PART
I
FORWARD
LOOKING STATEMENTS
Except
for statements of historical fact, certain information described in this Form 10-K report contains “forward-looking statements”
that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “intend,” “may,”
“should,” “will,” “would” or similar words. The statements that contain these or similar words
should be read carefully because these statements discuss the Company’s future expectations, including its expectations
of its future results of operations or financial position, or state other “forward-looking” information. Vivos Inc.
believes that it is important to communicate its future expectations to its investors. However, there may be events in the future
that the Company is not able to accurately predict or to control. Further, the Company urges you to be cautious of the forward-looking
statements which are contained in this Form 10-K report because they involve risks, uncertainties and other factors affecting
its operations, market growth, service, products and licenses. The risk factors in the section captioned “Risk Factors”
in Item 1A of the Company’s Form 10-K, as well as other cautionary language in this Form 10-K report, describe such risks,
uncertainties and events that may cause the Company’s actual results and achievements, whether expressed or implied, to
differ materially from the expectations the Company describes in its forward-looking statements. The occurrence of any of the
events described as risk factors could have a material adverse effect on the Company’s business, results of operations and
financial position.
ITEM
1. BUSINESS.
Vivos
Inc. (the
“Company” or “we”
) was incorporated under the laws of Delaware on December 23, 1994 as
Savage Mountain Sports Corporation (“
SMSC
”). On December 28, 2017, the Company changed its name from Advanced
Medical Isotope Corp. to Vivos Inc. The Company has authorized capital of 2,000,000,000 shares of common stock, $0.001 par value
per share, and 20,000,000 shares of preferred stock, $0.001 par value per share.
Our
principal place of business is 719 Jadwin Avenue, Richland, Washington 99352. Our telephone number is (509) 736-4000. Our corporate
website address is http://www.radiogel.com. Our common stock is currently listed for quotation on the OTC Pink Marketplace under
the symbol “RDGL.”
Overview
The
Company is a radiation oncology medical device company engaged in the development of its yttrium-90 based brachytherapy device,
RadioGel™, for the treatment of non-resectable tumors. A prominent team of radiochemists, scientists and engineers, collaborating
with strategic partners, including national laboratories, universities and private corporations, lead the Company’s development
efforts. The Company’s overall vision is to globally empower physicians, medical researchers and patients by providing them
with new isotope technologies that offer safe and effective treatments for cancer.
The
Company’s current focus is on the development of our RadioGel™ device candidate, including obtaining approval from
the Food and Drug Administration (“
FDA
”) to market and sell RadioGel™ as a Class II medical device. RadioGel™
is an injectable particle-gel for brachytherapy radiation treatment of cancerous tumors in people and animals. RadioGel™
is comprised of a hydrogel, or a substance that is liquid at room temperature and then gels when reaching body temperature after
injection into a tumor. In the gel are small, one micron, yttrium-90 phosphate particles (“
Y-90
”). Once injected,
these inert particles are locked in place inside the tumor by the gel, delivering a very high local radiation dose. The radiation
is beta, consisting of high-speed electrons. These electrons only travel a short distance so the device can deliver high radiation
to the tumor with minimal dose to the surrounding tissue. Optimally, patients can go home immediately following treatment without
the risk of radiation exposure to family members. Since Y-90 has a half-life of 2.7 days, the radioactivity drops to 5% of its
original value after ten days.
The
Company’s lead brachytherapy products, including RadioGel™, incorporate patented technology developed for Battelle
Memorial Institute (“
Battelle
”) at Pacific Northwest National Laboratory, a leading research institute for
government and commercial customers. Battelle has granted the Company an exclusive license to patents covering the manufacturing,
processing and applications of RadioGel™ (the “
Battelle License
”). This exclusive license is to terminate
upon the expiration of the last patent included in this agreement. Other intellectual property protection includes proprietary
production processes and trademark protection in 17 countries. The Company plans to continue efforts to develop new refinements
on the production process, and the product and application hardware, as a basis for future patents.
Regulatory
History
Human
Therapy
RadioGel™
has a long regulatory history with the Food and Drug Administration (“
FDA
”). Initially, the Company submitted
a presubmission (Q130140) to obtain FDA feedback about the proposed product. The FDA requested that the Company file a request
for designation with the Office of Combination Products (RFD130051), which led to the determination that RadioGel™ is a
device for human therapy for non-resectable cancers, which must be reviewed and ultimately regulated by the Center for Devices
and Radiological Health (“
CDRH
”). The Company then submitted a 510(k) notice for RadioGel™ (K133368),
which was found Not Substantially Equivalent due to the lack of a suitable predicate, and RadioGel™ was assigned to the
Class III product code NAW (microspheres). Class III products or devices are generally the highest risk devices and are therefore
subject to the highest level of regulatory review, control and oversight. Class III products or devices must typically be approved
by FDA before they are marketed. Class II devices represent lower risk products or devices than Class III and require fewer regulatory
controls to provide reasonable assurance of the product’s or device’s safety and effectiveness. In contrast, Class
I products and devices are deemed to be lower risk than Class I or II, and are therefore subject to the least regulatory controls.
A
pre-submission meeting (Q140496) was held with the FDA on June 17, 2014, during which the FDA maintained that RadioGel™
should be considered a Class III device and therefore subject to pre-market approval. On December 29, 2014, the Company submitted
a
de novo
petition for RadioGel™ (DEN140043). The
de novo
petition was denied by the FDA on June 1, 2015,
with the FDA providing numerous comments and questions. On September 29, 2015, the Company submitted a follow-up pre-submission
informational meeting request with the FDA (Q151569). This meeting took place on November 9, 2015, at which the FDA indicated
acceptance of the Company’s applied dosimetry methods and clarified the FDA’s outstanding questions regarding RadioGel™.
Following the November 2015 pre-submission meeting, the Company prepared a new pre-submission package to obtain FDA feedback on
the proposed testing methods, intended to address the concerns raised by the FDA staff and to address the suitability of RadioGel™
for
de novo
reclassification. This pre-submission package was presented to the FDA in a meeting on August 29, 2017. During
the August 2017 meeting, the FDA clarified their position on the remaining pre-clinical testing needed for RadioGel™. Specifically,
the FDA addressed proposed dosimetry calculating techniques, dosimetry distribution between injections, hydrogel viscoelastic
properties, and the details of the Company’s proposed animal testing.
The
Company believes that its submissions to the FDA to date have taken into account all the FDA staff’s feedback over the past
three years. Of particular importance, the Company has provided corresponding supporting data for proposed future testing of RadioGel™
to address any remaining questions raised by the FDA. We believe, although no assurances can be given, that the clinical testing
modifications presented to the FDA in August 2017 will result in a
de novo
reclassification for RadioGel™ by the
FDA. In addition, in previous FDA submittals, the Company proposed applying RadioGel™ for a very broad range of cancer therapies,
referred to as Indication for Use. The FDA requested that the Company reduce its Indications for Use. To comply with that request,
the Company expanded its Medical Advisory Board (“
MAB
”) and engaged doctors from respected hospitals who have
evaluated the candidate cancer therapies based on three criteria: (1) potential for FDA approval and successful therapy;
(2) notable advantage over current therapies; and (3) probability of wide spread acceptance by the medical community.
The
MAB selected eighteen applications for RadioGel™, each of which meet the criteria described above. This large number confirms
the wide applicability of the device and defines the path for future business growth. The Company’s application establishes
a single Indication for Use - treatment of basal cell and squamous cell skin cancers. We anticipate that this initial application
will facilitate each subsequent application for additional Indications for Use, and the testing for many of the subsequent applications
could be conducted in parallel, depending on available resources.
In
the event the FDA denies the Company’s application for
de novo
review, and therefore determines that RadioGel™
cannot be classified as a Class I or Class I1 device, the Company will then need to submit a pre-market approval application to
obtain the necessary regulatory approval as a Class III device.
Animal
Therapy
As
noted above, the Office of Combination Products previously classified RadioGel
TM
as a device for human therapy for
non-sectable cancers. In January 2018, the Center for Veterinary Medicine Product Classification Group ruled that RadioGel
TM
should be classified as a device for animal therapy of feline sarcomas and canine soft tissue sarcomas. In addition, the
FDA also reviewed and approved our label, which is a requirement for any device used in animals. We expect the result of such
classification and label approval is that no additional regulatory approvals are necessary for the use of RadioGel
TM
for the treatment of skin cancer in animals.
Based
on the FDA’s recommendation, RadioGel
TM
will be marketed as “IsoPet™” for use by veterinarians
to avoid any confusion between animal and human therapy. The Company already has trademark protection for the “IsoPet™”
name. IsoPet™ and RadioGel
TM
are used synonymously throughout this document. As we stated the only distinction
between the two is the FDA’s recommendation we use IsoPet™ for all veterinarian usage and reserve RadioGel
TM
for human therapy.
IsoPet
Solutions
The
Company’s IsoPet Solutions division was established in May 2016 to focus on the veterinary oncology market, namely engagement
of university veterinarian hospital to develop the detailed therapy procedures to treat animal tumors and ultimately use of the
technology in private clinics. The Company has worked with four different university veterinarian hospitals on RadioGel™
testing and therapy. Colorado State University demonstrated the procedures and the CT and PET-CT imaging of RadioGel
TM
.
Washington State University treated five cats for feline sarcoma. They concluded that the product was safe and effective in killing
cancer cells. A contract was signed with University of Missouri to treat canine sarcomas and equine sarcoids starting early in
2019. The safety review at UC Davis is almost completed. They will be treating prostate and liver cancer in canines in 2019.
These
animal therapies will generate the additional data required by the private veterinary clinics to assure them of the safety and
efficacy of IsoPet™ to complement the previous work at Washington State University.
The
Company anticipates that future profit will be derived from direct sales of RadioGel™ (under the name IsoPet™) and
related services, and from licensing to private medical and veterinary clinics in the U.S. and internationally.
Financing
and Strategy
Research
and development of RadioGel™ and other products in the Company’s brachytherapy product line has been funded with proceeds
from the sale of equity and debt securities as well as a series of grants. The Company requires funding of approximately $1.5
million annually to maintain current operating activities. Over the next 12 to 24 months, the Company believes it will cost approximately
$5.0 million to $10.0 million to fund: (1) the FDA approval process and initial deployment of RadioGel™ and other brachytherapy
products, and (2) initiate regulatory approval processes outside of the United States. The continued deployment of RadioGel™
and the Company’s other brachytherapy products and a worldwide regulatory approval effort will require additional resources
and personnel. The principal variables in the timing and amount of spending for the brachytherapy products in the next 12 to 24
months will be the FDA’s classification of the Company’s brachytherapy products, including RadioGel™, as Class
II or Class III devices (or otherwise) and any requirements for additional studies which may possibly include clinical studies.
Thereafter, the principal variables in the amount of the Company’s spending and its financing requirements would be the
timing of any approvals and the nature of the Company’s arrangements with third parties for manufacturing, sales, distribution
and licensing of those products and the products’ success in the U.S. and elsewhere. The Company intends to fund its activities
through strategic transactions such as licensing and partnership agreements or additional capital raises.
Following
receipt of required regulatory approvals and financing in the U.S., the Company intends to outsource material aspects of manufacturing,
distribution, sales and marketing. Outside of the U.S., the Company intends to pursue licensing arrangements and/or partnerships
to facilitate its global commercialization strategy.
In
the longer-term, subject to the Company receiving adequate funding, regulatory approval for RadioGel™ and other brachytherapy
products, and thereafter being able to successfully commercialize its brachytherapy products, the Company intends to consider
resuming research efforts with respect to other products and technologies intended to help improve the diagnosis and treatment
of cancer and other illnesses
Based
on the Company’s financial history since inception, its auditor has expressed substantial doubt as to the Company’s
ability to continue as a going concern. The Company has limited revenue, nominal cash, and has accumulated deficits since inception.
If the Company cannot obtain sufficient additional capital, the Company will be required to delay the implementation of its business
strategy and may not be able to continue operations.
Product
Features
The
Company’s RadioGel™ device has the following product features:
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Beta
particles only travel a short distance so the device can deliver high radiation to the tumor with minimal dose to the nearby
normal tissues. In medical terms Y-90 beta emitter has a high efficacy rate;
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Benefitting
from the short penetration distance, the patient can go home immediately with no fear of exposure to family members, and there
is a greatly reduced radiation risk to the doctor. A simple plastic tube around the syringe, gloves and safety glasses are
all that is required. Other gamma emitting products require much more protection;
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A
2.7-day half-life means that only 5% of the radiation remains after ten days. This is in contrast to the industry-standard
gamma irradiation product, which has a half-life of 17 days;
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The
short half-life also means that any medical waste can be stored for thirty days then disposed as normal hospital waste;
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RadioGel™
can be administered with small diameter needles (27-gauge) so there is minimal damage to the normal tissue. This is in contrast
to the injection of metal seeds, which does considerable damage; and
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After
about 120 days the gel resorbs by a normal biological cycle, called the Krebs Cycle. The only remaining evidence of the treatment
are phosphate particles so small in diameter that it requires a high-resolution microscope to find them. This is in contrast
to permanent presence of metal seeds.
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Steps
from Production to Therapy
Device
Production
During
the next two years, the Company intends to outsource material aspects of manufacturing and distribution. As future product volume
increases, the Company will reassess its make-buy decision on manufacturing and will analyze the cost/benefit of a centrally located
facility.
Production
of the Hydrogel
RadioGel™
is manufactured with a proprietary process under ventilated sterile hood by following strict Good Laboratory Practices, or GLP,
procedures. It is made in large batches that are frozen for up to three months. When the product is ready to ship, a small quantity
of the gel is dissolved in a sterile saline solution. It is then passed through an ultra-fine filter to ensure sterility.
Production
of the Yttrium-90 Phosphate Particles
The
Y-90 particles are produced with simple ingredients via a proprietary process, again following strict GLP procedures. They are
then mixed into a phosphate-buffered saline solution. They can be produced in large batches for several shipments. The number
of particles per shipment is determined by the dose prescribed by the doctor.
Shipment
RadioGel™
is shipped in two containers, one with a solution of the gel and the other with a solution of the particles. Before shipment they
are subjected to sterility testing, again by strict procedures. The vial with the Y-90 is put through a special radiation calibrator,
which measures beta particles. The vials can be shipped via FedEx or UPS by following the proper protocols.
At
the User
The
user receives the two vials. The solution containing the RadioGel™ is mixed with the solution containing the Y-90 particles.
This is then shaken to ensure homogeneity and withdrawn into a syringe. The quantities that are mixed are calculated from the
information on the product label.
The
specific injection technique depends on the Indication for Use. For small tumors, one centimeter in diameter or less, the cancer
is treated with a single injection. For larger tumors, the cancer is treated with a series of small injections from the same syringe.
Principal
Markets
The
Company is currently pursuing two synergistic business sectors, medical and veterinary, each of which are summarized below.
Medical
Sector
Brachytherapy
is the use of radiation to destroy cancerous tumors by placing a radiation source inside or next to the treatment area. According
to the 2014 MEDraysintell report, the global market for brachytherapy reached US$ 680 million in 2013 and is projected to reach
$2.4 billion by 2030. It is estimated that the U.S. market represents approximately half of the global market. The Company believes
there are significant opportunities in prostate, breast, liver, pancreatic, head and neck cancers. The 2014 U.S. estimated new
cases of cancer according to the American Cancer Society are 233,000 prostate, 235,000 breast, 31,000 liver, and 46,000 pancreas.
RadioGel™
is currently fully developed, requiring only FDA approval before commercialization. The Company has been seeking FDA approval
of RadioGel™ for almost four years. The principal issue preventing approval is that the Company attempted to obtain regulatory
approval for a broad range of Indications for Use, including all non-resectable cancers, without sufficient supporting data.
Building
on the FDA’s ruling of RadioGel™ as a device, the Company is currently developing test plans to address issues raised
in the Company’s prior FDA submittal regarding RadioGel™. The Company intends to request FDA approval to submit RadioGel™
for
de novo
classification, which would reclassify the device from a Class III device to a Class II device and accelerate
the regulatory approval path.
After
analyzing the Company’s data and the last four years of communication from the FDA, the Company has taken the following
steps:
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1.
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Under
new leadership, the Company is implementing all past recommendations from the FDA. The Company intends to narrow the Indications
for Use, will provide test plans for FDA review to respond to answer all previous FDA questions, and will request a pre-submission
meeting;
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2.
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Prepare
a pre-submission request document and FDA meeting request to obtain feedback on the test plans in order to initiate testing,
to present the proposed content for the final application and to request permission to submit a de novo;
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3.
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Submit
an Investigational Device Exemption (“
IDE
”) to obtain permission to conduct human clinical studies; and
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4.
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File
a de novo or Pre-Market Approval application.
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The
critical path is the required testing – in vitro, animal testing, human clinical studies – all of which is resource
dependent.
In
previous submittals, the Company proposed applying a very broad range of cancer therapies, referred to as Indications for Use,
to RadioGel™. The FDA has strongly advised the Company to reduce its Indications for Use. To comply with that request, the
Company has expanded its MAB, consisting of Drs. Barry D. Pressman (Chairman), Albert DeNittis, and Howard Sandler.
The
MAB evaluated the candidate cancer therapies based on three criteria: (i) the potential for FDA approval and successful therapy;
(ii) notable advantages of RadioGel™ over current therapies; and (iii) the likelihood that RadioGel™ can be widely
accepted by the medical community and profitably commercialized.
The
MAB selected eighteen Indications for Use for RadioGel™, each of which meets the above-mentioned criteria. These eighteen
Indications for Use are listed below. This large number confirms the wide applicability of the device and defines the path for
future growth. The Company intends to apply to the FDA for a single Indication for Use, followed by subsequent applications for
additional Indications for Use. The initial application should facilitate each subsequent application, and the testing for many
of the subsequent applications could be conducted in parallel, depending on available resources.
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Skin cancer
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Non-dendritic brain
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Involved
lymph nodes
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Pediatric
cancers – several types
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Bladder
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Rectal
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Liver
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Gynecological
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Localized
prostate
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Spinal
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Pancreas
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Recurrent
esophageal
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Head
and neck (including sino-nasal and oropharyngeal)
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Breast
cancer resection cavity
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Ocular
melanoma
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Anaplastic
thyroid
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After
thorough review to prioritize indications, the MAB has selected basal cell and squamous cell carcinoma (skin cancers) as the first
Indication for Use to be presented to the FDA. According to American Cancer Society, one out of every three new cancers diagnosed
in the U.S. is a cancerous skin lesion of this type, representing 5.5 million tumors annually. The MAB believes RadioGel™
will be the preferred treatment in a reasonable number of cases in a very large market.
Veterinary
Sector
There
are about 150 million pet dogs and cats in the United States. Nearly one-half of dogs and one-third of cats are diagnosed with
cancer at some point in their lifetime. The Veterinary Oncology & Hematology Center in Norwalk, Connecticut, reports that
cancer is the number one natural cause of death in older cats and dogs, accounting for nearly 50 percent of pet deaths each year.
The American Veterinary Medical Association reports that half of the dogs ten years or older will die because of cancer. The National
Cancer Institute reports that about six million dogs are diagnosed with cancer each year, translating to more than 16,000 a day.
The average cost of treating tumors in dogs using radiation is $5,000 to $7,000, according to petcarerx.com.
The
Company’s IsoPet™ operating division focuses on the veterinary oncology market. Dr. Alice Villalobos, a founding member
of the Veterinary Cancer Society and the Chair of our Veterinary Medicine Advisory Board, has been providing guidance to management
regarding this market. The Veterinary Medicine Advisory Board gives us recommendations regarding the overall strategy for our
animal business sector. Specially, they recommended the university veterinary hospitals for demonstration therapies, the specific
cancers to be treated, and have provided business contact information to the private clinics.
Development
of the product and application techniques and animal testing is allowed under FDA regulation. Commercial sales of RadioGel
TM
for animals requires confirmation by the FDA Center for Veterinary Medicine (“
CVM
”). In January 2018,
the Center for Veterinary Medicine Product Classification Group, the entity within the CVM that is responsible for determining
the classification of a product, ruled that RadioGel
TM
should be classified as a device for animal therapy of feline
sarcomas and canine soft tissue sarcomas. In addition, the FDA reviewed and approved our label, which is a requirement for any
device used in animals. The result of such classification and label approval is that no additional regulatory approvals are necessary
for the use of RadioGel
TM
for the treatment of skin cancer in animals.
The
Company currently intends to utilize university veterinary hospitals for therapy development, given that veterinary hospitals
offer superior and plentiful veterinarians and students, a large number of animal patients, radioactive material handling licenses,
and are respected by private veterinary centers and hospitals.
The
Company has worked with four different university veterinarian hospitals on RadioGel™ testing and therapy. Colorado State
University demonstrated the procedures and the CT and PET-CT imaging of RadioGel
TM
. Washington State University treated
four cats for feline sarcoma. They concluded that the product was safe and effective in killing cancer cells. A contract was signed
with University of Missouri to treat canine sarcomas and equine sarcoids starting early in 2019. The safety review at UC Davis
is almost completed. They will be treating prostate and liver cancer in canines in 2019.
Pursuant
to the terms of the grant with Washington State University, it will be responsible for conducting studies regarding in vivo dosimetry
and toxicity of intralesional Y-90 phosphate nanoparticles for the treatment of spontaneous feline and canine sarcomas. The term
of the grant is October 1, 2016 through January 31, 2018. The Company provides the university with the RadioGel
TM
required
to complete the studies, as well as technical support for dosimetry calculations. All payments provided to Washington State University
in relation to the grant shall be made by Washington State Life Sciences Discovery Fund pursuant to a grant, and shall not be
paid by the Company. To compliment the grant, additional scope was added to explore the option of pre-mixing the vials prior to
shipment and the Company was reimbursed $17,583 as a separate contract to the grant.
Pursuant
to the terms of the contract with the University of Missouri, it will be responsible for conducting studies regarding in vivo
dosimetry and toxicity of intralesional Y-90 phosphate nanoparticles for the treatment of soft tissue carcinoma and equine sarcoids.
The term of the contract is November 1, 2017 through October 31, 2018. Project costs shall not exceed $74,009, and payments shall
be made by the Company to the University of Missouri in the following installments: (i) 60% upon the date that the project commences,
(ii) 50% six months thereafter, and (iii) the remaining 10% upon the Company’s receipt of the final report.
The
Company is currently in negotiations with University of California Davis, and the parties have not yet entered into a formal contract.
Although the Company anticipates that such contract will be executed in the near future, no assurances can be given that the Company
will be successful.
Competitors
The
Company competes in a market characterized by technological innovation, extensive research efforts, and significant competition.
The
pharmaceutical and biotechnology industries are intensely competitive and subject to rapid and significant technological changes.
A number of companies are pursuing the development of pharmaceuticals and products that target the same diseases and conditions
that our products target. We cannot predict with accuracy the timing or impact of the introduction of potentially competitive
products or their possible effect on our sales. Certain potentially competitive products to our products are possibly in various
stages of development. Also, there may be many ongoing studies with currently marketed products and other developmental products,
which may yield new data that could adversely impact the use of our products in their current and potential future Indications
for Use. The introduction of competitive products could significantly reduce our sales, which, in turn would adversely impact
our financial and operating results.
There
are a wide variety of cancer treatments approved and marketed in the U.S. and globally. General categories of treatment include
surgery, chemotherapy, radiation therapy and immunotherapy. These products have a diverse set of success rates and side effects.
The Company’s products, including RadioGel™, fall into the brachytherapy treatment category. There are a number of
brachytherapy devices currently marketed in the U.S. and globally. The traditional iodine-125 (I-125) and palladium-103 (Pd-103)
technologies for brachytherapy are well entrenched with powerful market players controlling the market. The industry-standard
I-125-based therapy was developed by Oncura, which is a unit of General Electric Company. Additionally, C.R. Bard, a major industry
player competes in the I-125 brachytherapy marketplace. These market competitors are also involved in the distribution of Pd-103
based products. Cs-131 brachytherapy products are sold by IsoRay. Several Y-90 therapies have been FDA approved including SIR-Spheres
by Sirtex, TheraSphere by Biocompatibles UK and Zevalin by Spectrum Pharmaceuticals.
Raw
Materials
The
Company currently subcontracts the manufacturing of RadioGel
TM
at IsoTherapeutics. PerkinElmer Inc., the only supplier
of Y-90 in the United States, is the sole supplier of the Y-90 used by IsoTherapeutics to manufacture the Company’s RadioGel™.
The Company obtains supplies, hardware, handling equipment and packaging from several different U.S. suppliers.
Customers
The
Company anticipates that potential customers for our potential brachytherapy products likely would include those institutions
and individuals that currently purchase brachytherapy products or other oncology treatment products.
Government
Regulation
The
Company’s present and future intended activities in the development, manufacturing and sale of cancer therapy products,
including RadioGel™, are subject to extensive laws, regulations, regulatory approvals and guidelines. Within the United
States, the Company’s therapeutic radiological devices must comply with the U.S. Federal Food, Drug and Cosmetic Act, which
is enforced by FDA. The Company is also required to adhere to applicable FDA Quality System Regulations, also known as the Good
Manufacturing Practices, which include extensive record keeping and periodic inspections of manufacturing facilities.
In
the United States, the FDA regulates, among other things, new product clearances and approvals to establish the safety and efficacy
of these products. We are also subject to other federal and state laws and regulations, including the Occupational Safety and
Health Act and the Environmental Protection Act.
The
Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations govern or influence the research, testing, manufacture,
safety, labeling, storage, record keeping, approval, distribution, use, reporting, advertising and promotion of such products.
Noncompliance with applicable requirements can result in civil penalties, recall, injunction or seizure of products, refusal of
the government to approve or clear product approval applications, disqualification from sponsoring or conducting clinical investigations,
preventing us from entering into government supply contracts, withdrawal of previously approved applications, and criminal prosecution.
In
the United States, medical devices are classified into three different categories over which the FDA applies increasing levels
of regulation: Class I, Class II, and Class III. Most Class I devices are exempt from premarket notification 510(k); most Class
II devices require premarket notification 510(k); and most Class III devices require premarket approval. RadioGel™ is currently
classified as a Class III device.
Approval
of new Class III medical devices is a lengthy procedure and can take a number of years and require the expenditure of significant
resources. There is a shorter FDA review and clearance process for Class II medical devices, the premarket notification or 510(k)
process, whereby a company can market certain Class II medical devices that can be shown to be substantially equivalent to other
legally marketed devices.
The
Company intends to apply for a
de novo
with an anticipated expenditure of $4.0 million over the next four years. This expenditure
estimate includes anticipated costs associated with in vitro and in vivo pre-clinical testing, our application for an Investigational
Device Exemption, Phase I and Phase II clinical trials and our application for a
de novo
.
As
a registered medical device manufacturer with the FDA, we are subject to inspection to ensure compliance with FDA’s current
Good Manufacturing Practices, or cGMP. These regulations require that we and any of our contract manufacturers design, manufacture
and service products, and maintain documents in a prescribed manner with respect to manufacturing, testing, distribution, storage,
design control, and service activities. Modifications or enhancements that could significantly affect the safety or effectiveness
of a device or that constitute a major change to the intended use of the device require a new 510(k) premarket notification for
any significant product modification.
The
Medical Device Reporting regulation requires that we provide information to the FDA on deaths or serious injuries alleged to be
associated with the use of our devices, as well as product malfunctions that are likely to cause or contribute to death or serious
injury if the malfunction were to recur. Labeling and promotional activities are regulated by the FDA and, in some circumstances,
by the Federal Trade Commission.
As
a medical device manufacturer, we are also subject to laws and regulations administered by governmental entities at the federal,
state and local levels. For example, our facility is licensed as a medical device manufacturing facility in the State of Washington
and is subject to periodic state regulatory inspections. Our customers are also subject to a wide variety of laws and regulations
that could affect the nature and scope of their relationships with us.
In
the United States, as a manufacturer of medical devices and devices utilizing radioactive byproduct material, we are subject to
extensive regulation by not only federal governmental authorities, such as the FDA and FAA, but also by state and local governmental
authorities, such as the Washington State Department of Health, to ensure such devices are safe and effective. In Washington State,
the Department of Health, by agreement with the federal Nuclear Regulatory Commission (“
NRC
”), regulates the
possession, use, and disposal of radioactive byproduct material as well as the manufacture of radioactive sealed sources to ensure
compliance with state and federal laws and regulations. RadioGel™ constitutes both medical devices and radioactive sealed
sources and are subject to these regulations.
Moreover,
our use, management, and disposal of certain radioactive substances and wastes are subject to regulation by several federal and
state agencies depending on the nature of the substance or waste material. We believe that we are in compliance with all federal
and state regulations for this purpose.
Environmental
Regulation
Our
business does not require us to comply with any extraordinary environmental regulations. Our RadioGel™ product is manufactured
in an independently owned and operated facility. Any environmental effects or contamination event that could result would be from
the shipping company during shipment and misuse by the treatment facility upon arrival.
Employees
As
of December 31, 2017, the Company had two full-time personnel. The Company utilizes several independent contractors to assist
with its operations. The Company does not have a collective bargaining agreement with any of its personnel and believes its relations
with its personnel are good.
Available
Information
The
Company prepares and files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and certain
other information with the United States Securities and Exchange Commission (the “
SEC
”). Persons may read and
copy any materials the Company files with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington D.C.
20549, on official business days during the hours of 10 a.m. to 3 p.m. Eastern Time. Information may be obtained on the operation
of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Moreover, the Company maintains a website at http://www.RadioGel.com that contains important information about the Company, including
biographies of key management personnel, as well as information about the Company’s business. This information is publicly
available and is updated regularly. The content on any website referred to in this Form 10-K report is not incorporated by reference
into this Form 10-K report, unless (and only to the extent) expressly so stated herein.
ITEM
1A. RISK FACTORS.
Investing
in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other
information in this Form 10-K, including our financial statements and the related notes and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our securities. The
occurrence of any of the events or developments described below could harm our business, financial condition, operating results,
and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your
investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair
our business operations.
RISKS
ASSOCIATED WITH THE COMPANY’S BUSINESS
Our
independent registered public accounting firms’ reports on its financial statements questions the Company’s ability
to continue as a going concern.
The
Company’s independent registered public accounting firms’ reports on the Company’s financial statements for
the years ended December 31, 2017 and 2016 express doubt about the Company’s ability to continue as a going concern. The
reports include an explanatory paragraph stating that the Company has suffered recurring losses, used significant cash in support
of its operating activities and, based on its current operating levels, require additional capital or significant restructuring
to sustain its operation for the foreseeable future. There is no assurance that the Company will be able to obtain sufficient
additional capital to continue its operations and to alleviate doubt about its ability to continue as a going concern. If the
Company obtains additional financing, such funds may not be available on favorable terms and likely would entail considerable
dilution to existing shareholders. Any debt financing, if available, may involve restrictive covenants that restrict its ability
to conduct its business. It is extremely remote that the Company could obtain any financing on any basis that did not result in
considerable dilution for shareholders. Inclusion of a “going concern qualification” in the report of its independent
accountants or in any future report may have a negative impact on its ability to obtain debt or equity financing and may adversely
impact its stock price.
A
combination of our current financial condition and the FDA’s determinations to date regarding our brachytherapy products
raise material concerns about ability to continue as a going concern.
The
Company will not be able to continue as a going concern unless the Company obtains financing. Depending upon the amount of financing,
if any, the Company is able to obtain, the Company may not receive adequate funds to continue the approval process for RadioGel™
or other brachytherapy products with the FDA.
The
Company has generated operating losses since inception, which are expected to continue, and has increasing cash requirements,
which it may be unable to satisfy
.
The
Company has generated material operating losses since inception. The Company has had recurring net losses since inception which
has resulted in an accumulated deficit of $64,288,167 as of December 31, 2017, including a net loss of $6,418,727 for the year
ended December 31, 2017 and a net loss of $9,854,895 for the year ended December 31, 2016. Historically, the Company has relied
upon investor funds to maintain its operations and develop its business. The Company needs to raise additional capital within
the next quarter from investors for working capital as well as business expansion, and there is no assurance that additional investor
funds will be available on terms acceptable to the Company, or at all. If the Company is unable to unable to obtain additional
financing to meet its working capital requirements, the Company likely would cease operations.
The
Company requires funding of at least $1.5 million per year to maintain current operating activities. Over the next 12 to 24 months,
the Company believes it will cost approximately $5.0 million to $10.0 million to fund: (1) the FDA approval process and initial
deployment of the brachytherapy products and (2) initiate regulatory approval processes outside of the United States. The continued
deployment of the brachytherapy products and a worldwide regulatory approval effort will require additional resources and personnel.
The principal variables in the timing and amount of spending for the brachytherapy products in the next 12 to 24 months will be
the FDA’s classification of the Company’s brachytherapy products as Class II or Class III devices (or otherwise) and
any requirements for additional studies, which may possibly include clinical studies. Thereafter, the principal variables in the
amount of the Company’s spending and its financing requirements would be the timing of any approvals and the nature of the
Company’s arrangements with third parties for manufacturing, sales, distribution and licensing of those products and the
products’ success in the U.S. and elsewhere. The Company intends to fund its activities through strategic transactions such
as licensing and partnership agreements or additional capital raises.
Recent
economic events, including the inherent instability in global capital markets, as well as the lack of liquidity in the capital
markets, could adversely impact the Company’s ability to obtain financing and its ability to execute its business plan.
The
Company has a limited operating history, which may make it difficult to evaluate its business and prospects.
The
Company has a limited operating history upon which one can base an evaluation of its business and prospects. As a company in the
development stage, there are substantial risks, uncertainties, expenses and difficulties to which its business is subject. To
address these risks and uncertainties, the Company must do the following:
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successfully
develop and execute the business strategy;
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respond
to competitive developments; and
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attract,
integrate, retain and motivate qualified personnel.
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There
is no assurance that the Company will achieve or maintain profitable operations or that the Company will obtain or maintain adequate
working capital to meet its obligations as they become due. The Company cannot be certain that its business strategy will be successfully
developed and implemented or that the Company will successfully address the risks that face its business. In the event that the
Company does not successfully address these risks, its business, prospects, financial condition, and results of operations could
be materially and adversely affected.
The
Company’s new products are regulated and require appropriate clearances and approvals to be marketed in the U.S. and globally.
There
is no assurance the FDA or other global regulatory authorities will grant the Company permission to market the Company’s
brachytherapy Y-90 RadioGel™ device.
The
Company has been working with the FDA to obtain clearance for its brachytherapy Y-90 RadioGel
TM
device, but no assurances
have been received. On December 23, 2014, the Company announced that it submitted a
de novo
to the FDA for marketing clearance
for its patented Y-90 RadioGel
TM
device pursuant to Section 513(f)(2) of the U.S. Food, Drug and Cosmetic Act (the
“
Act
”). In June 2015, the FDA notified the Company the
de novo
was not granted. In February 2014, the
FDA found the same device under Section 510(k) of the Act not substantially equivalent and concluded that the device is classified
by statute as a Class III medical device, unless the device is reclassified. The Company is seeking reclassification of the product
to Class II. If the Company is successful in seeking reconsideration of the Company’s
de novo
application, as a regulatory
matter, the device could be on an easier and faster path to market in the United States. However, there would still be the requirements
to complete the in vitro and in vivo testing, and then some human clinical trials. That testing date is submitted in a de novo
pre-market application and if accepted we could then go to market. As a practical matter, the Company would still need to secure
funding and commercial arrangements before marketing could commence. If the
de novo
is declined and if the Company obtains
funding to permit it to continue operations, the Company will explore steps toward seeking approval for the device as a Class
III medical device. Generally, the time period and cost of seeking approval as a Class III medical device is materially greater
than the time period and cost of seeking approval as a Class II medical device. If the Company seeks approval as a Class III device,
human clinical trials will be necessary. Generally, human trials for Class III products are larger, of longer duration and costlier
than those for Class II devices. If human clinical trials are necessary, there will be additional cost and time to reach marketing
clearance or approval. Unless the Company obtains sufficient funding, it will be unable to do the foregoing activities. There
can be no assurance that the product will be approved as either a Class II or Class III device by the FDA even if additional data
is provided. There can be no assurance that the Company will receive FDA approval, or if it does, the timing thereof.
If
the Company is successful in increasing the size of its organization, the Company may experience difficulties in managing growth.
The
Company is a small organization with a minimal number of employees. If the Company is successful, it may experience a period of
significant expansion in headcount, facilities, infrastructure and overhead and further expansion may be required to address potential
growth and market opportunities. Any such future growth will impose significant added responsibilities on members of management,
including the need to improve the Company’s operational and financial systems and to identify, recruit, maintain and integrate
additional managers. The Company’s future financial performance and its ability to compete effectively will depend, in part,
on the ability to manage any future growth effectively.
The
Company’s business is dependent upon the continued services of the Company’s Chief Executive Officer, Michael Korenko.
Should the Company lose the services of Dr. Korenko, the Company’s operations will be negatively impacted.
The
Company’s business is dependent upon the expertise of its Chief Executive Officer, Michael Korenko. Dr. Korenko is essential
to the Company’s operations. Accordingly, an investor must rely on Dr. Korenko’s management decisions that will continue
to control the Company’s business affairs. The Company does not maintain key man insurance on Dr. Korenko’s life.
The loss of the services of Dr. Korenko would have a material adverse effect upon the Company’s business.
The
Company is heavily dependent on consultants for many of the services necessary to continue operations. The loss of any of these
consultants could have a material adverse effect on the Company’s business, results of operations and financial condition.
The
Company’s success is heavily dependent on the continued active participation of certain consultants and collaborating scientists.
Certain key employees and consultants have no written employment contracts. Loss of the services of any one or more of its consultants
could have a material adverse effect upon the Company’s business, results of operations and financial condition.
If
the Company is unable to hire and retain additional qualified personnel, the business and financial condition may suffer.
The
Company’s success and achievement of its growth plans depend on its ability to recruit, hire, train and retain highly qualified
technical, scientific, regulatory and managerial employees, consultants and advisors. Competition for qualified personnel among
pharmaceutical and biotechnology companies is intense, and an inability to attract and motivate additional highly skilled personnel
required for the expansion of the Company’s activities, or the loss of any such persons, could have a material adverse effect
on its business, results of operations and financial condition.
The
Company’s revenues have historically been derived from sales made to a small number of customers. The Company has discontinued
prior operations related to its core business. To succeed, we will need to recommence our operations and achieve sales to a materially
larger number of customers.
During
2014, the Company ceased all previous manufacturing and sales activities. Our sales for the year ended December 31, 2017 and 2016
consisted of only consulting revenue. The Company’s consulting revenues for the years ended December 31, 2017 and 2016 were
made to one customer, and those sales constituted 100.0% of total revenues for those years. At such time as the Company recommences
active operations, no assurances can be given that the Company will be successful in commercializing its products or expanding
the number of customers purchasing its products and services.
Many
of the Company’s competitors have greater resources and experience than the Company has.
Many
of the Company’s competitors have greater financial resources, longer history, broader experience, greater name recognition,
and more substantial operations than the Company has, and they represent substantial long-term competition for us. The Company’s
competitors may be able to devote more financial and human resources than the Company can to research, new product development,
regulatory approvals, and marketing and sales. The Company’s competitors may develop or market products that are viewed
by customers as more effective or more economical than the Company’s products. There is no assurance that the Company will
be able to compete effectively against current and future competitors, and such competitive pressures may adversely affect the
Company’s business and results of operations.
The
Company’s future revenues depend upon acceptance of its current and future products in the markets in which they compete.
The
Company’s future revenues depend upon receipt of financing, regulatory approval and the successful production, marketing,
and sales of the various isotopes the Company might market in the future. The rate and level of market acceptance of each of these
products, if any, may vary depending on the perception by physicians and other members of the healthcare community of its safety
and efficacy as compared to that of any competing products; the clinical outcomes of any patients treated; the effectiveness of
its sales and marketing efforts in the United States, Europe, Far East, Middle East, and Russia; any unfavorable publicity concerning
its products or similar products; the price of the Company’s products relative to other products or competing treatments;
any decrease in current reimbursement rates from the Centers for Medicare and Medicaid Services or third-party payers; regulatory
developments related to the manufacture or continued use of its products; availability of sufficient supplies to either purchase
or manufacture its products; its ability to produce sufficient quantities of its products; and the ability of physicians to properly
utilize its products and avoid excessive levels of radiation to patients. Any material adverse developments with respect to the
commercialization of any such products may adversely affect revenues and may cause the Company to continue to incur losses in
the future.
There
is only one supplier of Y-90 in the United States, requiring us to rely entirely on this supplier to provide the Y-90 particles
needed to produce RadioGel
TM
. If we are unable to obtain a sufficient supply of Y-90 particles, we will not be able
to proceed with our development of RadioGel
TM
and our business will be materially harmed.
The
Company currently subcontracts the manufacturing of RadioGel
TM
at IsoTherapeutics. PerkinElmer Inc., the only supplier
of Y-90 particles in the United States, is the sole supplier of the Y-90 used by IsoTherapeutics to manufacture the Company’s
RadioGel™. In the event PerkinElmer is unable to satisfy our supply requirements or stope producing Y-90 particles, we will
be unable to continue with development of RadioGel™ and our business would be materially harmed.
The
Company will in the future rely heavily on a limited number of suppliers.
Some
of the products the Company might market and components thereof are currently available only from a limited number of suppliers,
several of which are international suppliers. Failure to obtain deliveries from these sources could have a material adverse effect
on the Company’s ability to operate.
The
Company may incur material losses and costs as a result of product liability claims that may be brought against it.
The
Company faces an inherent business risk of exposure to product liability claims in the event that products supplied by the Company
fail to perform as expected or such products result, or is alleged to result, in bodily injury. Any such claims may also result
in adverse publicity, which could damage the Company’s reputation by raising questions about the safety and efficacy of
its products and could interfere with its efforts to market its products. A successful product liability claim against the Company
in excess of its available insurance coverage or established reserves may have a material adverse effect on its business. Although
the Company currently maintains liability insurance in amounts it believes are commercially reasonable, any product liability
the Company may incur may exceed its insurance coverage.
The
Company is subject to the risk that certain third parties may mishandle the Company’s products.
If
the Company markets products, the Company likely will rely on third parties, such as commercial air courier companies, to deliver
the products, and on other third parties to package the products in certain specialized packaging forms requested by customers.
The Company thus would be subject to the risk that these third parties may mishandle its product, which could result in material
adverse effects, particularly given the radioactive nature of some of the products.
The
Company is subject to uncertainties regarding reimbursement for use of its products.
Hospitals
and freestanding clinics may be less likely to purchase the Company’s products if they cannot be assured of receiving favorable
reimbursement for treatments using its products from third-party payers, such as Medicare and private health insurance plans.
Third-party payers are increasingly challenging the pricing of certain medical services or devices, and there is no assurance
that they will reimburse the Company’s customers at levels sufficient for it to maintain favorable sales and price levels
for the Company’s products. There is no uniform policy on reimbursement among third-party payers, and there is no assurance
that the Company’s products will continue to qualify for reimbursement from all third-party payers or that reimbursement
rates will not be reduced. A reduction in or elimination of third-party reimbursement for treatments using the Company’s
products would likely have a material adverse effect on the Company’s revenues.
The
Company’s future growth is largely dependent upon its ability to develop new technologies that achieve market acceptance
with appropriate margins.
The
Company’s business operates in global markets that are characterized by rapidly changing technologies and evolving industry
standards. Accordingly, future growth rates depend upon a number of factors, including the Company’s ability to (i) identify
emerging technological trends in the Company’s target end-markets, (ii) develop and maintain competitive products, (iii)
enhance the Company’s products by adding innovative features that differentiate the Company’s products from those
of its competitors, and (iv) develop, manufacture and bring products to market quickly and cost-effectively. The Company’s
ability to develop new products based on technological innovation can affect the Company’s competitive position and requires
the investment of significant resources. These development efforts divert resources from other potential investments in the Company’s
business, and they may not lead to the development of new technologies or products on a timely basis or that meet the needs of
the Company’s customers as fully as competitive offerings. In addition, the markets for the Company’s products may
not develop or grow as it currently anticipates. The failure of the Company’s technologies or products to gain market acceptance
due to more attractive offerings by the Company’s competitors could significantly reduce the Company’s revenues and
adversely affect the Company’s competitive standing and prospects.
The
Company may rely on third parties to represent it locally in the marketing and sales of its products in international markets
and its revenue may depend on the efforts and results of those third parties.
The
Company’s future success may depend, in part, on its ability to enter into and maintain collaborative relationships with
one or more third parties, the collaborator’s strategic interest in the Company’s products and the Company’s
products under development, and the collaborator’s ability to successfully market and sell any such products. The Company
intends to pursue collaborative arrangements regarding the marketing and sales of its products; however, it may not be able to
establish or maintain such collaborative arrangements, or if it is able to do so, the Company’s collaborators may not be
effective in marketing and selling its products. To the extent that the Company decides not to, or is unable to, enter into collaborative
arrangements with respect to the sales and marketing of its products, significant capital expenditures, management resources and
time will be required to establish and develop an in-house marketing and sales force with technical expertise. To the extent that
the Company depends on third parties for marketing and distribution, any revenues received by the Company will depend upon the
efforts and results of such third parties, which may or may not be successful.
The
Company may pursue strategic acquisitions that may have an adverse impact on its business.
Executing
the Company’s business strategy may involve pursuing and consummating strategic transactions to acquire complementary businesses
or technologies. In pursuing these strategic transactions, even if the Company does not consummate them, or in consummating such
transactions and integrating the acquired business or technology, the Company may expend significant financial and management
resources and incur other significant costs and expenses. There is no assurance that any strategic transactions will result in
additional revenues or other strategic benefits for the Company’s business. The Company may issue the Company’s stock
as consideration for acquisitions, joint ventures or other strategic transactions, and the use of stock as purchase consideration
could dilute the interests of its current stockholders. In addition, the Company may obtain debt financing in connection with
an acquisition. Any such debt financing may involve restrictive covenants relating to capital-raising activities and other financial
and operational matters, which may make it more difficult for the Company to obtain additional capital and pursue business opportunities,
including potential acquisitions. In addition, such debt financing may impair the Company’s ability to obtain future additional
financing for working capital, capital expenditures, acquisitions, general corporate or other purposes, and a substantial portion
of cash flows, if any, from the Company’s operations may be dedicated to interest payments and debt repayment, thereby reducing
the funds available to the Company for other purposes.
The
Company will need to hire additional qualified accounting personnel in order to remediate a material weakness in its internal
control over financial accounting, and the Company will need to expend any additional resources and efforts that may be necessary
to establish and to maintain the effectiveness of its internal control over financial reporting and its disclosure controls and
procedures.
As
a public company, the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and
the Sarbanes-Oxley Act of 2002. The Company’s management is required to evaluate and disclose its assessment of the effectiveness
of the Company’s internal control over financial reporting as of each year-end, including disclosing any “material
weakness” in the Company’s internal control over financial reporting. A material weakness is a control deficiency,
or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual
or interim financial statements will not be prevented or detected. As a result of its assessment, management has determined that
there is a material weakness due to the lack of segregation of duties and, due to this material weakness, management concluded
that, as of December 31, 2017 and 2016, the Company’s internal control over financial reporting was ineffective. This material
weakness was first identified in the Company’s Form 10-K/A amended annual report for the year ended December 31, 2008. This
material weakness has the potential of adversely impacting the Company’s financial reporting process and the Company’s
financial reports. Because of this material weakness, management also concluded that the Company’s disclosure controls and
procedures were ineffective as of December 31, 2017 and 2016. The Company needs to hire additional qualified accounting personnel
in order to resolve this material weakness. The Company also will need to expend any additional resources and efforts that may
be necessary to establish and to maintain the effectiveness of the Company’s internal control over financial reporting and
disclosure controls and procedures.
The
Company may be unable to make timely license and patent payments
Patent
costs associated with existing and new technology were significant; however, the licensing contract was re-negotiated to significantly
reduce these costs. Existing patent and license fees must be paid for the Company to maintain rights to the technology. The Company
would forfeit its exclusive rights to licensed technologies without paying patent and rights fees in a timely fashion. There is
no assurance of sufficient capital to meet ongoing legal costs associated with the patent costs for the Company’s technology.
The
Company’s patented or other technologies may infringe on other patents, which may expose it to costly litigation.
It
is possible that the Company’s patented or other technologies may infringe on patents or other rights owned by others. The
Company may have to alter its products or processes, pay licensing fees, defend infringement actions or challenge the validity
of the patents in court, or cease activities altogether because of patent rights of third parties, thereby causing additional
unexpected costs and delays to the Company. Patent litigation is costly and time consuming, and the Company may not have sufficient
resources to pursue such litigation. If the Company does not obtain a license under such patents, if it is found liable for infringement,
or if it is not able to have such patents declared invalid, the Company may be liable for significant money damages, may encounter
significant delays in bringing products to market or may be precluded from participating in the manufacture, use or sale of products
or methods of treatment requiring such licenses.
Protecting
the Company’s intellectual property is critical to its innovation efforts.
The
Company owns or has a license to use several U.S. and foreign patents and patent applications, trademarks and copyrights. The
Company’s intellectual property rights may be challenged, invalidated or infringed upon by third parties, or it may be unable
to maintain, renew or enter into new licenses of third party proprietary intellectual property on commercially reasonable terms.
In some non-U.S. countries, laws affecting intellectual property are uncertain in their application, which can adversely affect
the scope or enforceability of the Company’s patents and other intellectual property rights. Any of these events or factors
could diminish or cause the Company to lose the competitive advantages associated with the Company’s intellectual property,
subject the Company to judgments, penalties and significant litigation costs, or temporarily or permanently disrupt its sales
and marketing of the affected products or services.
The
Company may not be able to protect its trade secrets and other unpatented proprietary technology, which could give competitors
an advantage.
The
Company relies upon trade secrets and other unpatented proprietary technology. The Company may not be able to adequately protect
its rights with regard to such unpatented proprietary technology, or competitors may independently develop substantially equivalent
technology. The Company seeks to protect trade secrets and proprietary knowledge, in part through confidentiality agreements with
its employees, consultants, advisors and collaborators. Nevertheless, these agreements may not effectively prevent disclosure
of the Company’s confidential information and may not provide the Company with an adequate remedy in the event of unauthorized
disclosure of such information, and as result the Company’s competitors could gain a competitive advantage.
General
economic conditions in markets in which the Company does business can impact the demand for the Company’s goods and services.
Decreased demand for the Company’s products and services could have a negative impact on its financial performance and cash
flow.
Demand
for the Company’s products and services, in part, depends on the general economic conditions affecting the countries and
industries in which the Company does business. A downturn in economic conditions in a country or industry that the Company serves
may adversely affect the demand for the Company’s products and services, in turn negatively impacting the Company’s
operations and financial results. Further, changes in demand for the Company’s products and services can magnify the impact
of economic cycles on the Company’s businesses. Unanticipated contract terminations by current customers can negatively
impact operations, financial results and cash flow. The Company’s earnings, cash flow and financial position are exposed
to financial market risks worldwide, including interest rate and currency exchange rate fluctuations and exchange rate controls.
Fluctuations in domestic and world financial markets could adversely affect interest rates and impact the Company’s ability
to obtain credit or attract investors.
The
Company is subject to extensive government regulation in jurisdictions around the world in which it does business. Regulations
address, among other things, environmental compliance, import/export restrictions, healthcare services, taxes and financial reporting,
and those regulations can significantly increase the cost of doing business, which in turn can negatively impact operations, financial
results and cash flow.
If
the Company is successful in developing manufacturing capability, the Company will be subject to extensive government regulation
and intervention both in the U.S. and in all foreign jurisdictions in which it conducts business. Compliance with applicable laws
and regulations will result in higher capital expenditures and operating costs, and changes to current regulations with which
the Company complies can necessitate further capital expenditures and increases in operating costs to enable continued compliance.
Additionally, from time to time, the Company may be involved in proceedings under certain of these laws and regulations. Foreign
operations are subject to political instabilities, restrictions on funds transfers, import/export restrictions, and currency fluctuation.
Volatility
in raw material and energy costs, interruption in ordinary sources of supply, and an inability to recover from unanticipated increases
in energy and raw material costs could result in lost sales or could increase significantly the cost of doing business.
Market
and economic conditions affecting the costs of raw materials, utilities, energy costs, and infrastructure required to provide
for the delivery of the Company’s products and services are beyond the Company’s control. Any disruption or halt in
supplies, or rapid escalations in costs, could adversely affect the Company’s ability to manufacture products or to competitively
price the Company’s products in the marketplace. To date, the ultimate impact of energy costs increases has been mitigated
through price increases or offset through improved process efficiencies; however, continuing escalation of energy costs could
have a negative impact upon the Company’s business and financial performance.
RISKS
RELATED TO THE COMPANY’S COMMON STOCK
The
Company’s common stock is currently quoted on the OTC Pink Marketplace. Failure to develop or maintain a more active trading
market may negatively affect the value of the Company’s common stock, may deter some potential investors from purchasing
the Company’s common stock or other equity securities, and may make it difficult or impossible for stockholders to sell
their shares of common stock.
The
Company’s average daily volume of shares traded for the years ended December 31, 2017 and 2016 was 223,500 and 113,034,
respectively
.
Failure to develop or maintain an active trading market may negatively affect the value of the Company’s
common stock, may make some potential investors unwilling to purchase the Company’s common stock or equity securities that
are convertible into or exercisable for the Company’s common stock, and may make it difficult or impossible for the Company’s
stockholders to sell their shares of common stock and recover any part of their investment.
The
Company’s outstanding securities, the stock or securities that it may become obligated to issue under existing agreements,
and certain provisions of those securities, may cause immediate and substantial dilution to existing stockholders and may make
it more difficult to raise additional equity capital.
The
Company had 71,447,213 shares of common stock outstanding on March 28, 2018. The Company also had outstanding on that date derivative
securities consisting of options, warrants, and convertible notes that if they had been exercised and converted in full on March
28, 2018, would have resulted in the issuance of up to 19,557,612 additional shares of common stock. The issuance of shares upon
the exercise of options or the conversion of convertible notes may result in substantial dilution to each stockholder by reducing
that stockholder’s percentage ownership of the Company’s total outstanding common stock. Additionally, the Company
has outstanding notes that if not prepaid by specific dates entitle the holder to convert the principal and accrued interest into
common stock at 60% of the lowest trading price during the previous thirty-day trading period of the Company’s common stock
prior to conversion as provided in the notes. See Note 9 of the footnotes to the Financial Statements for the years ended December
31, 2017 and 2016 beginning on page [F-2] of this report regarding the equity issuable upon conversion. The issuance of some or
all those warrants and any exercise of those warrants will have the effect of further diluting the percentage ownership of the
Company’s other stockholders. That agreement also provides for stock compensation for consulting services. The existence
and terms of these derivative securities and other obligations may make it more difficult for the Company to raise additional
capital through the sale of stock or other equity securities.
Future
sales of the Company’s stock, including sales following exercise or conversion of derivative securities, or the perception
that such sales may occur, may depress the price of common stock and could encourage short sales.
The
sale or availability for sale of substantial amounts of the Company’s shares in the public market, including shares issuable
upon exercise of options or warrants or upon the conversion of convertible securities, or the perception that such sales may occur,
may adversely affect the market price of the Company’s common stock. Any decline in the price of the Company’s common
stock may encourage short sales, which could place further downward pressure on the price of the Company’s common stock.
The
Company’s stock price is likely to be volatile.
For
the year ended December 31, 2017, the reported low closing price for the Company’s common stock was $0.02 per share, and
the reported high closing price was $0.18 per share. For the year ended December 31, 2016, the reported low closing price for
the Company’s common stock was $0.07 per share, and the reported high closing price was $0.96 per share. There is generally
significant volatility in the market prices, as well as limited liquidity, of securities of early stage companies, particularly
early stage medical product companies. Contributing to this volatility are various events that can affect the Company’s
stock price in a positive or negative manner. These events include, but are not limited to: governmental approvals, refusals to
approve, regulations or other actions; market acceptance and sales growth of the Company’s products; litigation involving
the Company or the Company’s industry; developments or disputes concerning the Company’s patents or other proprietary
rights; changes in the structure of healthcare payment systems; departure of key personnel; future sales of its securities; fluctuations
in its financial results or those of companies that are perceived to be similar to us; investors’ general perception of
us; and general economic, industry and market conditions. If any of these events occur, it could cause the Company’s stock
price to fall, and any of these events may cause the Company’s stock price to be volatile.
The
Company’s common stock is subject to the “Penny Stock” rules of the SEC and the trading market in its securities
is limited, which makes transactions in its common stock cumbersome and may reduce the value of an investment in the Company’s
stock.
The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for
the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price
of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule
15g-9 requires that a broker or dealer approve a person’s account for transactions in penny stocks and that the broker or
dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information
and investment experience and objectives of the person and must make a reasonable determination that the transactions in penny
stocks are suitable for that person and that the person has sufficient knowledge and experience in financial matters to be capable
of evaluating the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which sets forth the basis on which the broker or dealer made the suitability determination, and that
the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of the Company’s common stock and may cause a decline in the market value of
its stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny
stocks.
As
a result of the Company issuing preferred stock, the rights of holders of the Company’s common stock and the value of the
Company’s common stock may be adversely affected.
The
Company’s board of directors is authorized to issue classes or series of preferred stock, without any action on the part
of the stockholders. The Company’s board of directors also has the power, without stockholder approval, to set the terms
of any such classes or series of preferred stock, including voting rights, dividend rights and preferences over the common stock
with respect to dividends or upon the liquidation, dissolution or winding-up of its business, and other terms. The Company has
issued preferred stock that has a preference over the common stock with respect to the payment of dividends or upon liquidation,
dissolution or winding-up, and with respect to voting rights. In accordance with that and with the issuance of preferred stock
the voting rights the common stockholders voting rights have been diluted and it is possible that the rights of holders of the
common stock or the value of the common stock have been adversely affected.
The
Company does not expect to pay any dividends on common stock for the foreseeable future.
The
Company has not paid any cash dividends on its common stock to date and does not anticipate it will pay cash dividends on its
common stock in the foreseeable future. Accordingly, stockholders must be prepared to rely on sales of their common stock after
price appreciation to earn an investment return, which may never occur. Any determination to pay dividends in the future will
be made at the discretion of the Company’s board of directors and will depend on the Company’s results of operations,
financial conditions, contractual restrictions, restrictions imposed by applicable law, and other factors that the Company’s
board deems relevant.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
This
item is not applicable to the Company because the Company is a smaller reporting company as defined by Rule 12b-2 under the Securities
Exchange Act of 1934.
ITEM
2. PROPERTIES.
The
Company is headquartered in Richland, Washington. The Company was renting office space from a significant shareholder and director
of the Company on a month-to-month basis with a monthly payment of $1,500. This rental agreement was terminated as of April 1,
2017.
ITEM
3. LEGAL PROCEEDINGS.
On
March 6, 2015, Robert and Maribeth Myers filed a lawsuit against the Company and BancLeasing, Inc., owner of a linear accelerator
and other equipment leased by the Company, in the Superior Court of the State of Washington, in and for Benton County (Case No.
15-2-0054101), asserting various claims related to the Company’s five-year lease of production center space owned by Mr.
and Mrs. Myers. The Company subsequently filed counterclaims against Mr. and Mrs. Myers, BancLeasing and Washington Trust Bank,
alleging misapplication of lease payments to the principal loan amount for a linear accelerator and other equipment stored on
the production center property, as well as certain building improvements made by the Company. During 2016, the Company entered
into a Settlement Agreement with Robert and Maribeth Myers, pursuant to which the Company agreed to pay a settlement amount of
$438,830 in exchange for the release of all claims related to the matter, which amount was paid by the Company during the year
ended December 31, 2016.
In
2016, the Company was awarded in the Superior Court of the State of Washington a total sum of $527,876 against BancLeasing. The
Company is pursuing its options for collection of the awarded amount, however there can be no assurance as to any eventual collection.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
Company’s current directors and executive officers are as follows:
NAME
|
|
AGE
|
|
POSITION
|
Michael
K. Korenko
|
|
76
|
|
President,
Chief Executive Officer, and Director
|
L.
Bruce Jolliff
|
|
68
|
|
Chief
Financial Officer
|
Carlton
M. Cadwell
|
|
73
|
|
Chairman
of the Board and Secretary
|
Term
of Office
All
the Company’s directors hold office until the next annual meeting of the stockholders or until their successors is elected
and qualified. The Company’s executive officers are appointed by the Company’s board of directors and hold office
until their resignation, removal, death or retirement.
Background
and Business Experience
The
business experience during the past five years of each of the Company’s directors and executive officers is as follows:
Dr.
Michael K. Korenko
,
President and Chief Executive Officer of the Company since December 2016, and a member of the Board
of Directors since August 2017, joined the Company as an Advisor to the Board of the Company during 2009 and served as member
of the Board from May 2009 to March 2010. Dr. Korenko has also served on the Hanford Advisory Board since 2009. Dr. Korenko served
as Business Development Manager for Curtiss-Wright from 2006 to 2009, as Chief Operating Officer for Curtiss-Wright from 2000
to 2005 and was Executive Vice President of Closure for Safe Sites of Colorado at Rocky Flats from 1994 to 2000. Dr. Korenko served
as Vice President of Westinghouse from 1987 to 1994 and was responsible for the 300 and 400 areas, including the Fast Flux Testing
Facility (“
FFTF
”) and all engineering, safety analysis, and projects for the Hanford site. Dr. Korenko is the
author of 28 patents and has received many awards, including the National Energy Resources Organization Research and Development
Award, the U.S. Steelworkers Award for Excellence in Promoting Safety, and the Westinghouse Total Quality Award for Performance
Manager of the Year. Dr. Korenko has a Doctor of Science from MIT, was a NATO Postdoctoral Fellow at Oxford University, and was
selected as a White House Fellow for the Department of Defense, reporting to Secretary Cap Weinberger.
Dr.
Korenko brings to the Board over seven years’ experience working with and advising various small businesses, including companies
involved in turnarounds. Dr. Korenko has also been involved as an advisor to the Company since 2009 in the development of medical
isotopes.
Carlton
M. Cadwell
,
Chairman of the Board and Secretary since December 2016, joined the Company as a director in 2006.
Dr. Cadwell brings over 30 years of experience in business management, strategic planning, and implementation. He co-founded Cadwell
Laboratories, Inc. in 1979 and has served as its President since its inception. Cadwell Laboratories, Inc. is a major international
provider of neurodiagnostic medical devices. After receiving his bachelor’s degree from the University of Oregon in 1966
and a doctoral degree from the University of Washington in 1970, he began his career serving in the United States Army as a dentist
for three years. From 1973 to 1980, Dr. Cadwell practiced dentistry in private practice and since has started several businesses.
Mr.
Cadwell brings to the Board over ten years of service on the Board and over forty-five years of experience as a successful entrepreneur,
as well as medical expertise.
Leonard
Bruce Jolliff
,
the Chief Financial Officer, joined the Company as chief financial officer in 2006. For nine years
prior to joining the Company, Mr. Jolliff was a sole practitioner in the role of CFO for Hire and as a Forensic Accountant, working
with companies ranging from Fortune 500 to small family operations. Mr. Jolliff is a CPA and a member of the Washington Society
of CPAs. He is also a CFE and a member of the Association of Certified Fraud Examiners.
Mr.
Jolliff has held CFO and Controller positions in an array of industries and has worked as a CPA in public practice.
Identification
of Significant Consultants
David
J. Swanberg, M.S., P.E.
Chief Technical Officer, has over 30 years’ experience in radiochemical processing, medical
isotope production, nuclear waste management, materials science, regulatory affairs, and project management. He has worked in
diverse organizations ranging from small start-up businesses to corporations with multi-billion dollar annual revenues. He previously
served as Executive Vice President of Operations for IsoRay Medical Inc. managing day-to-day operations, R&D, and New Product
Development. Mr. Swanberg was a co-founder of IsoRay and led the initial Cs-131 brachytherapy seed product development, FDA 510(k)
submission/clearance, and NRC Sealed Source review and registration. He led the radiation dosimetry evaluations to meet American
Association of Physicists in Medicine guidelines and is a current member of the AAPM. Mr. Swanberg served on the IsoRay Board
of Directors and participated in several capital financing rounds totaling over $30.0 million. He holds a BA in Chemistry from
Bethel University (MN) and an MS in Chemical Engineering from Montana State University. He has numerous technical publications
and holds several patents.
Nigel
R. Stevenson, Ph.D.,
is an expert in the production of medical isotopes. He holds a Ph.D. in Nuclear Physics from the
University of London and has directed many corporate innovations for imaging and therapeutic nuclide agents. For the past five
years he has served as Chief Operating Officer for Clear Vascular Inc. and was previously Chief Operating Officer of Trace Life
Sciences, which produced a range of medical radiochemicals and radiopharmaceuticals. Prior to this, he had been VP Production
and Research for Theragenics Corp. and directed operations in Atlanta for the world’s largest cyclotron facility (14 cyclotrons)
that produced brachytherapy seeds. Dr. Stevenson was also Head of Isotope Production and Research at TRIUMF (Canadian National
Accelerator Laboratory) where he managed the production of medical radioisotopes for MDS Nordion.
Donald
A. Ludwig, Ph.D
.
, Special Projects Manager and IsoPet™ Business Development Manager. Dr. Ludwig is an expert in
particle accelerator applications in radiation therapy, nuclear medicine and radioisotope production. Since 1988 he has served
as an advisor to numerous entities in the field, both domestic and foreign. Among these are the Atomic Energy of Canada, the U.
S. Department of Energy Labs at Los Alamos, Berkeley, Fermi, Hanford and Oak Ridge, the Israel Atomic Energy Agency, the Australian
Nuclear Science and Technology Organization, the Kurchatov Russian Research Institute in Moscow and the Bhabha Atomic Research
Center in Mumbai, India. He holds a Ph.D. from UCLA in Medical Physics as well as an MS in Nuclear Physics from Cal Tech, a BS
in Physics from the U. S. Military Academy at West Point and an MBA in Theoretical Marketing from the University of Southern California.
Medical
and Veterinarian Advisory Boards
Dr.
Barry D. Pressman MD, FACR - Chairman Medical Advisory Board.
Dr. Pressman is Professor and Chairman of the S. Mark Taper
Foundation Imaging Centre and Department, and Chief of the Section of Neuroradiology and Head and Neck Radiology at
Cedars-Sinai
Medical Center
, located in Los Angeles, California.
Dr.
Pressman is a past President of The American College of Radiology, the Western Neuroradiological Society, as well as past President
of the California Radiological Society. Currently he is a member of the American Society of Neuroradiology and the American Society
of Pediatric Neuroradiology.
Dr.
Pressman earned his medical degree Cum Laude from Harvard Medical School after graduating Summa Cum Laude from Dartmouth College.
After a surgical internship at Harvard’s Peter Bent Brigham Hospital in Boston, he completed a diagnostic radiology residency
at Columbia-Presbyterian Medical Center in New York and a Neuroradiology fellowship at George Washington University Hospital.
During this period, he wrote many original papers for Computer Tomography (CT).
Dr.
Albert S. DeNittis MD, MS, FCPP - Medical Advisory Board.
Dr. Albert S. DeNittis is currently is the Chief of Radiation
Oncology at Lankenau Medical Center and Clinical Professor at Lankenau Institute for Medical Research in Wynnewood, Pennsylvania
and the Director of Radiation Oncology at Brodesseur Cancer Center in New Jersey. He is also the Principal Investigator and in
charge of a grant awarded by the NIH for its National Cancer Oncology Research Program (NCORP) at Main Line Health. Dr. DeNittis’
practice experience includes image-guided radiosurgery, stereotactic body radiation therapy (SBRT), intensity modulated radiation
therapy (IMRT), image guided radiation therapy (IGRT), high-dose rate (HDR) brachytherapy, cranial and extracranial stereotactic
radiosurgery, respiratory gating, and Cyberknife.
Dr.
DeNittis has served on numerous regional, national and government committees related to key issues in Dr. DeNittis earned a BA
and a MS at Rutgers University and a MD from the Robert Wood Johnson Medical School at the University of Medicine and Dentistry
of New Jersey. He completed postdoctoral training internships and residency at the Department of Radiation Oncology at the Hospital
of the University of Pennsylvania. Dr. DeNittis is board certified by the American Board of Radiology and Licensed in New Jersey
and Pennsylvania.
Dr.
Howard M. Sandler, MD, MS, FASTRO, FASCO - Medical Advisory Board
. Dr. Sandler is Ronald H. Bloom Family Chair in Cancer
Therapeutics and Professor and Chairman of Radiation Oncology and a member of the Samuel Oschin Cancer Institute, Cedars-Sinai
Medical Center, Los Angeles. He received his undergraduate degree, masters in physics and medical degree from the University of
Connecticut and completed his training in Radiation Oncology at the University of Pennsylvania. He was recruited to Cedars-Sinai
in 2008 from the University of Michigan, where he served as Newman Family Professor of Radiation Oncology. Dr. Sandler’s
research interests include prostate and other genitourinary tumors, as well as a broad range of subjects related to radiation
oncology. He has served as chairman of the Radiation Therapy Oncology Group — now part of NRG Oncology — Genitourinary
Cancer Committee since 1997. He has written nearly 300 peer-reviewed publications primarily on prostate cancer and radiation therapy.
Dr.
Alice Villalobos, DVM, FNAP - Chair of the Veterinary Medicine Advisory Board.
Dr. Alice Villalobos is a well-known pioneer
in the field of cancer care for companion animals and a founding member of the Veterinary Cancer Society. A 1972 graduate of UC
Davis, she completed Dr. Gordon Theilen’s first mock residency program in oncology and has served the profession by consulting,
writing and lecturing in the rapidly growing field of veterinary oncology and end of life care.
Dr.
Alice Villalobos is President Emeritus of the Society for Veterinary Medical Ethics, Past President of the American Association
of Human Animal Bond Veterinarians and Chair of the Veterinary Academy for the National Academies of Practice. She operated Coast
Pet Clinic/Animal Cancer Center for 25 years, which is now VCA Coast Animal Hospital. She is the author of numerous articles,
papers, and including her classic veterinarian textbook, Canine and Feline Geriatric Oncology: Honoring the Human-Animal Bond.
She has lectured worldwide on oncology, quality of life, the human-animal bond and end of life care and bioethics. She founded
Pawspice, an end of life care program that embraces kinder, gentler palliative cancer medicine and integrative care for pets with
cancer and terminal illness (www.Pawspice.com). Dr. Alice is Director of Animal Oncology Consultation Service in Woodland Hill,
California and Pawspice at VCA Coast Animal Hospital in Hermosa Beach, California. Dr. Alice was elected 2016 Hermosa Beach Woman
of the Year.
Dr.
Villalobos’ role with the Company is to support the commercialization of the Company’s yttrium-90 brachytherapy products
for use in companion animals.
Tariq
Shah BSc. DipMS - Veterinary Medicine Advisory Board Member.
Mr. Shah is a new member of the Veterinary Medicine Advisory
Board as of March 2, 2018. He has been working within Animal Health for 25 years. A graduate in Marine Biology from the University
of Liverpool, United Kingdom, he has held managerial positions for both veterinary pharmaceutical companies and veterinary diagnostic
laboratories. Since he came to the US in 2008, he has worked with veterinary oncologists across America, conducting research and
commercializing diagnostic technology.
Mr.
Shah holds an adjunct faculty position at the University of Missouri College of Veterinary Medicine, which is our key canine testing
center. In 2017 he established Oncologize, a pioneering company designed to support and assist organizations in their development
and commercialization of oncology products.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors and persons who own more
than 10% of the Company’s common stock to file with the SEC initial reports of beneficial ownership on Form 3, changes in
beneficial ownership on Form 4, and an annual statement of beneficial ownership on Form 5. Such executive officers, directors
and greater than 10% stockholders are required by SEC rules to furnish the Company with copies of all such forms that they have
filed.
Based
solely on its review of such forms filed with the SEC and received by the Company and representations from certain reporting persons,
the Company believes that each of its executive officers and directors reported all transactions during the year ended December
31, 2017.
Code
of Ethics
The
Company’s Board of Directors has not adopted a code of ethics that applies to the principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar functions, because of the Company’s
limited number of executive officers and employees that would be covered by such a code and the Company’s limited financial
resources. The Company anticipates that it will adopt a code of ethics after it increases the number of executive officers and
employees and obtain additional financial resources.
Audit
Committee and Audit Committee Financial Expert
As
of the date of this report, the Company has not established an audit committee, and therefore, the Company’s board of directors
performs the functions that customarily would be undertaken by an audit committee. The Company’s board of directors during
2017 was comprised of three directors, two of whom the Company had determined satisfied the general independence standards of
the NASDAQ listing requirements, however one of those Directors resigned effective December 31, 2017.
The
Company’s Board of Directors has determined that none of its current members qualifies as an “audit committee financial
expert,” as defined by the rules of the SEC. In the future, the Company intends to establish board committees and to appoint
such persons to those committees as are necessary to meet the corporate governance requirements imposed by a national securities
exchange, although it is not required to comply with such requirements until the Company elects to seek listing on a national
securities exchange.
ITEM
11. EXECUTIVE COMPENSATION.
Summary
Compensation Table
The
following table sets forth the compensation paid to the Company’s Chief Executive Officer and those executive officers that
earned in excess of $100,000 during the twelve-month periods ended December 31, 2017 and 2016 (collectively, the “
Named
Executive Officers
”):
Name and Principal Position
|
|
Year
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards ($)
(3)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Michael K. Korenko
|
|
|
2017
|
|
|
$
|
164,548
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
164,548
|
|
CEO, President and Director
|
|
|
2016
|
|
|
$
|
-
|
(1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James C. Katzaroff
|
|
|
2017
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,525
|
(4)
|
|
$
|
7,525
|
|
Former CEO and Chairman
|
|
|
2016
|
|
|
$
|
250,000
|
(2)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
408,165
|
(4)
|
|
$
|
658,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L. Bruce Jolliff
|
|
|
2017
|
|
|
$
|
139,629
|
(5)
|
|
$
|
10,000
|
(6)
|
|
$
|
|
|
|
$
|
43,653
|
(7)
|
|
$
|
149,629
|
|
CFO
|
|
|
2016
|
|
|
$
|
180,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
110,389
|
(7)
|
|
$
|
290,389
|
|
(1)
Mr. Korenko began serving as our Chief Executive Officer and President on December 14, 2016 and, as such, did not receive any
compensation during 2016. Mr. Korenko received an annual salary of $120,000 for the period December 14, 2016 through May 9, 2017,
at which time his salary was raised to $180,000. Of the $164,548 salary for 2017, $66,308 has not been paid and is reflected as
accrued payroll at December 31, 2017.
(2)
Mr. Katzaroff resigned as Chief Executive Officer in December 2016.
(3)
The amounts in this column represent the grant date fair value of stock option awards, computed in accordance with FASB ASC Topic
718.
(4)
In June 2016, Mr. Katzaroff received 100,000, three-year common stock options at $1.00, and 1,000,000, five-year common stock
options at $0.50. Additionally, Mrs. Katzaroff received 100,000, five-year common stock options at $0.50, vested equally over
24 months. These options have a grant date fair value of $34,771, $363,776, and $36,378, respectively, which amounts were calculated
in accordance with ASC Topic 718.
(5)
Mr. Jolliff received an annual salary of $120,000 for the period January 1, 2017 through May 9, 2017, at which time his salary
was raised to $150,000. Of the $149,629 salary for 2017, $19,480 has not been paid and is reflected as accrued payroll at December
31, 2017.
(6)
Mr. Jolliff received a $10,000 bonus for the year ended December 31, 2017.
(7)
In June 2016, Mr. Jolliff received 240,000, five-year common stock options at $0.50 and another 240,000, five-year common stock
options at $0.50 vesting equally over 24 months. These options have a grant date fair value of $87,306 and $87,306, respectively,
which amounts were calculated in accordance with ASC Topic 718.
Narrative
Disclosure to Summary Compensation Table
Dr.
Michael K. Korenko.
On September 12, 2017, Mr. Korenko entered into an employment agreement with the Company, which commenced
retroactively with an effective date of December 14, 2016, and which shall terminate on December 31, 2018 (the “
Termination
Date
”). Under the terms of his employment agreement, the Company may terminate Dr. Korenko’s employment either
with or without cause prior to the Termination Date, but in the event of a termination without cause, Dr. Korenko shall be entitled
to receive monthly payments of his base salary for a period of eighteen months thereafter.
Pursuant
to his employment agreement, the Company shall issue to Dr. Korenko 100,000 shares of Series A Preferred Stock in satisfaction
of past due compensation, in exchange for $32,308 of accrued payroll, $67,692 of accounts payable, and wages valued at $199,690.
For the period spanning December 14, 2016 to May 8, 2017, the annual base salary shall be $120,000. From May 9, 2017 to the Termination
Date, the annual base salary shall increase to $180,000;
provided, however
, that one third of such increase shall be deferred
until such time that the Company’s cash balance exceeds $2.0 million. In addition, the Company shall issue to Dr. Korenko
4.0 million Restricted Stock Units under the Company’s 2015 Omnibus Securities and Incentive Plan (the “
Incentive
Plan
”), which shall serve as an employee bonus, and Dr. Korenko shall be eligible to participate in a discretionary
annual Executive Bonus Program.
In
2017, Mr. Korenko received an annual salary of $120,000 for the period December 14, 2016 through May 9, 2017, at which time his
salary was raised to $180,000. Of the $164,548 salary for 2017, $66,308 has not been paid and is reflected as accrued payroll
at December 31, 2017.
James
C. Katzaroff
. The Company’s former Chief Executive Officer, James C. Katzaroff, did not have a written employment agreement
and, therefore, no contracted amount or schedule of pay. However, his annual compensation was $250,000 and, accordingly, accruals
were made for his compensation in 2016 to bring his recorded salary to $250,000. In 2016, Mr. Katzaroff received $43,928 and an
additional $206,072 was accrued as of December 31, 2016. Mr. Katzaroff resigned as Chief Executive Officer in December 2016, and
therefore did not receive any compensation from the Company in 2017.
L.
Bruce Jolliff
. Through the year ended December 31, 2016, Mr. Jolliff had a May 2007 employment agreement with the Company
that provides for a salary of $100,000 per year, which amount was increased on January 1, 2012 to $156,000, and again adjusted
beginning January 1, 2013 to $180,000. In 2016, Mr. Jolliff received $96,721 and an additional $83,279 was accrued as of December
31, 2016.
On
September 12, 2017, the Company entered into a new employment agreement with Mr. Jolliff, which commenced retroactively with an
effective date of January 1, 2017, and which shall terminate on December 31, 2018 (the “
Termination Date
”).
Pursuant to his employment agreement, the Company may terminate Mr. Jolliff’s employment either with or without cause prior
to the Termination Date, but in the event of a termination without cause, Mr. Jolliff shall be entitled to receive monthly payments
of his base salary for a period of eighteen months thereafter.
Mr.
Jolliff’s employment agreement also provides that the Company shall issue to Mr. Jolliff 83,279 shares of Series A Preferred
Stock in satisfaction of past due compensation, in exchange for $83,280 of accrued payroll and wages valued at $166,299. For the
period spanning January 1, 2017 to May 8, 2017, the annual base salary shall be $120,000. From May 9, 2017 to the Termination
Date, the annual base salary shall increase to $150,000;
provided, however
, that one fifth of such increase shall be deferred
until such time that the Company’s cash balance exceeds $2.0 million. In addition, the Company shall issue to Mr. Jolliff
2.2 million Restricted Stock Units under the Incentive Plan, which shall serve as an employee bonus, and Mr. Jolliff shall be
eligible to participate in a discretionary annual Executive Bonus Program.
In
2017, Mr. Jolliff received an annual salary of $120,000 for the period January 1, 2017 through May 9, 2017, at which time his
salary was raised to $150,000. Of the $149,629 salary for 2017, $19,480 has not been paid and is reflected as accrued payroll
at December 31, 2017.
The
Company paid bonuses to certain employees based on their performance, the Company’s need to retain such employees, and funds
available. All bonus payments were approved by the Company’s Board of Directors.
Outstanding
Equity Awards at Fiscal Year-End Table
The
following table sets forth all outstanding equity awards held by the Company’s Named Executive Officers as of the end of
last fiscal year.
|
|
Option Awards
|
Name
|
|
Number of Securities Underlying Unexercised Options(#) Exercisable
|
|
Number of Securities Underlying Unexercised Options (#) Unexercisable
|
|
|
Option
Exercise
Price ($)
|
|
|
Option
Exercise Date
|
L. Bruce Jolliff
|
|
480,000
|
|
|
423,452
|
|
|
$
|
0.50
|
|
|
6/21/21
|
Compensation
of Directors
During
the year ended December 31, 2017, the Company’s non-employee directors were not paid any compensation.
The
following table sets forth, for each of the Company’s non-employee directors who served during 2017, the aggregate number
of stock awards and the aggregate number of stock option awards that were outstanding as of December 31, 2017:
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Stock
|
|
|
Stock
|
|
Name
|
|
Awards (#)
|
|
|
Options (#)
|
|
Carlton M. Cadwell
|
|
|
-
|
|
|
|
100,000
|
|
Thomas J. Clement
|
|
|
-
|
|
|
|
100,000
|
|
During
June 2016, the Company granted to Messrs. Cadwell and Clement options to purchase 100,000 shares of common stock at an exercise
price of $1.00 per share. The options are fully vested and expire June 21, 2019. These options have a grant date fair value of
$34,771 and $34,771, respectively, which amounts were calculated in accordance with ASC Topic 718.
There
are no employment contracts or compensatory plans or arrangements with respect to any director that would result in payments by
the Company to such person because of his or her resignation as a director or any change in control of the Company.
Compensation
Committee Interlocks and Insider Participation
None
of our officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board
of directors of any other entity that has one or more officers serving as a member of our board of directors.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Beneficial
Ownership of The Company’s Common Stock
The
following table sets forth, as of March 26, 2018, the number of shares of common stock beneficially owned by the following persons:
(i) all persons the Company knows to be beneficial owners of at least 5% of the Company’s common stock, (ii) the Company’s
directors, (iii) the Company’s executive officers, both of whom are named in the Summary Compensation Table above, and (iv)
all current directors and executive officers as a group.
As
of March 26, 2018, there were 71,477,213 shares outstanding and up to 19,557,612 shares issuable upon exercise of outstanding
options, warrants, and conversion of outstanding convertible securities, assuming exercise and conversion occurred as of that
date, for a total of 91,034,825 shares.
Name and Address of Beneficial Owner
(1)
|
|
Amount and Nature
of Beneficial
Ownership
(2)
|
|
|
Percent of Class
|
|
Cadwell Family Irrevocable Trust
(3)
|
|
|
1,698,390
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
Carlton M. Cadwell
(4)
|
|
|
9,233,734
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
Michael K. Korenko
(5)
|
|
|
6,739,000
|
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
L. Bruce Jolliff
(6)
|
|
|
4,920,124
|
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
All Current Directors and Executive Officers as a group (3 individuals)
|
|
|
22,591,248
|
|
|
|
18.4
|
%
|
|
(1)
|
The
address of each of the beneficial owners above is c/o Vivos Inc, 719 Jadwin Avenue, Richland, WA 99336, except that the address
of the Cadwell Family Irrevocable Trust (the “
Cadwell Trust
“) is 909 North Kellogg Street, Kennewick,
WA 99336.
|
|
|
|
|
(2)
|
In
determining beneficial ownership of the Company’s common stock as of a given date, the number of shares shown includes
shares of common stock which may be acquired upon exercise of options or conversion of convertible securities within 60 days
of that date. In determining the percent of common stock owned by a person or entity on December 31, 2017, (a) the numerator
is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within
60 days on exercise of options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total
shares of common stock outstanding on December 31, 2017, and (ii) the total number of shares that the beneficial owner may
acquire upon conversion of the convertible securities and upon exercise of the options. Subject to community property laws
where applicable, the Company believes that each beneficial owner has sole power to vote and dispose of its shares, except
that Dr. Cadwell under the terms of the Cadwell Trust does not have or share voting or investment power over the shares beneficially
owned by the Cadwell Trust.
|
|
|
|
|
(3)
|
Includes
1,483,090 shares issuable upon conversion of Series A Preferred.
|
|
|
|
|
(4)
|
Includes
100,000 shares issuable upon exercise of options and 9,089,100 shares issuable upon conversion of Series A Preferred.
|
|
|
|
|
(5)
|
Includes
1,000,000 shares issuable upon conversion of Series A Preferred and 4,400,000 of vested Restricted Stock Units.
|
|
|
|
|
(6)
|
Includes
480,000 shares issuable upon exercise of options held by Mr. Jolliff and 1,979,790 shares issuable upon conversion of Series
A Preferred and 2,420,000 of vested Restricted Stock Units.
|
Beneficial
Ownership of The Company’s Preferred Stock
As
of March 26, 2018, there were 71,447,213 Common stock shares issued and outstanding, and up to 19,557,612 shares issuable upon
exercise of outstanding options, warrants, and conversion of outstanding convertible securities, assuming exercise and conversion
occurred as of that date, for a total of 91,034,825 shares. In addition, as of March 31, 2018, there was 3,204,422 shares of Series
A Preferred issued and outstanding, convertible into 32,044,220 Common stock shares.
The
following table sets forth, as of March 26, 2018, the number of shares of preferred stock beneficially owned by the following
persons: (i) all persons the Company known to be beneficial owners of at least 5% of the Company’s preferred stock, (ii)
the Company’s directors, (iii) the Company’s executive officers, both of whom are named in the Summary Compensation
Table above, and (iv) all current directors and executive officers as a group.
Name and Address of Beneficial Owner
(1)
|
|
Amount and Nature
of Beneficial
Ownership
(2)
|
|
|
Percent of Class
|
|
Cadwell Family Irrevocable Trust
|
|
|
148,309
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
Carlton M. Cadwell
|
|
|
908,910
|
|
|
|
28.4
|
%
|
|
|
|
|
|
|
|
|
|
Michael K. Korenko
|
|
|
100,000
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
L. Bruce Jolliff
|
|
|
197,979
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
All Current Directors and Executive Officers as a group (3 individuals)
|
|
|
1,355,198
|
|
|
|
42.3
|
%
|
|
|
|
|
|
|
|
|
|
Major Shareholder(s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew Limpert
(3)
|
|
|
723,952
|
|
|
|
22.6
|
%
|
|
|
|
|
|
|
|
|
|
MEF I, LP
|
|
|
251,800
|
|
|
|
7.9
|
%
|
(1)
|
The
address of each of the beneficial owners above is c/o Vivos Inc, 719 Jadwin Avenue, Richland, WA 99336, except that the address
of (i) the Cadwell Family Irrevocable Trust (the “
Cadwell Trust
“) is 909 North Kellogg Street, Kennewick,
WA 99336; (ii) Andrew Limpert is 254 N 860 East, American Fork, UT 84003; and (iii) MEF I, LLP is c/o Magna Management, 40
Wall Street, 58
th
Floor, New York, NY 10005.
|
|
|
(2)
|
Subject
to community property laws where applicable, the Company believes that each beneficial owner has sole power to vote and dispose
of its shares, except that Dr. Cadwell under the terms of the Cadwell Trust does not have or share voting or investment power
over the Series A Preferred beneficially owned by the Cadwell Trust.
|
|
|
(3)
|
Includes
16,200 shares of Series A Preferred held by Trina Limpert, Mr. Limpert’s spouse.
|
Changes
in Control
The
Company does not know of any arrangements, including any pledges of the Company’s securities that may result in a change
in control of the Company.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Indebtedness
from Related Parties
Beginning
in December 2008, the Company has obtained financing from Carlton M. Cadwell, one of our directors and a beneficial owner of more
than 10% of the Company’s common stock, in transactions which involved the Company’s issuance of convertible notes
and common stock. On September 4, 2015, the Company exchanged $1,414,100 of convertible notes plus $810,538 of accrued interest
into 148,311 shares of Series A Preferred and another $2,224,466 of convertible notes plus $889,838 of accrued interest into 207,620
shares of Series A Preferred. Additionally, the Company exchanged the remaining $906,572 of convertible notes plus $148,960 accrued
interest into a $1,055,532 demand note, 8% interest rate, due on demand at any time after March 31, 2017. Such note was converted
into 73,546 shares of Series A Preferred on May 19, 2016. At December 31, 2016 Mr. Cadwell has an aggregate total of $332,195
in promissory notes. In March 2017 the Company converted the $332,195 promissory note and $51,576 of accrued interest into a new
promissory note totaling $383,771, due December 31, 2017. In December 2017 the note due date was extended to May 9, 2018.
Independent
Directors
The
Company’s common stock is traded on the OTC Pink Marketplace, which does not impose any independence requirements on the
board of directors or the board committees of the companies whose stock is traded on that market. The Company has decided to adopt
the independence standards of the NASDAQ listing rules in determining whether the Company’s directors are independent. Generally,
under those rules a director does not qualify as an independent director if the director or a member of the director’s immediate
family has had in the past three years certain relationships or affiliations with the Company, the Company’s auditors, or
other companies that do business with the Company. The Company’s Board of Directors has determined that Mr. Cadwell is qualified
as an independent director under those NASDAQ rules, and accordingly, each would have been qualified under those rules to serve
on a compensation committee or a nominating committee, if the Company had established such committees of the Company’s Board
of Directors. Dr. Korenko is not an independent director due to his employment by the Company as an executive officer.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit
Fees
The
aggregate fees incurred by the Company’s principal accountant for the audit of the Company’s annual financial statements,
review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2017 and 2016 were $79,900
and $13,500, all of which was paid to Fruci & Associates II, PLLC.
Tax
Fees
The
aggregate fees billed for professional services rendered by principal accountant for tax compliance, tax advice and tax planning
during the fiscal years ended December 31, 2017 and 2016 were $2,500 and $0, all of which was paid to Fruci & Associates II,
PLLC.
All
Other Fees
Other
fees billed for products or services provided by the Company’s principal accountant during the fiscal years ended December
31, 2017 and 2016 were $4,250 and $0, all of which was paid to Fruci & Associates II, PLLC..
Notes
to Financial Statements
For
the years ended December 31, 2017 and 2016
NOTE
1: ORGANIZATION & BASIS OF PRESENTATION
Business
Overview
The
Company was incorporated under the laws of Delaware on December 23, 1994 as Savage Mountain Sports Corporation (“
SMSC
”).
On September 6, 2006, the Company changed its name to Advanced Medical Isotope Corporation, and on December 28, 2017, the Company
began operating as Vivos Inc. The Company has authorized capital of 2,000,000,000 shares of common stock, $0.001 par value per
share, and 20,000,000 shares of preferred stock, $0.001 par value per share.
Our
principal place of business is 719 Jadwin Avenue, Richland, WA 99352. Our telephone number is (509) 736-4000. Our corporate website
address is http://www.radiogel.com. Our common stock is currently quoted on the OTC Pink Marketplace under the symbol “RDGL.”
The
Company is a radiation oncology medical device company engaged in the development of its yttrium-90 based brachytherapy device
RadioGel™ for the treatment of non-resectable tumors. A prominent team of radiochemists, scientists and engineers, collaborating
with strategic partners, including national laboratories, universities and private corporations, lead the Company’s development
efforts. The Company’s overall vision is to globally empower physicians, medical researchers and patients by providing them
with new isotope technologies that offer safe and effective treatments for cancer.
The
Company’s current focus is on the development of its RadioGel™ device. RadioGel™ is an injectable particle-gel,
for brachytherapy radiation treatment of cancerous tumors in people and animals. RadioGel™ is comprised of a hydrogel, or
a substance that is liquid at room temperature and then gels when reaching body temperature after injection into a tumor. In the
gel are small, one micron, yttrium-90 phosphate particles (“
Y-90
”). Once injected, these inert particles are
locked in place inside the tumor by the gel, delivering a very high local radiation dose. The radiation is beta, consisting of
high-speed electrons. These electrons only travel a short distance so the device can deliver high radiation to the tumor with
minimal dose to the surrounding tissue. Optimally, patients can go home immediately following treatment without the risk of radiation
exposure to family members. Since Y-90 has a half-life of 2.7 days, the radioactively drops to 5% of its original value after
ten days.
The
Company’s lead brachytherapy products, including RadioGel™, incorporate patented technology developed for Battelle
Memorial Institute (“
Battelle
”) at Pacific Northwest National Laboratory, a leading research institute for
government and commercial customers. Battelle has granted the Company an exclusive license to patents covering the manufacturing,
processing and applications of RadioGel™ (the “
Battelle License
”). Other intellectual property protection
includes proprietary production processes and trademark protection in 17 countries. The Company plans to continue efforts to develop
new refinements on the production process, and the product and application hardware, as a basis for future patents.
The
Company is currently focusing on obtaining approval from the FDA to market and sell RadioGel™ as a Class II medical device.
The Company first requested FDA approval of RadioGel™ in June 2013, at which time the FDA classified RadioGel™ as
a medical device. The Company then followed with a 510(k) submission which the FDA responded, in turn, with a request for a physician
letter of substantial equivalence and a reformatted 510(k) summary, which the Company provided in January 2014. In February 2014,
the FDA ruled the device as not substantially equivalent due to a lack of a predicate device and it was therefore classified as
a Class III device. Class III devices are generally the highest risk devices and are therefore subject to the highest level of
regulatory review, control and oversight. Class III devices must typically be approved by the FDA before they are marketed. Class
II devices represent lower risk devices than Class III and require fewer regulatory controls to provide reasonable assurance of
the device’s safety and effectiveness. In contrast, Class I devices are deemed to be lower risk than Class II or III, and
are therefore subject to the least regulatory controls.
The
Company is currently developing test plans to address issues raised by the FDA in connection with the Company’s previous
submissions regarding RadioGel™, including developing specific test plans and specific indication of use. The Company intends
to request that the FDA grant approval to re-apply for
de novo
classification of RadioGel™, which would reclassify
the device from a Class III device to a Class II device, further simplifying the path to FDA approval. In the event the FDA denies
the Company’s application and subsequently determines during the de novo review that RadioGel™ cannot be classified
as a Class I or Class I1 device, the Company will then need to submit a pre-market approval application to obtain the necessary
regulatory approval as a Class III device.
See also
Business – Regulatory History in Part I of this Annual Report
on Form 10-K for a discussion regarding the Company’s application for FDA approval of RadioGel™.
IsoPet
Solutions
The
Company’s IsoPet
TM
Solutions division was established in May 2016 as a wholly owned subsidiary, then was absorbed
into the Company as a new division. The IsoPet
TM
Solutions division is to focus on the veterinary oncology market,
namely engagement of university veterinarian hospital to develop the detailed therapy procedures to treat animal tumors and ultimately
use of the technology in private clinics. The Company has worked with four different university veterinarian hospitals on RadioGel™
testing and therapy. Colorado State University demonstrated the procedures and the CT and PET-CT imaging of RadioGel
TM
.
Washington State University treated four cats for feline sarcoma. They concluded that the product was safe and effective in killing
cancer cells. A contract was signed with University of Missouri to treat canine sarcomas and equine sarcoids starting early in
2019. The safety review at UC Davis is almost completed. They will be treating prostate and liver cancer in dogs in 2019.
These
animal therapies will focus on creating labels that describe the procedures in detail as a guide to future veterinarians. The
labels will be voluntarily submitted to the FDA for review. They will then be used as data for future FDA applications in the
medical sector and as key intellectual property for licensing to private veterinary clinics.
The
Company anticipates that future profit will be derived from direct sales of RadioGel™ (under the name IsoPet™) and
related services, and from licensing to private medical and veterinary clinics in the U.S. and internationally. The Company intends
to report the results from the IsoPet™ Solutions division as a separate operating segment in accordance with GAAP.
Going
Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company has
suffered recurring losses and used significant cash in support of its operating activities and the Company’s cash position
is not sufficient to support the Company’s operations. Research and development of the Company’s brachytherapy product
line has been funded with proceeds from the sale of equity and debt securities as well as a series of grants. The Company requires
funding of approximately $1.5 million annually to maintain current operating activities. Over the next 12 to 24 months, the Company
believes it will cost approximately $5.0 million to $10.0 million to fund: (1) the FDA approval process and initial deployment
of the brachytherapy products, and (2) initiate regulatory approval processes outside of the United States. The continued deployment
of the brachytherapy products and a worldwide regulatory approval effort will require additional resources and personnel. The
principal variables in the timing and amount of spending for the brachytherapy products in the next 12 to 24 months will be the
FDA’s classification of the Company’s brachytherapy products as Class II or Class III devices (or otherwise) and any
requirements for additional studies which may possibly include clinical studies. Thereafter, the principal variables in the amount
of the Company’s spending and its financing requirements would be the timing of any approvals and the nature of the Company’s
arrangements with third parties for manufacturing, sales, distribution and licensing of those products and the products’
success in the U.S. and elsewhere. The Company intends to fund its activities through strategic transactions such as licensing
and partnership agreements or additional capital raises.
Following
receipt of required regulatory approvals and financing, in the U.S., the Company intends to outsource material aspects of manufacturing,
distribution, sales and marketing. Outside of the U.S., the Company intends to pursue licensing arrangements and/or partnerships
to facilitate its global commercialization strategy.
In
the longer-term, subject to the Company receiving adequate funding, regulatory approval for RadioGel™ and other brachytherapy
products, and thereafter being able to successfully commercialize its brachytherapy products, the Company intends to consider
resuming research efforts with respect to other products and technologies intended to help improve the diagnosis and treatment
of cancer and other illnesses
Based
on the Company’s financial history since inception, its auditor has expressed substantial doubt as to the Company’s
ability to continue as a going concern. The Company has limited revenue, nominal cash, and has accumulated deficits since inception.
If the Company cannot obtain sufficient additional capital, the Company will be required to delay the implementation of its business
strategy and may not be able to continue operations.
As
of December 31, 2017, the Company has $8,317 cash on hand. There are currently commitments to vendors for products and services
purchased, plus, the employment agreements of the CFO and other employees of the Company and the Company’s current lease
commitments that will necessitate liquidation of the Company if it is unable to raise additional capital. The current level of
cash is not enough to cover the fixed and variable obligations of the Company.
Assuming
the Company is successful in the Company’s sales/development effort, it believes that it will be able to raise additional
funds through strategic agreements or the sale of the Company’s stock to either current or new stockholders. There is no
guarantee that the Company will be able to raise additional funds or to do so at an advantageous price.
The
financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern
is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain
profitability. The Company plans to seek additional funding to maintain its operations through debt and equity financing and to
improve operating performance through a focus on strategic products and increased efficiencies in business processes and improvements
to the cost structure. There is no assurance that the Company will be successful in its efforts to raise additional working capital
or achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Financial
Statement Reclassification
Certain
account balances from prior periods have been reclassified in these audited financial statements so as to conform to current period
classifications.
Cash
Equivalents
For
the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Inventory
Inventory
is reported at the lower of cost or market, determined using the first-in, first-out basis, or net realizable value. All inventories
consist of finished goods. The Company had no raw materials or work in process. The Company had been carrying inventory consisting
of two bottles of O-18 water for a value of $8,475. The Company determined this water was no longer usable and wrote off the $8,475
value as of December 31, 2016.
Fair
Value of Financial Instruments
Fair
Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet,
where it is practicable to estimate that value. As of December 31, 2017, and December 31, 2016, the balances reported for cash,
prepaid expenses, accounts receivable, accounts payable, and accrued expenses, approximate the fair value because of their short
maturities.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes
the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
These tiers include:
Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted
prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not
active; and
Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions,
such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.
The
Company measures certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value
on a recurring basis were calculated using the Black-Scholes pricing model and are as follows at December 31, 2017:
|
|
Total
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets Measured at Fair Value
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liability
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Liabilities Measured at Fair Value
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Assets
and liabilities measured at fair value on a recurring basis are as follows at December 31, 2016:
|
|
Total
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets Measured at Fair Value
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liability
|
|
|
324,532
|
|
|
-
|
|
|
-
|
|
|
324,532
|
|
Total
Liabilities Measured at Fair Value
|
|
$
|
324,532
|
|
$
|
-
|
|
$
|
-
|
|
$
|
324,532
|
|
Fixed
Assets
Fixed
assets are carried at the lower of cost or net realizable value. Production equipment with a cost of $2,500 or greater and other
fixed assets with a cost of $1,500 or greater are capitalized. Major betterments that extend the useful lives of assets are also
capitalized. Normal maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of,
the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations.
Depreciation
is computed using the straight-line method over the following estimated useful lives:
Production
equipment:
|
3
to 7 years
|
Office
equipment:
|
2
to 5 years
|
Furniture
and fixtures:
|
2
to 5 years
|
Leasehold
improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated life of the asset.
Management
of the Company reviews the net carrying value of all of its equipment on an asset by asset basis whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. These reviews consider the net realizable value of each
asset, as measured in accordance with the preceding paragraph, to determine whether impairment in value has occurred, and the
need for any asset impairment write-down.
License
Fees
License
fees are stated at cost, less accumulated amortization. Amortization of license fees is computed using the straight-line method
over the estimated economic useful life of the assets.
The
Company made a $5,000 investment in February 2011 for a one-year option agreement to negotiate an exclusive license agreement
with Battelle Memorial Institute regarding its patents for the production of RadioGel™. This option agreement calls for
a $5,000 upfront fee for the option, which expired February 2012 and was fully expensed in the twelve months ended December 31,
2011. Effective March 2012, the Company entered into an exclusive license agreement with Battelle Memorial Institute regarding
the use of its patented RadioGel™ technology. This license agreement calls for a $17,500 nonrefundable license fee and a
royalty based on a percent of gross sales for licensed products sold; the license agreement also contains a minimum royalty amount
to be paid each year starting with 2013.
Calendar
Year
|
|
Minimum
Royalties per
Calendar Year
|
|
2012
|
|
$
|
-
|
|
2013
|
|
$
|
5,000
|
(1)
|
2014
|
|
$
|
7,500
|
(2)
|
2015
|
|
$
|
10,000
|
(3)
|
2016
|
|
$
|
10,000
|
(4)
|
2017
|
|
$
|
10,000
|
(5)
|
2018
|
|
$
|
10,000
|
|
2019
|
|
$
|
10,000
|
|
2020
|
|
$
|
25,000
|
|
2021
|
|
$
|
50,000
|
|
2022,
to be paid each year thereafter
|
|
$
|
100,000
|
|
(1)
Paid February, 2014
(2)
Paid February, 2015
(3)
Paid February, 2016
(4)
$5,399 was paid January 2017 and the remaining $4,601 was paid February 2017.
(5)
Paid January, 2018
The
Company periodically reviews the carrying values of capitalized license fees and any impairments are recognized when the expected
future operating cash flows to be derived from such assets are less than their carrying value.
Amortization
is computed using the straight-line method over the estimated useful live of three years.
Patents
and Intellectual Property
The
Company had a total $35,482 of capitalized patents and intellectual property costs at December 31, 2015 for the patent rights
in the area of a Brachytherapy seed with a Fast-dissolving Matrix for Optimized Delivery of Radionuclides. Effective December
31, 2016 the Company agreed to terminate this non-utilized patent license for which the $35,482 of capitalized patent and intellectual
costs applied and therefore the Company wrote off $35,482 of capitalized costs in the twelve months ending December 31, 2016.
Revenue
Recognition
The
Company recognized revenue related to product sales when (i) persuasive evidence of the arrangement exists, (ii) shipment has
occurred, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.
Revenue
for the fiscal year ended December 31, 2017 and December 31, 2016 consisted of consulting revenue. The Company recognizes revenue
once an order has been received and shipped to the customer or services have been performed. Prepayments, if any, received from
customers prior to the time products are shipped are recorded as deferred revenue. In these cases, when the related products are
shipped, the amount recorded as deferred revenue is recognized as revenue. The Company does not accrue for sales returns and other
allowances as it has not experienced any returns or other allowances.
Income
from Grants and Deferred Income
Government
grants are recognized when all conditions of such grants are fulfilled or there is reasonable assurance that they will be fulfilled.
The Company has chosen to recognize income from grants as it incurs costs associated with those grants, and until such time as
it recognizes the grant as income those funds received will be classified as deferred income on the balance sheet.
On
December 22, 2017, the Company received notification it had been awarded from Washington State University, $17,500 grant funds
from the sub-award project entitled “
Optimized Injectable Radiogels for High-dose Therapy of Non-Resectable Solid Tumors
”.
The Company expects to receive $17,500 of the grant award in the twelve months ended December 31, 2018.
Earnings
(Loss) Per Share
The
Company accounts for its earnings (loss) per common share by replacing primary and fully diluted earnings per share with basic
and diluted earnings per share. Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders
(the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period, and does not include
the impact of any potentially dilutive common stock equivalents since the impact would be anti-dilutive. The computation of diluted
earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional
common shares that would have been outstanding if potentially dilutive common shares had been issued. For the given periods of
loss, of the periods ending December 31, 2017 and 2016, the basic earnings per share equals the diluted earnings per share.
Securities,
all of which represent common stock equivalents, that could be dilutive in the future as of December 31, 2017 and 2016, are as
follows:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Convertible
debt
|
|
|
18,155,788
|
|
|
|
6,441,644
|
|
Preferred
stock
|
|
|
37,786,220
|
|
|
|
37,735,920
|
|
Common
stock options
|
|
|
1,097,623
|
|
|
|
2,402,500
|
|
Common
stock warrants
|
|
|
304,201
|
|
|
|
3,579,505
|
|
Total
potential dilutive securities
|
|
|
57,343,832
|
|
|
|
50,159,569
|
|
Research
and Development Costs
Research
and developments costs, including salaries, research materials, administrative expenses and contractor fees, are charged to operations
as incurred. The cost of equipment used in research and development activities which has alternative uses is capitalized as part
of fixed assets and not treated as an expense in the period acquired. Depreciation of capitalized equipment used to perform research
and development is classified as research and development expense in the year computed.
The
Company incurred $203,037 and $328,026 research and development costs for the years ended December 31, 2017, and 2016, respectively,
all of which were recorded in the Company’s operating expenses noted on the income statements for the years then ended.
Advertising
and Marketing Costs
Advertising
and marketing costs are expensed as incurred except for the cost of tradeshows which are deferred until the tradeshow occurs.
Tradeshow expenses incurred and not expensed as of the years ended December 31, 2017, and 2016 were $0 and $0, respectively. During
the twelve months ended December 31, 2017 and 2016, the Company incurred $111,662 and $284,138, respectively, in advertising and
marketing costs.
Shipping
and Handling Costs
Shipping
and handling costs are expensed as incurred and included in cost of materials.
Legal
Contingencies
In
the ordinary course of business, the Company is involved in legal proceedings involving contractual and employment relationships,
product liability claims, patent rights, and a variety of other matters. The Company records contingent liabilities resulting
from asserted and unasserted claims against it, when it is probable that a liability has been incurred and the amount of the loss
is reasonably estimable. The Company discloses contingent liabilities when there is a reasonable possibility that the ultimate
loss will exceed the recorded liability. Estimated probable losses require analysis of multiple factors, in some cases including
judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently
uncertain. Currently, the Company does not believe any probable legal proceedings or claims will have a material impact on its
financial position or results of operations. However, if actual or estimated probable future losses exceed the Company’s
recorded liability for such claims, it would record additional charges as other expense during the period in which the actual
loss or change in estimate occurred.
There
had been an ongoing dispute with the landlord, Rob and Maribeth Myers, regarding the production center rent. During 2016, the
Company reached a Settlement Agreement with regards to this dispute resulting in a payment of $438,830 for rent, interest, and
costs.
There
is an ongoing dispute with BancLeasing and Washington Trust Bank regarding application of lease payments to the principal loan
amount for the linear accelerator, and the Company believed it overpaid by approximately $300,000. In 2016 the Company was awarded
in the Superior Court of the State of Washington a total sum of $527,876 against BancLeasing. The Company is pursuing its options
for collection of the awarded amount, however there can be no assurance as to any eventual collection and so the Company has not
reflected any contingent gain in these financial statements.
Income
Taxes
To
address accounting for uncertainty in tax positions, the Company clarifies the accounting for income taxes by prescribing a minimum
recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company
also provides guidance on de-recognition, measurement, classification, interest, and penalties, accounting in interim periods,
disclosure and transition.
The
Company files income tax returns in the U.S. federal jurisdiction. The Company did not have any tax expense for the years ended
December 31, 2017 and 2016. The Company did not have any deferred tax liability or asset on its balance sheet on December 31,
2017 and 2016.
Interest
costs and penalties related to income taxes, if any, will be classified as interest expense and general and administrative costs,
respectively, in the Company’s financial statements. For the years ended December 31, 2017 and 2016, the Company did not
recognize any interest or penalty expense related to income taxes. The Company believes that it is not reasonably possible for
the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months.
The
Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate
from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously
tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed the accounting
for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on
existing deferred tax balances. These amounts are provisional and subject to change. The most significant impact of the legislation
for the Company was a $3,300,000 reduction of the value of net deferred tax assets (which represent future tax benefits) as a
result of lowering the U.S. corporate income tax rate from 35% to 21%. The Act also includes a requirement to pay a one-time transition
tax on the cumulative value of earnings and profits that were previously not repatriated for U.S. income tax purposes. The Company
has no earnings and profits that were previously not repatriated for U.S. income tax purposes.
Stock-Based
Compensation
The
Company recognizes in the financial statements compensation related to all stock-based awards, including stock options, based
on their estimated grant-date fair value. The Company has estimated expected forfeitures and is recognizing compensation expense
only for those awards expected to vest. All compensation is recognized by the time the award vests.
The
Company accounts for equity instruments issued in exchange for the receipt of goods or services from non-employees. Costs are
measured at the fair market value of the consideration received or the fair value of the equity instruments issued, whichever
is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined
on the earlier of the date on which there first exists a firm commitment for performance by the provider of goods or services
or on the date performance is complete. The Company recognizes the fair value of the equity instruments issued that result in
an asset or expense being recorded by the Company, in the same period(s) and in the same manner, as if the Company has paid cash
for the goods or services.
Recent
Accounting Pronouncements
There
are no recently issued accounting pronouncements that the Company believes are applicable or would have a material impact on the
financial statements of the Company.
NOTE
3: FIXED ASSETS
Fixed
assets consist of the following at December 31, 2017 and 2016:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Production
equipment
|
|
$
|
15,182
|
|
|
$
|
15,182
|
|
Office
equipment
|
|
|
-
|
|
|
|
14,594
|
|
|
|
|
15,182
|
|
|
|
29,776
|
|
Less
accumulated depreciation
|
|
|
(15,182
|
)
|
|
|
(28,303
|
)
|
|
|
$
|
-
|
|
|
$
|
1,473
|
|
Depreciation
expense for the above fixed assets for the years ended December 31, 2017 and 2016, respectively, was $1,473 and $2,947.
During
the year ended December 31, 2016, the Company abandoned production equipment, building, leasehold improvements, and office equipment
with an original cost totaling $1,016,532 that had been located in the production center. Additionally, the Company removed the
linear accelerator form the production center and has placed the equipment into storage. The $1,375,000 original cost of the linear
accelerator was also written off during the year ended December 31, 2016. All the equipment written off during the year ended
December 31, 2016 had been fully depreciated.
During
the year ended December 31, 2017, the Company abandoned production equipment, building, leasehold improvements, and office equipment
with an original cost totaling $14,594.
NOTE
4: INTANGIBLE ASSETS
Intangible
assets consist of the following at December 31, 2017 and December 31, 2016:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
License
Fee
|
|
$
|
-
|
|
|
$
|
112,500
|
|
Less
accumulated amortization
|
|
|
-
|
|
|
|
(112,500
|
)
|
|
|
|
-
|
|
|
|
-
|
|
Amortization
expense for the above intangible assets for the years ended December 31, 2017 and 2016, respectively, was $0 and $0.
NOTE
5: RELATED PARTY TRANSACTIONS
Related
Party Promissory Notes
As
of December 31, 2017, and 2016, the Company had the following related party promissory notes outstanding:
|
|
December
31, 2017
|
|
December
31, 2016
|
|
|
|
Principal
(net)
|
|
Accrued
Interest
|
|
Principal
(net)
|
|
Accrued
Interest
|
|
October
2015 $82,500 Note, 10% interest due October 2016
|
|
$
|
-
|
|
$
|
-
|
|
$
|
82,500
|
|
|
10,239
|
|
February 2016
$50,000 Note, 10% interest, due February 2017
|
|
|
-
|
|
|
-
|
|
|
50,000
|
|
|
4,192
|
|
May 2016 $109,695
Note, 10% interest, due July 2017
|
|
|
-
|
|
|
-
|
|
|
109,695
|
|
|
7,093
|
|
May
2016 $90,000 Note, 10% interest, due May 2017
|
|
|
-
|
|
|
-
|
|
|
90,000
|
|
|
5,425
|
|
March
2017 $332,195 Note, 10% interest, due May 2017
|
|
|
383,771
|
|
|
29,230
|
|
|
-
|
|
|
-
|
|
Total
Convertible Notes Payable, Net
|
|
$
|
383,771
|
|
$
|
29,230
|
|
$
|
332,195
|
|
$
|
26,949
|
|
During
the year ending December 31, 2016, the Company received proceeds from new related party promissory notes of $249,695 and recorded
conversions of $1,197,950 for related party note principal.
The
Company, in March 2017, combined outstanding notes owed to a director and major stockholder, along with $51,576 of accrued interest
payable, into one promissory note.
Related
Party Convertible Notes Payable
During
the year ending December 31, 2016, the Company received proceeds from new related party convertible notes of $473,613 and, at
inception, issued 37,906 shares of Series A Convertible Preferred Stock (“
Series A Preferred
”) as loan fees
valued at $29,156. Each of the Company’s related party convertible notes have a conversion rate that is variable, therefore
the Company has accounted for such conversion features as derivative instruments (see Note 9). As a result of recording the preferred
stock and the derivative liabilities at note inception, the Company increased the debt discount recorded on their convertible
notes by $473,613 and recorded $1,912,587 in additional interest expense. During the year ending December 31, 2016, the Company
recorded amortization of $25,000 on their related party convertible note debt discounts, recorded conversions of $473,613 for
related party note principal, and recorded $448,613 of debt discount write-offs for early debt conversion. As a result of all
related party convertible notes being converted during the year ending December 31, 2016, the related party convertible notes
payable balance was $0 as of December 31, 2016.
Preferred
Shares Issued to Officers
During
2017, the Company issued 100,000 shares of its Series A Preferred to its CEO, in exchange for $32,308 of accrued payroll, $67,692
of accounts payable, and wages valued at $199,690.
During
2017, the Company issued 83,279 shares of its Series A Preferred to its CFO, in exchange for $83,280 of accrued payroll and wages
valued at $166,299.
During
2016, the Company issued 10,000 shares of its Series A Preferred to its CFO, representing $54,152, for wages.
Rent
Expenses
On
July 17, 2007, the Company entered into a five-year lease for its production center from a less than 5% shareholder. Subsequent
to July 31, 2012, the Company was renting this space on a month-to-month basis at $11,904 per month. Effective January 1, 2015,
the Company’s lease was terminated. There has been an ongoing dispute with the landlord, Rob and Maribeth Myers, regarding
the production center rent. During 2016, the Company reached a Settlement Agreement with regards to this dispute resulting in
a payment of $438,830 for rent, interest, and costs.
The
Company was renting office space from a significant shareholder and director of the Company on a month-to-month basis with a monthly
payment of $1,500. This rental agreement was terminated as of April 1, 2017.
Rental
expense for the years ended December 31, 2017 and 2016 consisted of the following:
|
|
Year
ended
December 31, 2017
|
|
|
Year
ended December 31, 2016
|
|
Office
and warehouse space
|
|
$
|
-
|
|
|
$
|
40,000
|
|
Corporate
office
|
|
|
4,500
|
|
|
|
18,000
|
|
Total
Rental Expense
|
|
$
|
4,500
|
|
|
$
|
58,000
|
|
NOTE
6: CONVERTIBLE NOTES PAYABLE
As
of December 31, 2017, and 2016, the Company had the following convertible notes outstanding:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
Principal
(net)
|
|
|
Accrued
Interest
|
|
|
Principal
(net)
|
|
|
Accrued
Interest
|
|
July
and August 2012 $1,060,000 Notes convertible into common stock at $4.60 per share, 12% interest, due December 2013 and January
2014
|
|
$
|
45,000
|
|
|
$
|
29,218
|
|
|
$
|
95,000
|
|
|
|
50,365
|
|
May
through October 2015 $605,000 Notes convertible into preferred stock at $1 per share, 8-10% interest, due September 30, 2015
|
|
|
-
|
|
|
|
17,341
|
|
|
|
-
|
|
|
|
17,341
|
|
October
through December 2015 $613,000 Notes convertible into preferred stock at $1 per share, 8% interest, due June 30, 2016, net
of debt discount of $0 and $560,913, respectively
|
|
|
-
|
|
|
|
5,953
|
|
|
|
-
|
|
|
|
5,953
|
|
January
through March 2016 $345,000 Notes convertible into preferred stock at $1 per share, 8% interest, due June 30, 2016
|
|
|
-
|
|
|
|
696
|
|
|
|
-
|
|
|
|
696
|
|
November
2016 $979,162 Notes convertible into common stock at a variable conversion price, 10% interest, due May 2017, net of debt
discounts of $540,720 and $0, respectively
|
|
|
-
|
|
|
|
-
|
|
|
|
438,442
|
|
|
|
12,397
|
|
May
2017 $2,378,155 Notes convertible into common stock after April 15, 2018 at a $0.20 conversion price (subject to adjustment),
7.5% interest, due May 2018, net of debt discounts of $544,845 and $0, respectively
|
|
|
1,833,310
|
|
|
|
178,304
|
|
|
|
-
|
|
|
|
-
|
|
May
2017 $820,420 Notes convertible into common stock after April 15, 2018 at a $0.12 conversion price (subject to adjustment),
7.5% interest, due May 2018, net of debt discounts of $147,335 and $0, respectively
|
|
|
500,703
|
|
|
|
52,831
|
|
|
|
-
|
|
|
|
-
|
|
May
2017 $110,312 Notes convertible after April 15, 2018 into common stock at a $0.13 conversion price (subject to adjustment),
7.5% interest, due May 2018, net of debt discounts of $25,085 and $0, respectively
|
|
|
85,227
|
|
|
|
15,773
|
|
|
|
-
|
|
|
|
-
|
|
November
2017 $166,666 Note convertible at maturity or upon the issuance of a variable security at a $0.12 conversion price (subject
to adjustment), with a one-time interest charge of 10%, due April 15, 2018, net of debt discounts of $74,662 and $0, respectively
|
|
|
92,004
|
|
|
|
16,667
|
|
|
|
-
|
|
|
|
-
|
|
Penalties
on notes in default
|
|
|
7,028
|
|
|
|
-
|
|
|
|
11,066
|
|
|
|
-
|
|
Total
Convertible Notes Payable, Net
|
|
$
|
2,563,272
|
|
|
$
|
316,784
|
|
|
$
|
544,508
|
|
|
$
|
86,752
|
|
During
the year ending December 31, 2017, the Company received proceeds from the issuance of 10% Convertible Notes (“
Convertible
Notes
”) and 7.5% Original Issue Discount Senior Secured Convertible Debentures (“
Debentures
”) of
$1,230,334 and obtained advances from shareholders of $137,000 that were reclassified into Convertible Notes. The Company also
assigned or exchanged $1,358,750 worth of Convertible Notes and Notes that were outstanding as of December 31, 2016 into Debentures,
while also reclassifying $69,732 worth of accrued interest to convertible note principal. The Company recorded original issue
discounts and loan fees on Convertible Notes and Debentures of $774,362 and $386,758, respectively, which also increased the debt
discounts recorded on the Convertible Notes and Debentures.
The
Company recorded $322,381 of conversions on certain outstanding notes. The Company also recorded amortization of $2,023,144 on
outstanding note debt discounts. Lastly, the Company paid $101,631 in cash for loan fees and issued 843,699 shares of the Company’s
Series A Convertible Preferred Stock (“
Series A Preferred
”) as loan fees in connection with the issuance of
the Convertible Notes and Debentures. The Company therefore increased its debt discount by $1,212,503, which represented the portion
of the proceeds from the Convertible Notes and Debentures that were allocated to preferred stock.
During
the year ending December 31, 2016, the Company received proceeds from new convertible notes of $1,273,534, obtained advances from
shareholders of $127,533 that were reclassified into convertible notes payable, and reclassified $455,150 of accrued interest
into convertible notes payable. The Company recorded original issue discounts and loan fees on new convertible notes of $193,831
and $6,000, respectively, which also increased the debt discounts recorded on the convertible notes. The Company recorded $419,055
of payments on their convertible notes, conversions of $1,444,950 of convertible note principal, a total gain on settlement of
$1,456,113 representing the write-off of convertible note principal, and $814,625 of debt discount write-offs for early debt conversion
or extinguishment. Each of the Company’s convertible notes have a conversion rate that is variable. The Company therefore
has accounted for such conversion features as derivative instruments (see Note 7). As a result of recording derivative liabilities
at note inception, the Company increased the debt discount recorded on their convertible notes by $809,835 during the year ending
December 31, 2016. The Company also recorded amortization of $579,042 on their convertible note debt discounts. Lastly, the Company
issued 347,400 shares of Series A Preferred as loan fees with their new convertible notes. The Company therefore increased their
convertible note debt discount by $363,807, which represented the portion of the convertible note proceeds that were allocated
to preferred stock.
The
May 2017 notes totaling $3,136,506, $2,419,240 after debt discounts, had a December 2017 due date which was extended to May 2018.
The Company has not yet evaluated the embedded conversion feature in the notes, given the notes are not convertible at the option
of the holder until maturity in May 2018.
The
November 2017 Note totaling $166,666, $92,004 after debt discount, included an Investor’s Put Option whereby if the Company’s
stock was not listed on the Nasdaq or NYSE by January 31, 2018, the lender had the right to require the Company to repurchase
the Note at any time after January 31, 2018 in an amount equal to 130% of the sum of the Principal plus all accrued and unpaid
interest. The Investor issued notice February 2, 2018 exercising it’s Put Option and requiring the Company repurchase the
Note on April 19, 2018 in the aggregate amount of $228,332. The investor may elect to cancel the repurchase notice at any time
prior to receiving the repurchase payment.
NOTE
7: DERIVATIVE LIABILITY
During
the years ending December 31, 2017 and 2016, the Company had the following activity in their derivative liability account:
|
|
Warrants
|
|
Conversion
Feature
|
|
Total
|
|
Derivative
Liability at December 31, 2015
|
|
|
714,401
|
|
|
3,520,615
|
|
|
4,235,016
|
|
Derivative
Liability Recorded on New Instruments
|
|
|
-
|
|
|
6,150,026
|
|
|
6,150,026
|
|
Elimination
of Liability on Conversion
|
|
|
(1,266,795
|
)
|
|
(10,381,138
|
)
|
|
(11,647,933
|
)
|
(Gain)
on Settlement of Debt
|
|
|
-
|
|
|
(656,930
|
)
|
|
(656,930
|
)
|
Change
in Fair Value
|
|
|
552,452
|
|
|
1,691,901
|
|
|
(2,244,353
|
)
|
Derivative
Liability at December 31, 2016
|
|
|
58
|
|
|
324,474
|
|
|
324,532
|
|
Derivative
Liability Recorded on New Instruments
|
|
|
-
|
|
|
99,661
|
|
|
99,661
|
|
Elimination
of Liability on Conversion
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(Gain)
on Settlement of Debt
|
|
|
-
|
|
|
(15,704
|
)
|
|
(15,704
|
)
|
Change
in Fair Value
|
|
|
(58
|
)
|
|
(408,431
|
)
|
|
(408,489
|
)
|
Derivative
Liability at December 31, 2017
|
|
|
-
|
|
|
-
|
|
|
-
|
|
The
Company uses the Black-Scholes pricing model to estimate fair value for those instruments convertible into common stock at inception,
at conversion date, and at each reporting date. During the years ending December 31, 2017, and 2016, the Company used the following
assumptions in their Black-Scholes model:
|
|
December
31, 2017
|
|
December
31, 2016
|
|
|
|
Warrants
|
|
|
Conversion
Feature
|
|
Warrants
|
|
|
Conversion
Feature
|
|
Risk-free
interest rate
|
|
|
1.39
|
%
|
|
n/a
|
|
|
0.46%
- 1.38%
|
|
|
|
0.12%
- 0.85%
|
|
Expected
life in years
|
|
|
0.25
|
|
|
n/a
|
|
|
0.53
- 4.08
|
|
|
|
0.01
- 1.00
|
|
Dividend
yield
|
|
|
0
|
%
|
|
n/a
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
187.59
|
%
|
|
n/a
|
|
|
156.29%
- 273.70
|
%
|
|
|
115.46%
- 239.93
|
%
|
NOTE
8: INCOME TAXES
The
Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate
from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously
tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, the Company has not completed
the accounting for the tax effects of enactment of the Act; however, as described below, it has made a reasonable estimate of
the effects on existing deferred tax balances. These amounts are provisional and subject to change. The most significant impact
of the legislation for the Company was a $3,300,000 reduction of the value of the Company’s net deferred tax assets (which
represent future tax benefits) as a result of lowering the U.S. corporate income tax rate from 35% to 21%. The Act also includes
a requirement to pay a one-time transition tax on the cumulative value of earnings and profits that were previously not repatriated
for U.S. income tax purposes. The Company has no earnings and profits that were previously not repatriated for U.S. income tax
purposes.
Deferred
taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating
loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Net
deferred tax assets consist of the following components as of December 31, 2017 and 2016:
|
|
December
31, 2017
|
|
December
31, 2016
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carryover
|
|
$
|
5,640,000
|
|
$
|
8,854,900
|
|
Depreciation
|
|
|
-
|
|
|
-
|
|
Related
party accrual
|
|
|
110,600
|
|
|
179,400
|
|
Capital
Loss Carryover
|
|
|
3,400
|
|
|
5,500
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(2,100
|
)
|
|
(197,200
|
)
|
Valuation
allowance
|
|
|
(5,751,900
|
)
|
|
(8,842,600
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
The
income tax provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income
from continuing operations for the years ended December 31, 2017 and 2016 due to the following:
|
|
December
31, 2017
|
|
December
31, 2016
|
|
Book
income (loss)
|
|
$
|
(1,347,900
|
)
|
$
|
(3,350,700
|
)
|
Grant
income
|
|
|
-
|
|
|
(7,100
|
)
|
Depreciation
|
|
|
(700
|
)
|
|
(25,300
|
)
|
Intangible
asset impairment
|
|
|
-
|
|
|
12,100
|
|
Related
party accrual
|
|
|
(100
|
)
|
|
(65,900
|
)
|
Meals
and entertainment
|
|
|
200
|
|
|
1,600
|
|
Stock
for services
|
|
|
130,300
|
|
|
341,300
|
|
Options
expense
|
|
|
142,600
|
|
|
229,600
|
|
Non-cash
interest expense
|
|
|
946,500
|
|
|
1,976,300
|
|
Other
non-deductible expenses
|
|
|
(12,200
|
)
|
|
(90,600
|
)
|
Valuation
allowance
|
|
|
141,300
|
|
|
846,900
|
|
Income
tax expense
|
|
$
|
-
|
|
$
|
-
|
|
At
December 31, 2017, the Company had net operating loss carryforwards of approximately$26,856,300 that may be offset against future
taxable income from the year 2018 through 2037.
Due
to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting
purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited
as to use in future years.
Topic
740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s financial statements.
Topic 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination
based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax
position to determine the amount to recognize in the financial statements. At the adoption date of January 1, 2007, the Company
had no unrecognized tax benefit, which would affect the effective tax rate if recognized.
The
Company includes interest and penalties arising from the underpayment of income taxes in the statements of operations in the provision
for income taxes. As of December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions.
The
Company files income tax returns in the U.S. federal jurisdiction. The Company is located in the state of Washington and Washington
state does not require the filing of income taxes. With few exceptions, the Company is no longer subject to U.S. federal, state
and local, or non-U.S. income tax examinations by tax authorities for years before 2014.
NOTE
9: STOCKHOLDERS’ EQUITY
Common
Stock
The
Company has 2,000,000,000 shares of common stock authorized, with a par value of $0.001, and as of December 31, 2017 and 2016,
the Company has 65,695,213 and 31,743,797 shares issued and outstanding, respectively. The Company’s Board of Directors
is authorized to provide for the issuance of shares of preferred stock in one or more series, fix or alter the designations, preferences,
rights, qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates,
conversion rights, voting rights, term of redemption including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of such series without further vote or action by
the shareholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control
of management without further action by the shareholders and may adversely affect the voting and other rights of the holders of
common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders
of common stock, including the loss of voting control to others.
Effective
October 2016, the Company filed a Certificate of Amendment to perform a 1:100 reverse stock split. The Company’s financial
statements have been retroactively adjusted for all periods presented to reflect the reverse stock split.
Preferred
Stock
As
of December 31, 2017, and 2016, the Company has 20,000,000 shares of Series A Preferred authorized with a par value of $0.001.
The Company’s Board of Directors is authorized to provide for the issuance of shares of preferred stock in one or more series,
to establish the number of shares in each series, and to determine the designations, preferences and rights through a resolution
of the Board of Directors.
We
currently have one series of preferred stock authorized, the Series A Preferred. The following is a summary of the rights and
preferences of the Series A Preferred, which summary is not meant to be a complete description of those terms. For a complete
description of the rights and preferences attributable to the Series A Preferred, please see the Certificate of Designations,
Preferences and Rights of the Series A Convertible Preferred Stock (the “
Series A Certificate of Designation
”),
attached as Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on July 8, 2015.
Series
A Convertible Preferred Stock
In
June 2015, the
Series A Certificate of Designation was filed with the Delaware Secretary
of State to designate 2.5
million shares of our preferred stock as Series A Preferred. Effective March 31, 2016, the Company
amended the Certificate of Designations, Preferences and Rights of Series A Convertible Preferred of the Registrant, increasing
the maximum number of shares of Series A Preferred from 2,500,000 shares to 5,000,000 shares. The following summarizes the current
rights and preferences of the Series A Preferred:
Liquidation
Preference
. The Series A Preferred has a liquidation preference of $5.00 per share.
Dividends
.
Shares of Series A Preferred do not have any separate dividend rights.
Conversion
.
Subject to certain limitations set forth in the Series A Certificate of Designation, each share of Series A Preferred is convertible,
at the option of the holder, into that number of shares of common stock (the “
Series A Conversion Shares
”)
equal to the liquidation preference thereof, divided by Conversion Price (as such term is defined in the Series A Certificate
of Designation), currently $0.50.
In
the event the Company completes an equity or equity-based public offering, registered with the SEC, resulting in gross proceeds
to the Company totaling at least $5.0 million, all issued and outstanding shares of Series A Preferred at that time will automatically
convert into Series A Conversion Shares.
Redemption
.
Subject to certain conditions set forth in the Series A Certificate of Designation, in the event of a Change of Control (defined
in the Series A Certificate of Designation as
the time at which as a third party not affiliated
with the Company or any holders of the Series A Preferred shall have acquired, in one or a series of related transactions, equity
securities of the Company representing more than fifty percent 50% of the outstanding voting securities of the Company), the Company,
at its option, will have the right to redeem all or a portion of the outstanding Series A Preferred in cash at a price per share
of Series A Preferred equal to 100% of the Liquidation Preference.
Voting
Rights
. Holders of Series A Preferred are entitled to vote on all matters, together with the holders of common stock, and
have the equivalent of five (5) votes for every Series A Conversion Share issuable upon conversion of such holder’s outstanding
shares of Series A Preferred. However, the Series A Conversion Shares, when issued, will have all the same voting rights as other
issued and outstanding common stock of the Company, and none of the rights of the Series A Preferred.
Liquidation
.
Upon any liquidation, dissolution, or winding-up of the Company, whether voluntary or involuntary (a “
Liquidation
”),
the holders of Series A Preferred shall be entitled to receive out of the assets, whether capital or surplus, of the Company an
amount equal to the liquidation preference of the Series A Preferred before any distribution or payment shall be made to the holders
of any junior securities, and if the assets of the Company is insufficient to pay in full such amounts, then the entire assets
to be distributed to the holders of the Series A Preferred shall be ratably distributed among the holders in accordance with the
respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.
Certain
Price and Share Adjustments
.
a)
Stock Dividends and Stock Splits
. If the Company (i) pays a stock dividend or otherwise makes a distribution or distributions
payable in shares of common stock on shares of common stock or any other common stock equivalents; (ii) subdivides outstanding
shares of common stock into a larger number of shares; (iii) combines (including by way of a reverse stock split) outstanding
shares of common stock into a smaller number of shares; or (iv) issues, in the event of a reclassification of shares of the common
stock, any shares of capital stock of the Company, then the conversion price shall be adjusted accordingly.
b)
Merger or Reorganization
. If the Company is involved in any reorganization, recapitalization, reclassification, consolidation
or merger in which the Common Stock is converted into or exchanged for securities, cash or other property than each share of Series
A Preferred shall be convertible into the kind and amount of securities, cash or other property that a holder of the number of
shares of common stock issuable upon conversion of one share of Series A Preferred prior to any such merger or reorganization
would have been entitled to receive pursuant to such transaction.
Common
Stock Issued for Services
During
2017, the Company issued 2,302,194 shares of common stock for services valued at $254,438.
During
2016, the Company did not issue any shares of common stock for services.
Common
Stock Issued for the Exercise of Options and Warrants
During
2017, the Company did not issue any shares of common stock for the exercise of options and warrants.
During
2016, the Company issued 30,644 shares of common stock for cashless warrants exercise.
Common
Stock Issued for Settlement and Conversion of Debt
During
2017, the Company issued 3,040,239 shares of common stock in conjunction with the settlement of $322,381 worth of convertible
debt and $36,479 worth of accrued interest. The shares were valued at $334,048 and $159,299 worth of debt discount was written
off, with $21,282 recognized as a loss on the settlement of debt and $113,205 recorded to Additional Paid in Capital upon conversion.
During
2016, the Company issued 563,523 shares of common stock in conjunction with the settlement of convertible debt that was paid in
cash. The shares were valued at $70,863 and were recognized as a loss on the settlement of debt.
Common
Stock Issued for Conversion of Preferred Stock
During
2017, the Company issued 18,692,500 shares of common stock valued at $4,305,962 in exchange for 1,809,250 shares of Series A Preferred.
During
2016, the Company issued 11,180,289 shares of common stock valued at $4,828,204 in exchange for 1,118,024 shares of Series A Preferred.
Preferred
Stock Issued for Cash
During
2017, the Company issued no shares of Series A Preferred for cash.
During
2016, the Company issued 46,666 shares of Series A Preferred for $70,000 cash.
Preferred
Stock Issued for Exercise of Warrants
During
2017, the Company issued no shares of Series A Preferred for the exercise of warrants.
During
2016, the Company issued 250,000 shares of Series A Preferred for $250 for the exercise of warrants.
Preferred
Stock Issued for Warrants Surrendered
During
2017, the Company issued no shares of Series A Preferred for the surrender of warrants.
During
2016, the Company issued 62,854 shares of Series A Preferred, representing $407,973, in exchange for the surrender of 2,407,500
warrants. This resulted in the Company writing off $1,179,710 worth of derivative liabilities and recognizing a gain on debt extinguishment
of $771,737.
Preferred
Stock Issued for Services
During
2017, the Company issued no shares of its Series A Preferred for services.
During
2016, the Company issued 218,000 shares of its Series A Preferred, representing $942,644, for services valued at $949,661, therefore
recognizing $7,018 of a gain on settlement of debt. During 2016, the Company issued 10,000 shares of its Series A Preferred to
its CFO, representing $54,152, for wages.
Preferred
Stock Issued for Loan Fees
During
2017, the Company issued 843,699 shares of Series A Preferred, valued at $1,212,503, for loan fees, and recorded $1,212,503 as
debt discount.
During
2017, the Company issued 627,302 shares of Series A Preferred, valued at $1,488,650, to current note holders for the due date
extension on the conversion date of the related notes from December 15, 2017 to May 9, 2018.
During
2016, the Company issued 30,000 shares of its Series A Preferred, valued at $162,456, as a finder’s fee and issued 37,906
shares of its Series A Preferred, valued at $29,156, as loan fees on related party convertible notes. The Company also issued
347,400 shares of its Series A Preferred, valued at $363,807, as loan fees on convertible notes recorded as debt discount, and
issued 47,840 shares of its Series A Preferred, valued at $39,904, as loan fees on convertible notes recorded as derivative liabilities.
Preferred
Stock Issued for Debt Extinguishment
During
2017, the Company issued no shares of Series A Preferred in exchange for debt extinguishment.
During
2016, the Company issued 215,961 shares of Series A Preferred, valued at $1,401,760, in exchange for $1,197,950 of related party
debt, and $59,671 of accrued interest. This resulted in the Company recognizing $144,139 as a loss on debt extinguishment.
During
2016, the Company issued 473,830 shares of Series A Preferred, valued at $2,330,876, in exchange for $473,613 of related party
convertible debt, and $0 of accrued interest (see Note 6). This resulted in the Company writing off $2,330,154 in derivative liabilities,
$448,613 in debt discounts, and recognizing $24,278 as a gain on debt extinguishment.
During
2016, the Company issued 1,460,600 shares of Series A Preferred, valued at $8,552,746 in exchange for $1,444,950 of convertible
debt, and $50,711 of accrued interest (see Note 8). This resulted in the Company writing off $8,138,070 in derivative liabilities,
$814,625 in debt discounts, and recognizing $266,358 as a gain on debt extinguishment.
Stock
Issued for Accounts Payable and Accrued Liabilities
During
2017, the Company issued 183,279 shares of Series A Preferred to the CEO and CFO, in exchange for $115,587 of accrued payroll,
$67,692 of accounts payable and wages valued at $365,989. Additionally, the Company issued 3,096,483 shares of Common Stock and
160,000 shares of Series A Preferred to third parties and former employees to extinguish $205,283 worth of accounts payable and
$272,164 of accrued payroll, which resulted in the Company recording a loss on extinguishment of debt of $294,530.
During
2016, no shares were issued for accounts payable and accrued liabilities.
Common
Stock Options
The
following schedule summarizes the changes in the Company’s stock options:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
Options
Outstanding
|
|
Average
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
Remaining
|
|
Aggregate
|
|
|
Exercise
|
|
|
|
Of
|
|
|
Price
|
|
Contractual
|
|
Intrinsic
|
|
|
Price
|
|
|
|
Shares
|
|
|
Per
Share
|
|
Life
|
|
Value
|
|
|
Per
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2015
|
|
|
51,350
|
|
|
$
|
12.00-15.00
|
|
|
7.12
years
|
|
$
|
-
|
|
|
$
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
2,370,000
|
|
|
$
|
0.50-1.00
|
|
|
-
|
|
|
|
|
|
$
|
0.62
|
|
Options
exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
-
|
|
|
|
|
|
$
|
-
|
|
Options
expired
|
|
|
(18.850
|
)
|
|
$
|
0.12-.0.15
|
|
|
-
|
|
|
|
|
|
$
|
14.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
|
|
2,402,500
|
|
|
$
|
0.50-15
|
|
|
4.05
years
|
|
$
|
-
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
-
|
|
|
$
|
|
|
|
-
|
|
|
|
|
|
$
|
|
|
Options
exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
-
|
|
|
|
|
|
$
|
-
|
|
Options
expired
|
|
|
(1,180,000
|
)
|
|
$
|
1.00-0.50
|
|
|
-
|
|
|
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
|
1,222,500
|
|
|
$
|
0.50-15
|
|
|
2.91
years
|
|
$
|
-
|
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
|
|
1,097,623
|
|
|
$
|
0.50-15
|
|
|
2.85
years
|
|
$
|
-
|
|
|
$
|
1.14
|
|
During
the year ending December 31, 2017 and 2016, the Company recognized $103,865 and $675,324, respectively, worth of stock based compensation
related to the vesting of it stock options.
Common
Stock Warrants
The
following schedule summarizes the changes in the Company’s common stock warrants:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
Warrants
Outstanding
|
|
Average
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
Remaining
|
|
Aggregate
|
|
|
Exercise
|
|
|
|
Of
|
|
|
Price
|
|
Contractual
|
|
Intrinsic
|
|
|
Price
|
|
|
|
Shares
|
|
|
Per
Share
|
|
Life
|
|
Value
|
|
|
Per
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2015
|
|
|
6,803,503
|
|
|
$
|
0.1-10
|
|
|
1.90
years
|
|
$
|
2,052,699
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
granted
|
|
|
233,334
|
|
|
$
|
0.40-0.10
|
|
|
1.71
years
|
|
|
|
|
|
$
|
0.34
|
|
Warrants
exercised
|
|
|
(202,500
|
)
|
|
$
|
-
|
|
|
-
|
|
$
|
|
|
|
$
|
0.10
|
|
Warrants
expired/cancelled
|
|
|
(3,254,832
|
)
|
|
$
|
0.01-6.00
|
|
|
-
|
|
$
|
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
|
|
3,579,505
|
|
|
$
|
0.01-10
|
|
|
0.52
years
|
|
$
|
749
|
|
|
$
|
4.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
granted
|
|
|
-
|
|
|
$
|
-
|
|
|
-
|
|
|
|
|
|
$
|
|
|
Warrants
exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
-
|
|
|
|
|
|
$
|
|
|
Warrants
expired/cancelled
|
|
|
(3,275,305
|
)
|
|
$
|
4.62
|
|
|
-
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
|
304,200
|
|
|
$
|
1.19
|
|
|
years
|
|
$
|
-
|
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
|
|
304,200
|
|
|
$
|
1.19
|
|
|
years
|
|
$
|
-
|
|
|
$
|
2.63
|
|
During
the year ending December 31, 2017 and 2016, the Company recognized $0 and $595,175, respectively, worth of expense related to
warrants granted for services.
Restricted
Stock Units
The
following schedule summarizes the changes in the Company’s restricted stock units:
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
Of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
RSU’s granted
|
|
|
12,560,000
|
|
|
$
|
0.07
|
|
RSU’s vested
|
|
|
(6,820,000
|
)
|
|
$
|
-
|
|
RSU’s forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
5,740,000
|
|
|
$
|
0.07
|
|
During
the year ending December 31, 2017 and 2016, the Company recognized $575,011 and $0 worth of expense related to the vesting of
its RSU’s, respectively. As of December 31, 2017, the Company had $354,429 worth of expense yet to be recognized for RSU’s
not yet vested.
NOTE
10: CONCENTRATIONS OF CREDIT AND OTHER RISKS
Accounts
Receivable
The
Company had one customer that represented 100% of the Company’s total revenues for each of the years ended December 31,
2017 and 2016. The customer that represented 100% of the Company’s total revenue for the years ended December 31, 2017 and
2016, and accounted for 100% of the consulting revenue for that year. The Company had no net accounts receivable balance at December
31, 2017 and 2016.
The
loss of a significant customer representing the percentage of total revenue as represented for the years ended December 31, 2017
and 2016 would have a temporary adverse effect on the Company’s revenue, which would continue until the Company located
new customers to replace them.
The
Company routinely assesses the financial strength of its customers and provides an allowance for doubtful accounts as necessary.
As of December 31, 2017, and 2016, the Company had no allowance or bad debt expense recorded.
Product
Purchases
Some
of the products the Company might market and components thereof are currently available only from a limited number of suppliers,
several of which are international suppliers. Failure to obtain deliveries from these sources could have a material adverse effect
on the Company’s ability to operate.
NOTE
11: SUPPLEMENTAL CASH FLOW INFORMATION
During
the year ended December 31, 2017, the Company had the following non-cash investing and financing activities:
|
-
|
Decreased
convertible note principal by $322,381 offset by a decrease in debt discount of $159,299, decreased accrued interest by $36,479,
increased common stock by $3,040 and increased paid in capital by $196,540 due to shares issued in conjunction with the settlement
of convertible notes.
|
|
-
|
Decreased
accrued payroll by $387,751, decreased accounts payable by $272,976, and increased common stock, preferred stock and paid
in capital for $660,727 due to shares issued to extinguish liabilities.
|
|
-
|
Increased
common stock by $18,693, increased paid in capital - common by $4,287,269, decreased preferred stock by $1,809, and decreased
paid in capital - preferred by $4,304,153 due to preferred shares converted to common shares.
|
|
-
|
Increased
preferred stock by $844, increased paid in capital - preferred by $1,211,659, and increased debt discount by $1,212,503 due
to preferred shares issued for loan fees.
|
|
-
|
Increased
common stock and decreased paid in capital by $6,820 due to the vesting of restricted stock units.
|
|
-
|
Increased
convertible notes payable and decreased loan from shareholder by $137,000 to roll proceeds from shareholder advances to a
formal convertible note payable.
|
|
-
|
Increased
derivative liability and debt discount for $99,660 to record a debt discount on convertible notes payable.
|
|
-
|
Decreased
accrued interest by $121,308, increased related party notes payable by $51,576, and increased convertible notes payable by
$69,732 due to accrued interest being reclassified to principal.
|
During
the year ended December 31, 2016, the Company had the following non-cash investing and financing activities:
|
-
|
Issued
30,644 shares of common stock valued at $0 for the issuance of cashless warrants.
|
|
-
|
Decreased
convertible notes by $473,613, offset by a decrease $448,613 in debt discount decreased convertible notes payable by $1,444,950,
offset by a decrease $814,624 in debt discount, decreased accrued interest by $110,382, decreased derivative liabilities by
$10,468,224, and increased Series A Preferred by $12,431,882 due to 2,150,391 shares issued in conjunction with the settlement
of convertible notes.
|
|
-
|
Increased
convertible notes payable and decreased accrued interest by $455,150 for the reclassification of accrued interest to principal.
|
|
-
|
Issued
62,854 shares of Series A Preferred, valued at $407,973, which decreased derivative liabilities by $1,179,710 and for which
a gain on debt extinguishment was recorded for $771,737.
|
|
-
|
Increased
derivative liabilities for $1,283,448 to record a debt discount on related party convertible notes of $473,613 and a debt
discount on convertible notes of $809,835.
|
|
-
|
Increased
paid in capital and decreased liability for lack of authorized shares for $852,092.
|
|
-
|
Increased
convertible notes payable and decreased loan from shareholder by $127,533 to roll proceeds from shareholder advances to a
formal convertible note payable.
|
|
-
|
Issued
433,146 shares of Series A Preferred, valued at $432,866, for loan fees that increased the convertible note debt discount
by $363,807 and increased derivative liabilities by $69,059.
|
|
-
|
Issued
11,180,289 shares of common stock valued at $1,590,801 in exchange for 1,118,024 shares of Series A Preferred valued at $4,828,204,
resulting in an increase in retained earnings of $3,237,403.
|
NOTE
12: SUBSEQUENT EVENTS
In
January 2018, the Company issued a $32,279 promissory note due January 2, 2019 in exchange for $32,279 of accounts payable.
In
January 2018, the Company received $40,000 as a shareholder loan.
In
January and through March 2, 2018, the Company issued 5,742,000 shares of common stock for 574,200 shares of Series A Preferred.
In
February 2018, the Company revised the license agreement with Battelle for its patented technology.
In
March 2018, the Company issued 10,000 shares of common stock to a member of the Veterinary Medical Advisory Board.
The
Company has evaluated subsequent events pursuant to ASC Topic 855 and has determined that there are no additional subsequent events
to disclose.