 30 days from issuance, for 120% of outstanding principal and interest at any time from 31 to 60 days
from issuance and for 140% of outstanding principal and interest at any time from 61 days to 180 days from issuance. The note may
not be prepaid after 180 days. After nine months from the date of issuance, the note will become convertible, at any time thereafter,
in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price equal to 30% of the lowest
trading price during the 25 trading days prior to conversion (if note cannot be converted due to issues with DTC then rate increases
to 40%). The note includes customary event of default provisions and a default interest rate of the lesser of 20% per year or the
maximum amount permitted by law. Upon the occurrence of an event of default, the holder of the note may require us to redeem the
note (or convert it into shares of common stock) at 150% of the outstanding principal balance. As of March 31, 2019, the Company
has a net debt of $103,285 (which includes $35,285 for a default penalty), including unamortized debt issuance costs of $1,592,
unamortized discount of $1,364 and accrued interest of $13,356. As of December 31, 2018, the Company had a net debt of $103,285
(which includes $35,285 for a default penalty), including unamortized debt issuance costs of $3,318, unamortized discount of $2,844
and accrued interest of $8,263. In addition, as of March 31, 2019 the beneficial conversion feature of $29,143 had an unamortized
balance of $6,569. At December 31, 2018, $15,288 was amortized leaving an unamortized balance of $13,855.
On July 3, 2018, the
Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $89,250 in aggregate
principal amount of a 12% convertible promissory note. On July 3, 2018, the Company issued the note to Auctus. The note matures
on April 3, 2019 and accrues interest at a rate of 12% per year. The Company could have prepaid the note, in whole or in part,
for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any
time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance
to 180 days from issuance. After nine months from the date of issuance, Auctus may convert the note, at any time, in whole or in
part, into shares of the Company’s common stock, at a conversion price equal to the lower of the price offered in the Company’s
next public offering or a 40% discount to the average of the two lowest trading prices of the common stock during the 20 trading
days prior to the conversion, subject to certain customary adjustments and price-protection provisions contained in the note. The
note includes customary events of default provisions and a default interest rate of 24% per year. 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, 2019, the Company has a net debt of $89,250, including unamortized
original issue discount of $203, unamortized debt issuance costs of $47 and accrued interest of $8,062. As of December 31, 2018,
the Company had a net debt of $81,528, including unamortized original issue discount of $1,443, unamortized debt issuance costs
of $6,279 and accrued interest of $5,385. In addition, as of March 31, 2019 the beneficial conversion feature of $59,500 had an
unamortized balance of $434. At December 31, 2018, $39,233 was amortized leaving and unamortized balance of $20,267. Upon the occurrence
of an event of default, Auctus may require the Company to redeem the note (or convert it into shares of common stock) at 150% of
the outstanding principal balance plus accrued and unpaid interest, this has not occurred as of this Form 10-Q quarterly report.
The following table summarizes the
Convertible
notes in default
:
|
|
March 31, 2019
|
|
December 31, 2018
|
GPB
|
|
$
|
2,177
|
|
|
$
|
2,198
|
|
GHS
|
|
|
359
|
|
|
|
364
|
|
Auctus
|
|
|
282
|
|
|
|
223
|
|
Debt Discount to be amortized
|
|
|
(3
|
)
|
|
|
(7
|
)
|
Convertible notes in default
|
|
$
|
2,815
|
|
|
$
|
2,778
|
|
11. INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share attributable
to common stockholders amounts are computed by dividing the net income (loss) plus preferred stock dividends and deemed dividends
on preferred stock by the weighted average number of shares outstanding during the period.
Diluted net income (loss) per share attributable
to common stockholders amounts are computed by dividing the net income (loss) plus preferred stock dividends, deemed dividends
on preferred stock, after-tax interest on convertible debt and convertible dividends by the weighted average number of shares outstanding
during the period, plus Series C convertible preferred stock, convertible debt, convertible preferred dividends and warrants convertible
into common stock shares.
The following table sets forth pertinent data
relating to the computation of basic and diluted net loss per share attributable to common shareholders.
In thousands
|
|
Three months ended March 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(224
|
)
|
|
$
|
1,027
|
|
Basic weighted average number of shares outstanding
|
|
|
3,248
|
|
|
|
111
|
|
Net (loss) income per share (basic)
|
|
$
|
(0.069
|
)
|
|
$
|
0.012
|
|
Diluted weighted average number of shares outstanding
|
|
|
3,248
|
|
|
|
2,492
|
|
Net (loss) income per share (diluted)
|
|
$
|
(0.069
|
)
|
|
$
|
0.001
|
|
|
|
|
|
|
|
|
|
|
Dilutive equity instruments (number of equivalent units):
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
Preferred stock
|
|
|
—
|
|
|
|
513
|
|
Convertible debt
|
|
|
37,898
|
|
|
|
1,188
|
|
Warrants
|
|
|
30,582
|
|
|
|
680
|
|
Total Dilutive instruments
|
|
|
68,480
|
|
|
|
2,381
|
|
|
|
|
|
|
|
|
|
|
12. SUBSEQUENT EVENTS
On May 15, 2019, the
Company entered into a securities purchase agreement with Eagle Equities, LLC, providing for the purchase by Eagle of a convertible
redeemable note in the principal amount of $57,750. The note was fully funded on May 21, 2019, upon which the Company received
$45,000 of net proceeds (net of a 10% original issue discount and other expenses). The note bears an interest rate of 8% and are
due and payable on May 15, 2020. The Company could have prepaid the note, in whole or in part, for 115% of outstanding principal
and interest until 30 days from issuance, for 121% of outstanding principal and interest at any time from 31 to 60 days from issuance,
for 127% of outstanding principal and interest at any time from 61 to 90 days from issuance, for 133% of outstanding principal
and interest at any time from 91 to 120 days from issuance, for 139% of outstanding principal and interest at any time from 121
to 150 days from issuance and for 145% of outstanding principal and interest at any time from 151 days from issuance to 180 days
from issuance. The note may not be prepaid after the 180
th
day. The note may be converted by Eagle at any time after
five months from issuance into shares of the Company common stock (as determined in the notes) calculated at the time of conversion.
The conversion price of the notes will be equal to 60% of the average of the two lowest closing bid prices of the Company’s
common stock shares as reported on OTC Markets exchange, for the 20 prior trading days including the day upon which the Company
receive a notice of conversion is received by the Company. The notes may be prepaid in accordance with the terms set forth in the
notes. The notes also contain certain representations, warranties, covenants and events of default including if the Company are
delinquent in our periodic report filings with the SEC and increases in the amount of the principal and interest rates under the
notes in the event of such defaults. In the event of default, at Eagle’s option and in its sole discretion, Eagle may consider
the notes immediately due and payable.
On May 15, 2019, the
Company entered into a securities purchase agreement with Adar Bays, LLC, providing for the purchase by Adar of a convertible redeemable
note in the principal amount of $57,750. The note was fully funded on May 21, 2019, upon which the Company received $45,000 of
net proceeds (net of a 10% original issue discount and other expenses). The note bears an interest rate of 8% and are due and payable
on May 15, 2020. The Company could have prepaid the note, in whole or in part, for 115% of outstanding principal and interest until
30 days from issuance, for 121% of outstanding principal and interest at any time from 31 to 60 days from issuance, for 127% of
outstanding principal and interest at any time from 61 to 90 days from issuance, for 133% of outstanding principal and interest
at any time from 91 to 120 days from issuance, for 139% of outstanding principal and interest at any time from 121 to 150 days
from issuance and for 145% of outstanding principal and interest at any time from 151 days from issuance to 180 days from issuance.
The note may not be prepaid after the 180
th
day. The note may be converted by Adar at any time after five months from
issuance into shares of the Company common stock (as determined in the notes) calculated at the time of conversion. The conversion
price of the notes will be equal to 60% of the average of the two lowest closing bid prices of the Company’s common stock
shares as reported on OTC Markets exchange, for the 20 prior trading days including the day upon which the Company receive a notice
of conversion is received by the Company. The notes may be prepaid in accordance with the terms set forth in the notes. The notes
also contain certain representations, warranties, covenants and events of default including if the Company are delinquent in our
periodic report filings with the SEC and increases in the amount of the principal and interest rates under the notes in the event
of such defaults. In the event of default, at Adar’s option and in its sole discretion, Adar may consider the notes immediately
due and payable.
On July 1, 2019, the
Company entered into a loan agreement with Accilent Capital Management Inc / Rev Royalty Income and Growth Trust (“Accilent”),
providing for the purchase by Rev of an unsecured promissory note in the principal amount of $49,389 (CAD$ 65,500) . The note was
fully funded on July 9, 2019 (net of a 8% original issue discount and other expenses). The note bears an interest rate of 16% and
are due and payable on September 11, 2019. The Company could have prepaid the note, with three months of interest as a penalty.
Following maturity, demand, default, or judgment and until actual payment in full, interest rate shall be paid at the rate of 19%
per annum. The Company will receive warrants to purchase one common share of the Company for each warrant held in the aggregate
amount of 215,000 warrants at an exercise price of $0.25 per warrant, or alternatively, the same price as for warrants granted
to investors as part of a financing of the Company subject to adjustment and exercisable within 3 years from issuance (the “Initial
Warrants”). In the event that the common shares of the Issuer are not listed on the TSX Venture Exchange pursuant to the
“Transaction” on or prior to September 1, 2019, an additional 100,000 warrants will be issued at an exercise price
equal to the lesser of $0.25 or the price of the next issuance of common shares of the Issuer (the “Revised Exercise Price”).
Further, the exercise price of the Initial Warrants will adjust to the Revised Exercise Price has stated herein.
In addition, after
March 31, 2019, the Company entered into promissory notes with investors and related parties for a total of $117,750.