NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019 AND 2018
1.
ORGANIZATION, BACKGROUND, AND BASIS OF PRESENTATION
Guided
Therapeutics, Inc. (formerly SpectRx, Inc.), together with its
wholly owned subsidiary, InterScan, Inc. (formerly Guided
Therapeutics, Inc.), collectively referred to herein as the
“Company”, is a medical
technology company focused on developing innovative medical devices
that have the potential to improve healthcare. The Company’s
primary focus is the continued commercialization of its LuViva
non-invasive cervical cancer detection device and extension of its
cancer detection technology into other cancers, including
esophageal. The Company’s technology, including products in
research and development, primarily relates to biophotonics
technology for the non-invasive detection of
cancers.
Basis
of Presentation
All
information and footnote disclosures included in the consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United
States.
A 1:800
reverse stock split of all of the Company’s issued and
outstanding common stock was implemented on March 29, 2019. As a
result of the reverse stock split, every 800 shares of issued and
outstanding common stock were converted into 1 share of common
stock. All fractional shares created by the reverse stock split
were rounded to the nearest whole share. The number of authorized
shares of common stock did not change. The reverse stock split
decreased the Company’s issued and outstanding shares of
common stock from 2,652,309,322 shares to 3,319,486 shares as of
that date with rounding. See Note 4, Stockholders’ Deficit.
Unless otherwise specified, all per share amounts are reported on a
post-stock split basis, as of December 31, 2019 and
2018.
The
Company’s prospects must be considered in light of the
substantial risks, expenses and difficulties encountered by
entrants into the medical device industry. This industry is
characterized by an increasing number of participants, intense
competition and a high failure rate. The Company has experienced
net losses since its inception and, as of December 31, 2019, it had
an accumulated deficit of approximately $139.6 million. To date,
the Company has engaged primarily in research and development
efforts and the early stages of marketing its products. The Company
may not be successful in growing sales for its products. Moreover,
required regulatory clearances or approvals may not be obtained in
a timely manner, or at all. The Company’s products may not
ever gain market acceptance and the Company may not ever generate
significant revenues or achieve profitability. The development and
commercialization of the Company’s products requires
substantial development, regulatory, sales and marketing,
manufacturing and other expenditures. The Company expects operating
losses to continue for the foreseeable future as it continues to
expend substantial resources to complete development of its
products, obtain regulatory clearances or approvals, build its
marketing, sales, manufacturing and finance capabilities, and
conduct further research and development.
Certain
prior year amounts have been reclassified in order to conform to
the current year presentation.
Going
Concern
The
Company’s consolidated financial statements have been
prepared and presented on a basis assuming it will continue as a
going concern. The factors below raise substantial doubt about the
Company’s ability to continue as a going concern. The
financial statements do not include any adjustments that might be
necessary from the outcome of this uncertainty.
At
December 31, 2019, the Company had a negative working capital of
approximately $11.4 million, accumulated deficit of $139.6 million,
and incurred a net loss of $1.9 million for the year then ended
(the net loss for the year ended December 31, 2019 was primarily
realized due to a $1.4 million in interest expense).
Stockholders’ deficit totaled approximately $16.9 million at
December 31, 2019, primarily due to recurring net losses from
operations, deemed dividends on warrants and preferred stock,
offset by proceeds from the exercise of options and warrants and
proceeds from sales of stock.
During
the end of 2019 and beginning of 2020, the Company was able to
raise $1.4 million in equity and debt investments. In addition, the
Company has executed several exchange agreements that will convert
debt for equity, as well as eliminate some existing debt. The
Company’s capital-raising efforts are ongoing and the Company
has taken the following steps to increase the likelihood of a
successful financing: 1) Applied to the Canadian Stock Exchange for
a possible listing, 2) Debt has been significantly reduced and
additional agreements are in place, contingent on a successful
financing, to reduce debt even further either by forgiveness of
debt and/or exchanges of debt for equity and 3) Monthly operating
expenses are scrutinized and controlled. If sufficient capital
cannot be raised during 200, the Company will continue its plans of
curtailing operations by reducing discretionary spending and
staffing levels and attempting to operate by only pursuing
activities for which it has external financial support. However,
there can be no assurance that such external financial support will
be sufficient to maintain even limited operations or that the
Company will be able to raise additional funds on acceptable terms,
or at all. In such a case, the Company might be required to enter
into unfavorable agreements or, if that is not possible, be unable
to continue operations, and to the extent practicable, liquidate
and/or file for bankruptcy protection.
The
Company had warrants exercisable for approximately 46.0 million
shares of its common stock outstanding at December 31, 2019, with
exercise prices ranging between $0.04 and $60,000 per share.
Exercises of these warrants would generate a total of approximately
$1.6 million in cash, assuming full exercise, although the Company
cannot be assured that holders will exercise any warrants.
Management may obtain additional funds through the public or
private sale of debt or equity, and grants, if available. However,
please refer to Footnote 11 - CONVERTIBLE DEBT IN DEFAULT in the
paragraph: Debt Restructuring for more information regarding our
warrants.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Significant areas where estimates are used include the
allowance for doubtful accounts, inventory valuation and input
variables for Black-Scholes, Monte Carlo simulations and binomial
calculations. The Company uses the Monte Carlo simulations and
binomial calculations in the calculation of the fair value of the
warrant liabilities and the valuation of embedded conversion
options and freestanding warrants.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts
of Guided Therapeutics, Inc. and its wholly owned subsidiary. All
intercompany transactions are eliminated.
Accounting
Standard Updates
Implemented
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic
842)” that requires lessees to recognize on the balance sheet
the assets and liabilities associated with the rights and
obligations created by those leases. Under the new guidance, a
lessee is required to recognize assets and liabilities for leases
with lease terms of more than 12 months. Consistent with current
U.S. GAAP, the recognition, measurement, and presentation of
expenses and cash flows arising from a lease by a lessee primarily
depends on its classification as finance or operating lease. The
update is effective for reporting periods beginning after December
15, 2018. The adoption
resulted in the Company in recognizing a lease asset and a
corresponding lease liability of $213,000 at adoption.
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued ASU 2014-09, “Revenue from Contracts with Distributors
(Topic 606),” (“ASU 2014-09”). ASU 2014-09
outlines a new, single comprehensive model for entities to use in
accounting for revenue arising from contracts with distributors and
supersedes most current revenue recognition guidance, including
industry-specific guidance. This new revenue recognition model
provides a five-step analysis in determining when and how revenue
is recognized. The new model requires revenue recognition to depict
the transfer of promised goods or services to distributors in an
amount that reflects the consideration a company expects to
receive. ASU 2014-09 also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including significant judgments
and changes in judgments and assets recognized from costs incurred
to obtain or fulfill a contract. In August 2015, the FASB issued
ASU 2015-14, “Deferral of the Effective Date”, which
amends ASU 2014-09. As a result, the effective date will be the
first quarter of fiscal year 2018 with early adoption permitted in
the first quarter of fiscal year 2017. Subsequently, the FASB has
issued the following standards related to ASU 2014-09: ASU 2016-08,
“Revenue from Contracts with Distributors (Topic 606),
Principal versus Agent Considerations (Reporting Revenue Gross
versus Net),” (“ASU 2016-08”); ASU 2016-10,
“Revenue from Contracts with Distributors (Topic 606),
Identifying Performance Obligations and Licensing,”
(“ASU 2016-10”); ASU 2016-12, “Revenue from
Contracts with Distributors (Topic 606) Narrow-Scope Improvements
and Practical Expedients,” (“ASU 2016-12”); and
ASU 2016-20, “Technical Corrections and Improvements to Topic
606, Revenue from Contracts with Distributors,” (“ASU
2016-20”), which are intended to provide additional guidance
and clarity to ASU 2014-09. The Company must adopt ASU 2016-08, ASU
2016-10, ASU 2016-12 and ASU 2016-20 along with ASU 2014-09
(collectively, the “New Revenue Standards”). The New
Revenue Standards may be applied using one of two retrospective
application methods: (1) a full retrospective approach for all
periods presented, or (2) a modified retrospective approach that
presents a cumulative effect as of the adoption date and additional
required disclosures. The Company has evaluated the adoption of
this guidance and has taken a modified retrospective approach to
the presentation of revenue from contracts with distributors. The
Company adopted this standard on January 1, 2018, using the
modified retrospective method, with no impact on its 2018 financial
statements. The cumulative effect of initially applying the new
guidance had no impact on its financial statements in future
periods.
In
February 2018, the FASB issued ASU 2018-02, Income Statement
– Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income. The amendment of ASU 2018-02 states an entity
may elect to reclassify the income tax effects of the Tax Cuts and
Jobs Act of 2017 (the “Tax Cuts and Jobs Act”) on items
within accumulated other comprehensive income to retained earnings.
The amendments in this update are effective for annual periods, and
interim periods within those annual periods, beginning after
December 15, 2018. Early adoption is permitted. The adoption did
not have a material effect on the Company’s consolidated
financial statements.
Except
as noted above, the guidance issued by the FASB during the current
year is not expected to have a material effect on the
Company’s consolidated financial statements.
A
variety of proposed or otherwise potential accounting standards are
currently under consideration by standard-setting organizations and
certain regulatory agencies. Because of the tentative and
preliminary nature of such proposed standards, management has not
yet determined the effect, if any, that the implementation of such
proposed standards would have on the Company’s consolidated
financial statements.
Cash
Equivalents
The
Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be a cash
equivalent.
Accounts
Receivable
The
Company performs periodic credit evaluations of its
distributors’ financial conditions and generally does not
require collateral. The Company reviews all outstanding accounts
receivable for collectability on a quarterly basis. An allowance
for doubtful accounts is recorded for any amounts deemed
uncollectable. The Company does not accrue interest receivable on
past due accounts receivable.
Concentrations
of Credit Risk
The
Company, from time to time during the years covered by these
consolidated financial statements, may have bank balances in excess
of its insured limits. Management has deemed this a normal business
risk.
Inventory
Valuation
All
inventories are stated at lower of cost or net realizable value,
with cost determined substantially on a “first-in,
first-out” basis. Selling, general, and administrative
expenses are not inventoried, but are charged to expense when
incurred. At December 31, 2019 and 2018, our inventories were as
follows (in thousands):
|
|
|
|
|
Raw
materials
|
$781
|
$783
|
Work in
process
|
81
|
81
|
Finished
goods
|
17
|
17
|
Inventory
reserve
|
(831)
|
(767)
|
Total
|
$48
|
$114
|
The
company periodically reviews the value of items in inventory and
provides write-downs or write-offs of inventory based on its
assessment of market conditions. Write-downs and write-offs are
charged to cost of goods sold.
Property
and Equipment
Property and
equipment are recorded at cost. Depreciation is computed using the
straight-line method over estimated useful lives of three to seven
years. Leasehold improvements are amortized at the shorter of the
useful life of the asset or the remaining lease term. Depreciation
and amortization expense is included in general and administrative
expense on the statement of operations. Expenditures for repairs
and maintenance are expensed as incurred. Property and equipment
are summarized as follows at December 31, 2019 and 2018 (in
thousands):
|
|
|
|
|
Equipment
|
$1,349
|
$1,378
|
Software
|
740
|
740
|
Furniture and
fixtures
|
124
|
124
|
Leasehold
Improvement
|
180
|
199
|
|
2,393
|
2,441
|
Less accumulated
depreciation
|
(2,393)
|
(2,420)
|
Total
|
$-
|
$21
|
Debt
Issuance Costs
Debt
issuance costs are capitalized and amortized over the term of the
associated debt. Debt issuance costs are presented in the balance
sheet as a direct deduction from the carrying amount of the debt
liability consistent with the debt discount.
Other
Assets
Other
assets primarily consist of a deposit for the corporate
office.
Patent
Costs (Principally Legal Fees)
Costs
incurred in filing, prosecuting, and maintaining patents are
recurring, and expensed as incurred. Maintaining patents are
expensed as incurred as the Company has not yet received U.S. FDA
approval and recovery of these costs is uncertain. Such costs
aggregated approximately $15,000 and $11,000 in 2019 and 2018,
respectively.
Leases
With the implementation of ASU 2016-02,
“Leases (Topic 842)”, the Company recorded a lease
asset-right and a lease liability. The implementation required the
analysis of certain criteria in determining its treatment. The
Company determined that its corporate office lease met those
criteria. The Company implemented the guidance using the
alternative transition method. Under this alternative, the
effective date would be the date of initial application. The
Company analyzed the lease at its effective date and calculated an
initial lease payment amount of $267,380 with a present value of
$213,000 using a 20% discount. As of December 31, 2019, the
balance of the lease asset – right and lease liability was
approximately $132,000.
The
cumulative effect of initially applying the new guidance had an
immaterial impact on the opening balance of retained earnings, The
Company does not expect the guidance to have a material impact on
its consolidated net earnings in future periods. The Company
elected the Practical expedients permitted under the transition
guidance within the new standards, which allowed the Company to
carry forward the historical lease classification.
Accrued
Liabilities
Accrued
liabilities are summarized as follows at December 31, 2019 and 2018
(in thousands):
|
|
|
|
|
Compensation
|
$1,123
|
$1,030
|
Professional
fees
|
181
|
203
|
Interest
|
1,603
|
892
|
Warranty
|
2
|
2
|
Vacation
|
41
|
53
|
Preferred
dividends
|
120
|
120
|
Stock subscription
for licenses
|
-
|
692
|
Other accrued
expenses
|
165
|
164
|
Total
|
$3,235
|
$3,156
|
Subscription
receivables
Cash
received from investors for common stock shares that has not
completed processing is recorded as a liability to subscription
receivables. As of December 31, 2019, the Company had reserved
1,270,000 common stock shares in exchange for
$635,000.
Revenue
recognition
The
Company follows, ASC 606 Revenue from Contracts with Customers
establishes a single and comprehensive framework which sets out how
much revenue is to be recognized, and when. The core principle is
that a vendor should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the vendor expects to be entitled in
exchange for those goods or services. Revenue will now be
recognized by a vendor when control over the goods or services is
transferred to the customer. In contrast, Revenue based revenue
recognition around an analysis of the transfer of risks and
rewards; this now forms one of a number of criteria that are
assessed in determining whether control has been transferred. The
application of the core principle in ASC 606 is carried out in five
steps: Step 1 – Identify the contract with a customer: a
contract is defined as an agreement (including oral and implied),
between two or more parties, that creates enforceable rights and
obligations and sets out the criteria for each of those rights and
obligations. The contract needs to have commercial substance and it
is probable that the entity will collect the consideration to which
it will be entitled. Step 2 – Identify the performance
obligations in the contract: a performance obligation in a contract
is a promise (including implicit) to transfer a good or service to
the customer. Each performance obligation should be capable of
being distinct and is separately identifiable in the contract. Step
3 – Determine the transaction price: transaction price is the
amount of consideration that the entity can be entitled to, in
exchange for transferring the promised goods and services to a
customer, excluding amounts collected on behalf of third parties.
Step 4 – Allocate the transaction price to the performance
obligations in the contract: for a contract that has more than one
performance obligation, the entity will allocate the transaction
price to each performance obligation separately, in exchange for
satisfying each performance obligation. The acceptable methods of
allocating the transaction price include adjusted market assessment
approach, expected cost plus a margin approach, and, the residual
approach in limited circumstances. Discounts given should be
allocated proportionately to all performance obligations unless
certain criteria are met and reallocation of changes in standalone
selling prices after inception is not permitted. Step 5 –
Recognize revenue as and when the entity satisfies a performance
obligation: the entity should recognize revenue at a point in time,
except if it meets any of the three criteria, which will require
recognition of revenue over time: the entity’s performance
creates or enhances an asset controlled by the customer, the
customer simultaneously receives and consumes the benefit of the
entity’s performance as the entity performs, and the entity
does not create an asset that has an alternative use to the entity
and the entity has the right to be paid for performance to
date.
Revenue
by product line:
|
|
|
|
|
Devices
|
$17
|
$17
|
Disposables
|
2
|
32
|
Other
|
15
|
1
|
Warranty
|
2
|
7
|
Total
|
$36
|
$57
|
Revenue
by geographic location:
|
|
|
|
|
Asia
|
$22
|
$49
|
Africa
|
-
|
8
|
Europe
|
14
|
-
|
Total
|
$36
|
$57
|
Significant
Distributors
As of
the year ended December 31, 2019, all the Company’s revenues
were from three distributors and for extended warranties. Revenue
from these distributors totaled approximately $36,000 for the year
ended December 31, 2019. For the year ended December 31, 2018, 82%
of the Company’s revenue was from one distributor and totaled
$40,750. There were no amounts due from these distributors as of
December 31, 2019, and 2018.
Deferred revenue
The
Company defers payments received as revenue until earned based on
the related contracts and applying ASC 606 as required. As of
December 31, 2019, and 2018, the Company had $101,000 and $66,000
in deferred revenue, respectively.
Research
and Development
Research and
development expenses consist of expenditures for research conducted
by the Company and payments made under contracts with consultants
or other outside parties and costs associated with internal and
contracted clinical trials. All research and development costs are
expensed as incurred.
Income
Taxes
The
Company uses the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and
tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Management provides valuation
allowances against the deferred tax assets for amounts that are not
considered more likely than not to be realized.
The
Company has filed its 2018 federal and state corporate tax
returns. The Company
has entered into an agreed upon payment plan with the IRS for
delinquent payroll taxes. The Company is currently in process of
setting up a payment arrangement for its delinquent state income
taxes with the State of Georgia and the returns are currently under
review by state authorities. Although the Company has been
experiencing recurring losses, it is obligated to file tax returns
for compliance with IRS regulations and that of applicable state
jurisdictions. At December 31, 2019, the Company has approximately
$76 million of net operating losses, but it has not filed its
Federal tax returns, therefore this number may not be accurate.
This net operating loss will be eligible to be carried forward for
tax purposes at federal and applicable states level. A full
valuation allowance has been recorded related the deferred tax
assets generated from the net operating losses.
As of
January 1, 2018, corporate tax rates in the U.S. have decreased
from 34% to 21%.
Uncertain
Tax Positions
The
Company assesses each income tax position is assessed using a
two-step process. A determination is first made as to whether it is
more likely than not that the income tax position will be
sustained, based upon technical merits, upon examination by the
taxing authorities. If the income tax position is expected to meet
the more likely than not criteria, the benefit recorded in the
financial statements equals the largest amount that is greater than
50% likely to be realized upon its ultimate settlement. At December
31, 2019 and, 2018, there were no uncertain tax
positions.
Warrants
The
Company has issued warrants, which allow the warrant holder to
purchase one share of stock at a specified price for a specified
period of time. The Company records equity instruments including
warrants issued to non-employees based on the fair value at the
date of issue. The fair value of warrants classified as equity
instruments at the date of issuance is estimated using the
Black-Scholes Model. The fair value of warrants classified as
liabilities at the date of issuance is estimated using the Monte
Carlo Simulation or Binomial model.
Stock
Based Compensation
The
Company records compensation expense related to options granted to
employees and non-employees based on the fair value of the
award.
Compensation cost
is recorded as earned for all unvested stock options outstanding at
the beginning of the first year based upon the grant date fair
value estimates, and for compensation cost for all share-based
payments granted or modified subsequently based on fair value
estimates.
For the
years ended December 31, 2019 and 2018, share-based compensation
for options attributable to employees, officers and Board members
were approximately $8,000 and $44,000, respectively. These amounts
have been included in the Company’s statements of operations.
Compensation costs for stock options which vest over time are
recognized over the vesting period. As of December 31, 2019, the
Company did not have any unrecognized compensation costs related to
granted stock options to be recognized.
Beneficial
Conversion Features of Convertible Securities
Conversion options
that are not bifurcated as a derivative pursuant to ASC 815 and not
accounted for as a separate equity component under the cash
conversion guidance are evaluated to determine whether they are
beneficial to the investor at inception (a beneficial conversion
feature) or may become beneficial in the future due to potential
adjustments. The beneficial conversion feature guidance in ASC
470-20 applies to convertible stock as well as convertible debt
which are outside the scope of ASC 815. A beneficial conversion
feature is defined as a nondetachable conversion feature that is in
the money at the commitment date. The beneficial conversion feature
guidance requires recognition of the conversion option’s
in-the-money portion, the intrinsic value of the option, in equity,
with an offsetting reduction to the carrying amount of the
instrument. The resulting discount is amortized as a dividend over
either the life of the instrument, if a stated maturity date
exists, or to the earliest conversion date, if there is no stated
maturity date. If the earliest conversion date is immediately upon
issuance, the dividend must be recognized at inception. When there
is a subsequent change to the conversion ratio based on a future
occurrence, the new conversion price may trigger the recognition of
an additional beneficial conversion feature on
occurrence.
Derivatives
The
Company reviews the terms of convertible debt issued to determine
whether there are embedded derivative instruments, including
embedded conversion options, which are required to be bifurcated
and accounted for separately as derivative financial instruments.
In circumstances where the host instrument contains more than one
embedded derivative instrument, including the conversion option,
that is required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative
instrument
Bifurcated embedded
derivatives are initially recorded at fair value and are then
revalued at each reporting date with changes in the fair value
reported as non-operating income or expense. When the equity or
convertible debt instruments contain embedded derivative
instruments that are to be bifurcated and accounted for as
liabilities, the total proceeds received are first allocated to the
fair value of all the bifurcated derivative instruments. The
remaining proceeds, if any, are then allocated to the host
instruments themselves, usually resulting in those instruments
being recorded at a discount from their face value. The discount
from the face value of the convertible debt, together with the
stated interest on the instrument, is amortized over the life of
the instrument through periodic charges to interest
expense.
3.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
guidance for fair value measurements, ASC820, Fair Value
Measurements and Disclosures, establishes the authoritative
definition of fair value, sets out a framework for measuring fair
value, and outlines the required disclosures regarding fair value
measurements. Fair value is the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at
the measurement date. The Company uses a three-tier fair value
hierarchy based upon observable and non-observable inputs as
follow:
●
Level 1
– Quoted market prices in active markets for identical assets
and liabilities;
●
Level 2
– Inputs, other than level 1 inputs, either directly or
indirectly observable; and
●
Level 3 –
Unobservable inputs developed using internal estimates and
assumptions (there is little or no market date) which reflect those
that market participants would use.
The
Company records its derivative activities at fair value, which
consisted of warrants as of December 31, 2019. The fair value of
the warrants was estimated using the Binomial Simulation model.
Gains and losses from derivative contracts are included in net gain
(loss) from derivative contracts in the statement of operations.
The fair value of the Company’s derivative warrants is
classified as a Level 3 measurement, since unobservable inputs are
used in the valuation.
The
following table presents the fair value for those liabilities
measured on a recurring basis as of December 31, 2019 and
2018:
FAIR
VALUE MEASUREMENTS (In Thousands)
The
following is summary of items that the Company measures at fair
value on a recurring basis:
|
Fair
Value at December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in
connection with Distributor Debt
|
-
|
-
|
(114)
|
(114)
|
Warrants issued in
connection with Short-term loans
|
-
|
-
|
(83)
|
(83)
|
Warrants issued in
connection with Long-term loans
|
-
|
-
|
(893)
|
(893)
|
Warrants issued in
connection with Senior Secured Debt
|
-
|
-
|
(4,002)
|
(4,002)
|
Embedded derivative
due to the conversion option that needed to be bifurcated for the
Auctus $700,000 loan on December 17, 2019
|
-
|
-
|
-
|
-
|
Total
long-term liabilities at fair value
|
$-
|
$-
|
$(5,092)
|
$(5,092)
|
|
Fair
Value at December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in
connection with Distributor Debt
|
-
|
-
|
(114)
|
(114)
|
Warrants issued in
connection with Senior Secured Debt
|
-
|
-
|
(4,614
|
(4,614
|
Total
long-term liabilities at fair value
|
$-
|
$-
|
$(4,728
|
$(4,728
|
|
|
|
|
|
The
following is a summary of changes to Level 3 instruments during the
year ended December 31, 2019:
|
Fair
Value Measurements Using Significant Unobservable Inputs (Level
3)
|
|
|
|
|
|
|
Balance,
December 31, 2018
|
$(114)
|
$-
|
$(4,614)
|
$-
|
$(4,728)
|
Warrants
issued during the year
|
-
|
(108)
|
-
|
(636)
|
(744)
|
Change
in fair value during the year
|
-
|
25
|
612
|
(257)
|
380
|
Balance, December
31, 2019
|
$(114)
|
$(83)
|
$(4,002)
|
$(893)
|
$(5,092)
|
As of
December 31, 2019, the fair value of warrants was approximately
$5.1 million. A net change of approximately $0.4 million has been
recorded to the accompanying statement of operations for the year
ended.
4.
STOCKHOLDER’S DEFICIT
Common
Stock
The
Company has authorized 3,000,000,000 shares of common stock with
$0.001 par value, of which 3,319,486 were issued and outstanding as
of December 31, 2019. As of December 31, 2018, there were
3,000,000,000 authorized shares of common stock, of which 2,669,348
were issued and outstanding.
For the
year ended December 31, 2019, the Company issued 650,138 shares of
common stock as listed below:
Convertible Debt
Conversions
|
|
650,138
|
Summary
table of common stock share transactions:
Balance
at December 31, 2018
|
|
2,669,348
|
Issued
in 2019
|
|
650,138
|
Balance
at December 31, 2019
|
|
3,319,486
|
Common
stock shares to be issued for subscription receivables and debt
exchange agreements
As of
December 31, 2019, the Company received investments for common
stock shares and warrants. The Company also received debt exchange
agreements for common stock shares and warrants. As of December 31,
2019, the Company had not issued the common stock shares to the
investors and debtors.
During
December 2019, the Company received equity investments in the
amount of $635,000. These investors will receive a total of
1,270,000 common stock shares and 1,270,000 warrants to purchase
common stock shares at a strike price of $0.25, 1,270,000 warrants
to purchase common stock shares at a strike price of $0.75 and 635
Series D preferred stock (each Series D preferred stock shares
converts into 3,000 shares of the Company’s common stock
shares). Of the amount invested $350,000 was from related
parties.
On
December 5, 2019, the Company entered into an exchange agreement
with Aquarius. Based on this agreement the Company will exchange
$145,544 of debt outstanding for: 291,088 common stock shares;
145,544 warrants to purchase common stock shares at a strike price
of $0.25; and 145,544 warrants to purchase common stock shares at a
strike price of $0.75.
On
December 30, 2019, the Company entered into an exchange agreement
with K2 Medical. Based on this agreement the Company will exchange
$790,544 of debt outstanding for: 1,881,495 common stock shares;
496,602 warrants to purchase common stock shares at a strike price
of $0.20; 692,446 warrants to purchase common stock shares at a
strike price of $0.25; and 692,446 warrants to purchase common
stock shares at a strike price of $0.75.
On
December 30, 2019, the Company entered into an exchange agreement
with Mr. Blumberg. Based on this agreement the Company will
exchange $305,320 of debt outstanding for: 1,167,630 common stock
shares; 928,318 warrants to purchase common stock shares at a
strike price of $0.20; 119,656 warrants to purchase common stock
shares at a strike price of $0.25; and 119,656 warrants to purchase
common stock shares at a strike price of $0.75.
On
December 30, 2019, the Company entered into an exchange agreement
with Mr. Case. Based on this agreement the Company will exchange
$179,291 of debt outstanding for: 896,456 common stock shares; and
896,455 warrants to purchase common stock shares at a strike price
of $0.20.
On
December 30, 2019, the Company entered into an exchange agreement
with Mr. Grimm. Based on this agreement the Company will exchange
$51,110 of debt outstanding for: 255,548 common stock shares; and
255,548 warrants to purchase common stock shares at a strike price
of $0.20.
On
December 30, 2019, the Company entered into an exchange agreement
with Mr. Gould. Based on this agreement the Company will exchange
$111,227 of debt outstanding for: 556,136 common stock shares; and
556,136 warrants to purchase common stock shares at a strike price
of $0.20.
On
December 30, 2019, the Company entered into an exchange agreement
with Mr. Mamula. Based on this agreement the Company will exchange
$15,577 of debt outstanding for: 77,885 common stock shares; and
77,885 warrants to purchase common stock shares at a strike price
of $0.20.
On
December 30, 2019, the Company entered into an exchange agreement
with Dr. Imhoff. Based on this agreement the Company will exchange
$400,417 of debt outstanding for: 1,699,255 common stock shares;
1,497,367 warrants to purchase common stock shares at a strike
price of $0.20; 100,944 warrants to purchase common stock shares at
a strike price of $0.25; and 100,944 warrants to purchase common
stock shares at a strike price of $0.75.
On
December 30, 2019, the Company entered into an exchange agreement
with Ms. Rosenstock. Based on this agreement the Company will
exchange $78,986 of debt outstanding for: 100,000 common stock
shares; and 50,000 warrants to purchase common stock shares at a
strike price of $0.25; and 50,000 warrants to purchase common stock
shares at a strike price of $0.75. Ms. Rosenstock also forgave
$28,986 in debt to the Company.
On
December 30, 2019, the Company entered into an exchange agreement
with Michael James. Based on this agreement the Company will
exchange $2,286 of debt outstanding for: 7,746 common stock shares;
1,227 warrants to purchase common stock shares at a strike price of
$0.25; 1,227 warrants to purchase common stock shares at a strike
price of $0.75; and 5,291 warrants to purchase common stock shares
at a strike price of $0.20.
The
Company’s COO and director, Mark Faupel, is a shareholder of
Shenghuo, and a former director, Richard Blumberg, is a managing
member of Shenghuo.
During
2018, the Company had exercised its rights under the $10,000,000
GHS Equity Financing Agreement entered into on March 1, 2018, to
exercise puts of $47,320 for the issuance of 87,500 common stock
shares. Pursuant to the agreement a put maybe executed for a price
that is 80% of the “market price” which is the average
of the two lowest volume weighted average prices of the
Company’s common stock for 15 consecutive trading days
preceding the put date.
Preferred
Stock
The
Company has authorized 5,000,000 shares of preferred stock with a
$.001 par value. The board of directors has the authority to issue
these shares and to set dividends, voting and conversion rights,
redemption provisions, liquidation preferences, and other rights
and restrictions. The board of directors designated 525,000 shares
of preferred stock redeemable convertible preferred stock, none of
which remain outstanding, 33,000 shares of preferred stock as
Series B Preferred Stock, none of which remain outstanding, 9,000
shares of preferred stock as Series C Convertible Preferred Stock,
(the “Series C Preferred Stock”), of which 286 were
issued and outstanding at December 31, 2019 and 2018, respectively
and 20,250 shares of preferred stock as Series C1 Preferred Stock,
of which 1,050 shares were issued and outstanding at December 31,
2019 and 2018, respectively.
On
August 31, 2018, the Company entered into agreements with certain
holders of the Company’s Series C1 Preferred Stock, including
the chairman of the Company’s board of directors, and the
Chief Operating Officer and a director of the Company (the
“Exchange Agreements”), pursuant to which those holders
separately agreed to exchange each share of the Series C1 Preferred
Stock held for one (1) share of the Company’s newly created
Series C2 preferred stock, par value $0.001 per share (the
“Series C2 Preferred Stock”). In total, for 3,262.25
shares of Series C1 Preferred Stock to be surrendered, the Company
issued 3,262.25 shares of Series C2 Preferred Stock.
The Company will issue Series D Preferred Stock in
2020. At the end of 2019 and beginning of 2020, the Company had
subscriptions from investors that would provide each investor one
Series D Preferred Stock share for each $1,000 invested. And
each Series D preferred stock converts into 3,000 shares of
the Company’s common stock shares.
Series C Convertible Preferred Stock
On June
29, 2015, the Company entered into a securities purchase agreement
with certain accredited investors, including John Imhoff and Mark
Faupel, members of the Board, for the issuance, exchange and sale
of an aggregate of 6,737 shares of Series C convertible preferred
stock, at a purchase price of $750 per share and a stated value of
$1,000 per share. Additionally, during October 2015 the Company
entered into an interim agreement amending the securities purchase
agreement to provide for certain of the investors to purchase an
additional aggregate of 1,166 shares. For a total of Series C
convertible preferred stock issued of 7,903 shares. Of the 7,903
Series C convertible preferred stock issued, 1,835 were issued in
exchange of Series B convertible preferred stock. Therefore 6,068
Series C preferred stock were issued at a purchase price of $750
for gross proceeds of $4,551,000. The Company received net cash
proceeds of $3,698,000, after cash and non-cash expenses of
$853,000.
Pursuant to the
Series C certificate of designations, shares of Series C preferred
stock are convertible into common stock by their holder at any time
and may be mandatorily convertible upon the achievement of
specified average trading prices for the Company’s common
stock. At December 31, 2019, there were 286 shares outstanding with
a conversion price of $0.50 per share, such that each share of
Series C preferred stock would convert into approximately 2,000
shares of the Company’s common stock, subject to customary
adjustments, including for any accrued but unpaid dividends and
pursuant to certain anti-dilution provisions, as set forth in the
Series C certificate of designations. The conversion price will
automatically adjust downward to 80% of the then-current market
price of the Company’s common stock 15 trading days after any
reverse stock split of the Company’s common stock, and 5
trading days after any conversions of the Company’s
outstanding convertible debt.
Holders
of the Series C preferred stock are entitled to quarterly
cumulative dividends at an annual rate of 12.0% until 42 months
after the original issuance date (the “Dividend End
Date”), payable in cash or, subject to certain conditions,
the Company’s common stock. In addition, upon conversion of
the Series C preferred stock prior to the Dividend End Date, the
Company will also pay to the converting holder a “make-whole
payment” equal to the number of unpaid dividends through the
Dividend End Date on the converted shares. At December 31, 2019,
the “make-whole payment” for a converted share of
Series C preferred stock would convert to 200 shares of the
Company’s common stock. The Series C preferred stock
generally has no voting rights except as required by Delaware law.
Upon the Company’s liquidation or sale to or merger with
another corporation, each share will be entitled to a liquidation
preference of $1,000, plus any accrued but unpaid dividends. In
addition, the purchasers of the Series C preferred stock received,
on a pro rata basis, warrants exercisable to purchase an aggregate
of approximately 1 share of Company’s common stock. The
warrants contain anti-dilution adjustments in the event that the
Company issues shares of common stock, or securities exercisable or
convertible into shares of common stock, at prices below the
exercise price of such warrants. As a result of the anti-dilution
protection, the Company is required to account for the warrants as
a liability recorded at fair value each reporting period. At
December 31, 2019, the exercise price per share was
$512,000.
On May
23, 2016, an investor canceled certain of these warrants,
exercisable into 903 shares of common stock. The same investor also
transferred certain of these warrants, exercisable for 150 shares
of common stock, to two investors who also had participated in the
2015 Series C financing.
Series C1 Convertible Preferred Stock
Between
April 27, 2016 and May 3, 2016, the Company entered into various
agreements with certain holders of Series C preferred stock,
including directors John Imhoff and Mark Faupel, pursuant to which
those holders separately agreed to exchange each share of Series C
preferred stock held for 2.25 shares of the Company’s newly
created Series C1 Preferred Stock and 12 (9,600 pre-split) shares
of the Company’s common stock (the “Series C
Exchanges”). In connection with the Series C Exchanges, each
holder also agreed to roll over the $1,000 stated value per share
of the holder’s shares of Series C1 Preferred Stock into the
next qualifying financing undertaken by the Company on a
dollar-for-dollar basis and, except in the event of an additional
$50,000 cash investment in the Company by the holder, to execute a
customary “lockup” agreement in connection with the
financing. In total, for 1,916 shares of Series C preferred stock
surrendered, the Company issued 4,312 shares of Series C1 Preferred
Stock and 29 shares of common stock. At December 31, 2019, there
were 1,050 shares outstanding with a conversion price of $0.50 per
share, such that each share of Series C preferred stock would
convert into approximately 2,000 shares of the Company’s
common stock.
On August 31, 2018, 3,262.25 shares of Series C1
Preferred Stock were surrendered, and the Company issued 3,262.25
shares of Series C2 Preferred Stock. At December 31,
2019, shares of Series C2 had a
conversion price of $0.50 per share, such that each share of Series
C preferred stock would convert into approximately 2,000 shares of
the Company’s common stock.
The
Series C1 preferred stock has terms that are substantially the same
as the Series C preferred stock, except that the Series C1
preferred stock does not pay dividends (unless and to the extent
declared on the common stock) or at-the-market “make-whole
payments” and, while it has the same anti-dilution
protections afforded the Series C preferred stock, it does not
automatically reset in connection with a reverse stock split or
conversion of our outstanding convertible debt.
Series C2 Convertible Preferred Stock
On August 31, 2018, the Company entered into
agreements with certain holders of the Company’s Series C1
Preferred Stock, including the chairman of the Company’s
board of directors, and the Chief Operating Officer and a director
of the Company pursuant to which those holders separately agreed to
exchange each share of the Series C1 Preferred Stock held for one
(1) share of the Company’s newly created Series C2 Preferred
Stock. In total, for 3,262.25 shares of Series C1 Preferred Stock
to be surrendered, the Company issued 3,262.25 shares of Series C2
Preferred Stock. At December 31, 2019, shares of Series C2 had a conversion price of
$0.50 per share, such that each share of Series C preferred stock
would convert into approximately 2,000 shares of the
Company’s common stock.
The
terms of the Series C2 Preferred Stock are substantially the same
as the Series C1 Preferred Stock, except that (i) shares of Series
C1 Preferred Stock may not be convertible into the Company’s
common stock by their holder for a period of 180 days following the
date of the filing of the Certificate of Designation (the
“Lock-Up Period”); (ii) the Series C2 Preferred Stock
has the right to vote as a single class with the Company’s
common stock on an as-converted basis, notwithstanding the Lock-Up
Period; and (iii) the Series C2 Preferred Stock will automatically
convert into that number of securities sold in the next Qualified
Financing (as defined in the Exchange Agreement) determined by
dividing the stated value ($1,000 per share) of such share of
Series C2 Preferred Stock by the purchase price of the securities
sold in the Qualified Financing.
Warrants
The
following table summarizes transactions involving the
Company’s outstanding warrants to purchase common stock for
the year ended December 31, 2019:
|
Warrants
(Underlying
Shares)
|
Outstanding,
January 1, 2019
|
23,551,857
|
Issuances
|
22,465,001
|
Canceled /
Expired
|
(18)
|
Exercised
|
-
|
Outstanding,
December 31, 2019
|
46,016,840
|
The
Company had the following shares reserved for the warrants as of
December 31, 2019:
Warrants
(Underlying Shares)
|
Exercise
Price
|
Expiration
Date
|
13(1)
|
$60,000.00 per
share
|
June
14, 2021
|
2(7)
|
$5,760,000.00 per
share
|
December 2,
2020
|
2(8)
|
$7,040,000.00 per
share
|
December 2,
2020
|
1(9)
|
$7,603,200.00 per
share
|
June
29, 2020
|
13(9)
|
$512,000.00 per
share
|
September 21,
2020
|
24(10)
|
$512,000.00 per
share
|
June
29, 2020
|
12(11)
|
$512,000.00 per
share
|
September 4,
2020
|
1(12)
|
$7,603,200.00 per
share
|
September 4,
2020
|
1(13)
|
$512,000.00 per
share
|
October
23, 2020
|
1(14)
|
$7,603,200.00 per
share
|
October
23, 2020
|
35,937,500(15)
|
$0.04
per share
|
June
14, 2021
|
1,725,000(16)
|
$0.04
per share
|
February 21,
2021
|
22(17)
|
$11,137.28 per
share
|
June 6,
2021
|
250(18)
|
$0.04
per share
|
February 13,
2022
|
25(19)
|
$144.00
per share
|
May 16,
2022
|
688(20)
|
$15.20
per share
|
November 16,
2020
|
250(21)
|
$15.20
per share
|
December 28,
2020
|
75(22)
|
$16.08
per share
|
January
10, 2021
|
4,262(23)
|
$0.04
per share
|
March
19, 2021
|
1,875(24)
|
$16.08
per share
|
March
20, 2021
|
63(25)
|
$48.00
per share
|
April
30, 2021
|
125(26)
|
$48.00
per share
|
May 17,
2021
|
125(27)
|
$48.00
per share
|
May 25,
2021
|
500(28)
|
$48.00
per share
|
June 1,
2021
|
1,875(29)
|
$200.00
per share
|
August
22, 2021
|
625(30)
|
$200.00
per share
|
September 18,
2021
|
1,250(31)
|
$1.12
per share
|
October
23, 2021
|
19(32)
|
$0.64
per share
|
November 20,
2021
|
375(33)
|
$0.32
per share
|
December 5,
2021
|
100(34)
|
$0.16
per share
|
December 19,
2021
|
188(35)
|
$0.24
per share
|
December 23,
2021
|
14(36)
|
$0.24
per share
|
December 27,
2021
|
313(37)
|
$0.24
per share
|
January
7, 2021
|
188(38)
|
$0.21
per share
|
January
17, 2021
|
438(39)
|
$0.16
per share
|
January
30, 2021
|
625(40)
|
$0.16
per share
|
February 15,
2021
|
325,000(41)
|
$0.18
per share
|
April
4, 2022
|
200,000(42)
|
$0.20
per share
|
April
25, 2022
|
215,000(43)
|
$0.20
per share
|
July 1,
2022
|
100,000(44)
|
$0.20
per share
|
September 1,
2022
|
7,500,000(45)
|
$0.20
per share
|
December 17,
2024
|
46,016,840*
|
|
|
* However, please refer to Footnote 10 - CONVERTIBLE DEBT IN
DEFAULT in the paragraph: Debt Restructuring for more
information regarding our warrants.
(1)
Issued in June 2015
in exchange for warrants originally issued as part of a May 2013
private placement.
(6)
Issued in June 2015
in exchange for warrants originally issued as part of a 2014 public
offering.
(7)
Issued as part of a
March 2015 private placement.
(8)
Issued to a
placement agent in conjunction with a June 2015 private
placement.
(9)
Issued as part of a
June 2015 private placement.
(10)
Issued as part of a
June 2015 private placement.
(11)
Issued as part of a
June 2015 private placement.
(12)
Issued to a
placement agent in conjunction with a June 2015 private
placement.
(13)
Issued as part of a
June 2015 private placement.
(14)
Issued to a
placement agent in conjunction with a June 2015 private
placement.
(15)
Issued as part of a
February 2016 private placement.
(16)
Issued to a
placement agent in conjunction with a February 2016 private
placement.
(17)
Issued pursuant to
a strategic license agreement.
(18)
Issued as part of a
February 2017 private placement.
(19)
Issued as part of a
May 2017 private placement.
(20)
Issued to investors
for a loan in November 2017.
(21)
Issued to investors
for a loan in December 2017.
(22)
Issued to investors
for a loan in January 2018.
(23)
Issued to investors
for a loan in March 2018.
(24)
Issued to investors
for a loan in March 2018.
(25)
Issued to investors
for a loan in April 2018.
(26)
Issued to investors
for a loan in May 2018.
(27)
Issued to investors
for a loan in May 2018.
(28)
Issued to investors
for a loan in June 2018
(29)
Issued to investors
for a loan in August 2018
(30)
Issued to investors
for a loan in September 2018
(31)
Issued to investors
for a loan in October 2018
(32)
Issued to investors
for a loan in November 2018
(33)
Issued to investors
for a loan in December 2018
(34)
Issued to investors
for a loan in December 2018
(35)
Issued to investors
for a loan in December 2018
(36)
Issued to investors
for a loan in December 2018
(37)
Issued to investors
for a loan in January 2019
(38)
Issued to investors
for a loan in January 2019
(39)
Issued to investors
for a loan in January 2019
(40)
Issued to investors
for a loan in February 2019
(41)
Issued to investors
for a loan in April 2019
(42)
Issued to investors
for a loan in April 2019
(43)
Issued to investors
for a loan in July 2019
(44)
Issued to investors
for a loan in September 2019
(45)
Issued to investors
for a loan in December 2019
All
outstanding warrant agreements provide for anti-dilution
adjustments in the event of certain mergers, consolidations,
reorganizations, recapitalizations, stock dividends, stock splits
or other changes in the Company’s corporate structure; except
for (8). In addition, warrants subject to footnotes (1) and
(9)-(11), (13), and (15) – (45) in the table above are
subject to “lower price issuance” anti-dilution
provisions that automatically reduce the exercise price of the
warrants (and, in the cases of warrants subject to footnote (1),
(15) and (16) in the table above, increase the number of shares of
common stock issuable upon exercise), to the offering price in a
subsequent issuance of the Company’s common stock, unless
such subsequent issuance is exempt under the terms of the
warrants.
For the
warrants to footnote (15), the Company further agreed to amend the
warrant issued with the original senior secured convertible note,
to adjust the number of shares issuable upon exercise of the
warrant to equal the number of shares that will initially be
issuable upon conversion of the new convertible note (without
giving effect to any beneficial ownership limitations set forth in
the terms of the new convertible note).
The
warrants subject to footnote (1) are subject to a mandatory
exercise provision. This provision permits the Company, subject to
certain limitations, to require exercise of such warrants at any
time following (a) the date that is the 30th day after the later of
the Company’s receipt of U.S. FDA approval for LuViva and the
date on which the common stock achieves an average market price for
20 consecutive trading days of at least $832,000.00 with an average
daily trading volume during such 20 consecutive trading days of at
least 250 shares, or (b) the date on which the average market price
of the common stock for 20 consecutive trading days immediately
prior to the date the Company delivers a notice demanding exercise
is at least $103,680,000.00 and the average daily trading volume of
the common stock exceeds 250 shares for such 20 consecutive trading
days. If these warrants are not timely exercised upon demand, they
will expire. Upon the occurrence of certain events, the Company may
be required to repurchase these warrants, as well as the warrants
subject to footnote (1) in the table above. The holders of the
warrants subject to footnote (1) in the table above have agreed to
surrender the warrants, upon consummation of a qualified public
financing, for new warrants exercisable for 200% of the number of
shares underlying the surrendered warrants, but without certain
anti-dilution protections included with the surrendered
warrants.
The
warrants subject to footnote (6) in the table above are also
subject to a mandatory exercise provision. This provision permits
the Company, subject to certain limitations, to require exercise of
50% of the then-outstanding warrants if the trading price of its
common stock is at least two times the initial warrant exercise
price for any 20-day trading period. Further, in the event that the
trading price of the Company’s common stock is at least 2.5
times the initial warrant exercise price for any 20-day trading
period, the Company will have the right to require the immediate
exercise of 50% of the then-outstanding warrants. Any warrants not
exercised within the prescribed time periods will be canceled to
the extent of the number of shares subject to mandatory
exercise.
Series
B Tranche B Warrants
As
discussed in Note 3, Fair Value Measurements, between June 13, 2016
and June 14, 2016, the Company entered into various agreements with
holders of the Company’s “Series B Tranche B”
warrants, pursuant to which each holder separately agreed to
exchange the warrants for either (1) shares of common stock equal
to 166% of the number of shares of common stock underlying the
surrendered warrants, or (2) new warrants exercisable for 200% of
the number of shares underlying the surrendered warrants, but
without certain anti-dilution protections included with the
surrendered warrants. In total, for surrendered warrants
then-exercisable for an aggregate of 1,482 shares of common stock
(but subject to exponential increase upon operation of certain
anti-dilution provisions), the Company issued or is obligated to
issue 21 shares of common stock and new warrants that, if exercised
as of the date hereof, would be exercisable for an aggregate of 271
shares of common stock. As of December 31, 2019, the Company had
issued 18 shares of common stock and rights to common stock shares
for 3. In certain circumstances, in lieu of presently issuing all
of the shares (for each holder that opted for shares of common
stock), the Company and the holder further agreed that the Company
will, subject to the terms and conditions set forth in the
applicable warrant exchange agreement, from time to time, be
obligated to issue the remaining shares to the holder. No
additional consideration will be payable in connection with the
issuance of the remaining shares. The holders that elected to
receive shares for their surrendered warrants have agreed that they
will not sell shares on any trading day in an amount, in the
aggregate, exceeding 20% of the composite aggregate trading volume
of the common stock for that trading day. The holders that elected
to receive new warrants will be required to surrender their old
warrants upon consummation of the Company’s next financing
resulting in net cash proceeds to the Company of at least $1
million. The new warrants will have an initial exercise price equal
to the exercise price of the surrendered warrants as of immediately
prior to consummation of the financing, subject to customary
“downside price protection” for as long as the
Company’s common stock is not listed on a national securities
exchange and will expire five years from the date of
issuance.
5.
INCOME TAXES
The
Company has incurred net operating losses ("NOLs") since inception.
As of December 31, 2019, the company had NOL carryforwards
available through 2038 of approximately $75.8 million to offset its
future income tax liability. The company has recorded deferred tax
assets but reserved against, due to uncertainties related to
utilization of NOLs as well as calculation of effective tax rate.
Utilization of existing NOL carryforwards may be limited in future
years based on significant ownership changes. The company is in the
process of analyzing their NOL and has not determined if the
company has had any change of control issues that could limit the
future use of NOL. NOL carryforwards that were generated after 2017
of approximately $4.2 million may only be used to offset 80% of
taxable income and are carried forward indefinitely.
Components of
deferred taxes are as follow at December 31 (in
thousands):
|
|
|
Deferred tax
assets:
|
|
|
Warrant
liability
|
$1,087
|
$1,182
|
Accrued executive
compensation
|
515
|
498
|
Reserves and
other
|
468
|
488
|
Net operating loss
carryforwards
|
18,961
|
19,297
|
|
21,031
|
21,465
|
Valuation
allowance
|
(21,031)
|
(21,465
|
Net deferred tax
assets
|
$0
|
$0
|
The
following is a summary of the items that caused recorded income
taxes to differ from taxes computed using the statutory federal
income tax rate for the years ended December 31:
|
|
|
Statutory federal
tax rate
|
21%
|
21%
|
State taxes, net of
federal benefit
|
4
|
4
|
Nondeductible
expenses
|
-
|
-
|
Valuation
allowance
|
(25)
|
(25)
|
Effective tax
rate
|
0%
|
0%
|
On
December 22, 2017, the U.S. government enacted comprehensive tax
reform commonly referred to as the Tax Cuts and Jobs Act
(“TCJA”). Under ASC 740, the effects of changes in tax
rates and laws are recognized in the period which the new
legislation is enacted. Among other things, the TCJA (1) reduces
the U.S. statutory corporate income tax rate from 34% to 21%
effective January 1, 2018 (2) eliminates the corporate alternative
minimum tax (3) eliminates the Section 199 deduction (4) changes
rules related to uses and limitations of net operating loss
carryforwards beginning after December 31, 2017.
The
Company applies the applicable authoritative guidance which
prescribes a comprehensive model for the manner in which a company
should recognize, measure, present and disclose in its financial
statements all material uncertain tax positions that the Company
has taken or expects to take on a tax return. As of December 31,
2019, the Company has no uncertain tax positions. There are no
uncertain tax positions for which it is reasonably possible that
the total amounts of unrecognized tax benefits will significantly
increase or decrease within twelve months from December 31,
2019.
The
Company files federal income tax returns and income tax returns in
various state tax jurisdictions with varying statutes of
limitations. The Company has filed its 2018 federal and state
corporate tax returns.
The
provision for income taxes as of the dates indicated consisted of
the following (in thousands) December 31:
|
|
|
Current
|
$-
|
$-
|
Deferred
|
-
|
-
|
Deferred
provision
|
-
|
-
|
Impact of change in
enacted tax rates
|
-
|
-
|
Change in valuation
allowance
|
-
|
-
|
Total provision for
income taxes
|
$-
|
$-
|
In 2019
and 2018, our effective tax rate differed from the U.S. federal
statutory rate due to the valuation allowance over our deferred tax
assets.
6.
STOCK OPTIONS
The
Company’s 1995 Stock Plan (the “Plan”) has
expired pursuant to its terms, so zero shares remained available
for issuance at December 31, 2019 and 2018. The Plan allowed for
the issuance of incentive stock options, nonqualified stock
options, and stock purchase rights. The exercise price of options
was determined by the Company’s board of directors, but
incentive stock options were granted at an exercise price equal to
the fair market value of the Company’s common stock as of the
grant date. Options historically granted have generally become
exercisable over four years and expire ten years from the date of
grant.
Due to
the 1:800 reverse stock split of all of the Company’s issued
and outstanding common stock was implemented on March 29, 2019. As
a result of the reverse stock split, every 800 shares of issued and
outstanding common stock were converted into 1 share of common
stock. This resulted in the number of stock options outstanding to
be zero.
7.
LITIGATION AND CLAIMS
From
time to time, the Company may be involved in various legal
proceedings and claims arising in the ordinary course of business.
Management believes that the dispositions of these matters,
individually or in the aggregate, are not expected to have a
material adverse effect on the Company’s financial condition.
However, depending on the amount and timing of such disposition, an
unfavorable resolution of some or all of these matters could
materially affect the future results of operations or cash flows in
a particular year.
As of
December 31, 2019, and 2018, there was no accrual recorded for any
potential losses related to pending litigation.
8.
COMMITMENTS AND CONTINGENCIES
Operating
Leases
In
December 2009, the Company moved its offices, which comprise its
administrative, research and development, marketing and production
facilities to 5835 Peachtree Corners East, Suite B, Peachtree
Corners, Georgia 30092. The Company leased approximately 23,000
square feet under a lease that expired in June 2017. In July 2017,
the Company leased the offices on a month to month basis. On
February 23, 2018, the Company modified its lease to reduce its
occupancy to 12,835 square feet. The fixed monthly lease expense
will be: $13,859 each month for the period beginning January 1,
2018 and ending March 31, 2018; $8,022 each month for the period
beginning April 1, 2018 and ending March 31, 2019; $8,268 each
month for the period beginning April 1, 2019 and ending March 31,
2020; and $8,514 each month for the period beginning April 1, 2020
and ending March 31, 2021.
The
Company recognizes lease expense on a straight-line basis over the
estimated lease term and combine lease and non-lease components.
Future minimum rental payments at December 31, 2019 under
non-cancellable operating leases for office space and equipment are
as follows (in thousands):
Year
|
|
2020
|
120
|
2021
|
30
|
Total
|
159
|
Less:
Interest
|
27
|
Present value of
lease liability
|
132
|
Related
Party Contracts
On June
5, 2016, the Company entered into a license agreement with Shenghuo
Medical, LLC pursuant to which the Company granted Shenghuo an
exclusive license to manufacture, sell and distribute LuViva in
Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines,
Singapore, Thailand, and Vietnam. Shenghuo was already the
Company’s exclusive distributor in China, Macau and Hong
Kong, and the license extended to manufacturing in those countries
as well. Under the terms of the license agreement, once Shenghuo
was capable of manufacturing LuViva in accordance with ISO 13485
for medical devices, Shenghuo would pay the Company a royalty equal
to $2.00 or 20% of the distributor price (subject to a discount
under certain circumstances), whichever is higher, per disposable
distributed within Shenghuo’s exclusive territories. In
connection with the license grant, Shenghuo was to underwrite the
cost of securing approval of LuViva with Chinese Food and Drug
Administration. At its option, Shenghuo also would provide up to
$1.0 million in furtherance of the Company’s efforts to
secure regulatory approval for LuViva from the U.S. Food and Drug
Administration, in exchange for the right to receive payments equal
to 2% of the Company’s future sales in the United States, up
to an aggregate of $4.0 million. Pursuant to the license agreement,
Shenghuo had the option to have a designee appointed to the
Company’s board of directors (former director Richard
Blumberg was the designee). As partial consideration for, and as a
condition to, the license, and to further align the strategic
interests of the parties, the Company agreed to issue a convertible
note to Shenghuo, in exchange for an aggregate cash investment of
$200,000. The note will provide for a payment to Shenghuo of
$300,000, expected to be due the earlier of 90 days from issuance
and consummation of any capital raising transaction by the Company
with net cash proceeds of at least $1.0 million. The note will
accrue interest at 20% per year on any unpaid amounts due after
that date. The note will be convertible into shares of the
Company’s common stock at a conversion price per share of
$11,137, subject to customary anti-dilution adjustment. The note
will be unsecured and is expected to provide for customary events
of default. The Company will also issue Shenghuo a five-year
warrant exercisable immediately for approximately 22 shares of
common stock at an exercise price equal to the conversion price of
the note, subject to customary anti-dilution
adjustment.
On July
24, 2019, Shandong Yaohua Medical Instrument Corporation
(“SMI”), agreed to modify its existing agreement. Under
the terms of this modification, the Company agreed to grant (1)
exclusive manufacturing rights, excepting the disposable cervical
guides for the Republic of Turkey, and the final assembly rights
for Hungary, and (2) exclusive distribution and sales for LuViva in
jurisdictions, subject to the following terms and conditions.
First, SMI shall complete the payment for parts, per the purchase
order, for five additional LuViva devices. Second, in consideration
for the $885,144 that the Company received, SMI will receive 12,147
common stock shares. Third, SMI shall honor all existing purchase
orders it has executed to date with the Company, in order to
maintain jurisdiction sales and distribution rights. If SMI needs
cervical guides then it will do so at a cost including labor, plus
ten percent markup. The Company will provide 200 cervical guides at
no cost for the clinical trials. Fourth, the Company and SMI will
make best efforts to sell devices after CFDA approval. With an
initial estimate of year one sales of 200 LuViva devices; year two
sales of 500 LuViva devices; year three sales of 1,000 LuViva
devices; and year four sales of 1,250 LuViva devices. Fifth, SMI
shall pay for entire costs of securing approval of LuViva with the
Chinese FDA. Sixth, SMI shall arrange, at its sole cost, for a
manufacturer in China to build tooling to support manufacture. In
addition, SMI retains the right to manufacture for China, Hong
Kong, Macau and Taiwan, where SMI has distribution and sales
rights. For each single-use cervical guide sold by SMI in the
jurisdictions, SMI shall transfer funds to escrow agent at a rate
of $1.90 per chip. If within 18 months of the license’s
effective date, SMI fails to achieve commercialization of LuViva in
China, SMI shall no longer have any rights to manufacture,
distribute or sell LuViva. Commercialization is defined as: Filing
an application with the Chinese FDA for the approval of LuViva; Any
assembly or manufacture of the devices or disposables that begins
in China; and purchase of at least 10 devices and disposables for
clinical evaluations and regulatory use and or sales in the
jurisdictions. The Company had recorded an accrued liability for
SMI of $692,335, which will be reclassified to additional paid in
capital and 12,147 common stock shares. The common stock shares
were issued on March 5, 2020.
On
September 6, 2016, the Company entered into a royalty agreement
with one of its directors, John Imhoff, and another stockholder,
Dolores Maloof, pursuant to which the Company sold to them a
royalty of future sales of single-use cervical guides for LuViva.
Under the terms of the royalty agreement, and for consideration of
$50,000, the Company will pay them an aggregate perpetual royalty
initially equal to $0.10, and from and after October 2, 2016, equal
to $0.20, for each disposable that the Company sells (or that is
sold by a third party pursuant to a licensing arrangement with the
Company).
9.
NOTES PAYABLE
Notes
Payable in Default
At
December 31, 2019 and 2018, the Company maintained notes payable to
both related and non-related parties totaling approximately
$776,000 and $700,000, respectively. These notes are short term,
straight-line amortizing notes. The notes carry annual interest
rates between 0% and 10% and have default rates as high a
20%. The Company is
accruing interest at the default rate of 18.0% on two of the
loans.
On July
1, 2019, the Company entered into a loan agreement with Accilent
Capital Management Inc / Rev Royalty Income and Growth Trust
(“Accilent”), providing for the purchase by Accilent of
an unsecured promissory note in the principal amount of $49,389
(CAD$ 65,500). The note was fully funded on July 9, 2019 (net of an
8% original issue discount and other expenses). The note bears an
interest rate of 16% and was due and payable on September 11, 2019.
Following maturity, demand, default, or judgment and until actual
payment in full, interest rate shall be paid at the rate of 19% per
annum. The Company will issue warrants to purchase one common share
of the Company for each warrant held in the aggregate amount of
215,000 warrants at an exercise price of $0.25 per warrant, or
alternatively, the same price as for warrants granted to investors
as part of a financing of the Company subject to adjustment and
exercisable within 3 years from issuance (the “Initial
Warrants”). In the event that the common shares of the Issuer
are not listed on the TSX Venture Exchange pursuant to the
“Transaction” on or prior to September 1, 2019, an
additional 100,000 warrants will be issued at an exercise price
equal to the lesser of $0.25 or the price of the next issuance of
common shares of the Issuer (the “Revised Exercise
Price”). Further, the exercise price of the Initial Warrants
will adjust to the Revised Exercise Price has stated herein. As of
December 31, 2019, $57,946 remained outstanding, which included a
fee of $4,951 and interest of $4,606.
The
following table summarizes the Notes payable in default, including related
parties:
|
|
|
Dr.
Imhoff
|
$199
|
$199
|
Dr.
Cartwright
|
2
|
2
|
Ms.
Rosenstock
|
50
|
50
|
Mr.
Fowler
|
26
|
26
|
Mr.
Mermelstein
|
244
|
211
|
GHS
|
-
|
15
|
GPB
|
17
|
17
|
Aquarius
|
108
|
108
|
Accilent
|
58
|
-
|
Mr.
Blumberg
|
70
|
70
|
Mr.
James
|
2
|
2
|
Notes
payable in default
|
$776
|
$700
|
The
notes payable to related parties was $349,000 of the $776,000
balance at December 31, 2019.
Short
Term Notes Payable
In July
2019, the Company entered into a premium finance agreement to
finance its insurance policies totaling $142,000. The note requires
monthly payments of $14,459, including interest at 4.91% and
matures in April 2020. As of December 31, 2019, the note for the
premium finance agreement was $57,483. The balance due on insurance
policies totaled $50,000 at December 31, 2018.
On
August 22, 2018, the Company issued a promissory note to Mr. Case
for $150,000 in aggregate principal amount of a 6% promissory note
for an aggregate purchase price of $157,500 (representing a $7,500
original issue discount). Pursuant to the promissory note the
entire unpaid principal balance on the promissory note together
with all accrued and unpaid interest and loan origination fees, if
any, at the choice of the investor, shall be due and payable in
full from the funds received by the Company from a financing of at
least $2,000,000, or at the option of the investor, to be included
in the Company’s financing under the same terms as the new
investors with the most favorable terms making a cash investment.
If the Company does not complete a financing of at least $2,000,000
within 90 days of the execution of this promissory note, any unpaid
amounts shall be due in full to the investor and shall accrue
interest at 12% (instead of 6%) per annum from the date thereof (90
days after execution), if not paid in full. In addition, the
investor will be granted 1,500,000 warrants under this promissory
note. The warrants shall be issued and vest upon the financing of
at least $2,000,000 and expire on the third anniversary of said
financing. The warrant exercise price shall be set at the same
price as for warrants granted to the investors with the most
favorable terms as part of any $2,000,000 or more financing of the
Company or $0.25, whichever is lower. The warrants shall have
standard anti-dilution features to protect the holder from dilution
due to down rounds of financing. As of December 31, 2019, and 2018,
the Company had not repaid the note and original issue discount of
$157,500 ($7,500 is recorded in accrued expenses).
On
September 19, 2018, the Company issued a promissory note to Mr.
Gould for $50,000 in aggregate principal amount of a 6% promissory
note for an aggregate purchase price of $52,500 (representing a
$2,500 original issue discount). Pursuant to the promissory note
the entire unpaid principal balance on the promissory note together
with all accrued and unpaid interest and loan origination fees, if
any, at the choice of the investor, shall be due and payable in
full from the funds received by the Company from a financing of at
least $2,000,000, or at the option of the investor, to be included
in the Company’s financing under the same terms as the new
investors with the most favorable terms making a cash investment.
If the Company does not complete a financing of at least $2,000,000
within 90 days of the execution of this promissory note, any unpaid
amounts shall be due in full to the investor and shall accrue
interest at 12% (instead of 6%) per annum from the date thereof (90
days after execution), if not paid in full. In addition, the
investor will be granted 500,000 warrants under this promissory
note. The warrants shall be issued and vest upon the financing of
at least $2,000,000 and expire on the third anniversary of said
financing. The warrant exercise price shall be set at the same
price as for warrants granted to the investors with the most
favorable terms as part of any $2,000,000 or more financing of the
Company or $0.25, whichever is lower. The warrants shall have
standard anti-dilution features to protect the holder from dilution
due to down rounds of financing. As of December 31, 2019, and 2018,
the Company had not repaid the note a and original issue discount
of $52,500 ($2,500 is recorded in accrued expenses) and therefore
the accrued interest rate increased to 12%.
On
February 15, 2019, the Company issued a promissory note to Mr.
Gould for $50,000 in aggregate principal amount of a 6% promissory
note for an aggregate purchase price of $52,500 (representing a
$2,500 original issue discount). Pursuant to the promissory note
the entire unpaid principal balance on the promissory note together
with all accrued and unpaid interest and loan origination fees, if
any, at the choice of the investor, shall be due and payable in
full from the funds received by the Company from a financing of at
least $1,000,000, or at the option of the investor, to be included
in the Company’s financing under the same terms as the new
investors with the most favorable terms making a cash investment.
If the Company did not complete a financing of at least $1,000,000
within 90 days of the execution of this promissory note, any unpaid
amounts shall be due in full to the investor and shall accrue
interest at 12% (instead of 6%) per annum from the date thereof (90
days after execution), if not paid in full. In addition, the
investor will be granted 500,000 warrants under this promissory
note. The warrants shall be issued and vest upon the financing of
at least $1,000,000 and expire on the third anniversary of said
financing. The warrant exercise price shall be set at the same
price as for warrants granted to the investors with the most
favorable terms as part of any $1,000,000 or more financing of the
Company or $0.25, whichever is lower. The warrants shall have
standard anti-dilution features to protect the holder from dilution
due to down rounds of financing. As of December 31, 2019, the
Company had not repaid the note and original issue discount of
$52,500 ($2,500 is recorded in accrued expenses).
For a
total note that had not been repaid to Mr. Gould of $100,000 and
$5,000 of which is recorded in accrued expenses for original issue
discount.
On
February 8, 2019, a note payable in default as reported in the
Company’s Form 10-K report - Footnote 9: Notes payable – Note payable
in default, was exchanged for a note with a convertible
option. The note amount was for $145,544. At the sole discretion of
the Company, rather than paying the holder in cash, the note can be
exchanged for equity in the new financing of at least $1,000,000.
If the financing occurs the Company will then have the option to
exchange the debt for $145,544 and award 291,088 warrants at $0.25
per share. If the Company elects to pay the balance in cash, the
note shall accrue simple interest of 6% per annum commencing on the
date of the new financing of at least $1,000,000.
On
February 14, 2019, the Company entered into a Purchase and Sale
Agreement with Everest Business Funding for the sale of its
accounts receivable. The transaction provided the Company with
$48,735 after $1,265 in debt issuance costs (bank costs) for a
total purchase amount of $50,000, in which the Company would have
to repay $68,500. At a minimum the Company would need to pay
$535.16 per day or 20.0% of the future collected accounts
receivable or “receipts.” The effective interest rate
as calculated for this transaction is approximately 132.5%. As of
December 31, 2019, $60,105 had been paid, leaving a balance of
$8,016.
At
December 31, 2019 and 2018, the Company maintained short term notes
payable to both related and non-related parties totaling $1,026,000
and $899,000, respectively. These notes are short term,
straight-line amortizing notes. The notes carry annual interest
rates between 5% and 19%.
The
following table summarizes the Short-term notes payable, including related
parties:
|
|
|
Dr.
Imhoff
|
$167
|
$135
|
Dr.
Cartwright
|
48
|
144
|
Dr.
Faupel
|
5
|
123
|
Ms.
Maloof
|
-
|
25
|
Mr.
Case
|
150
|
150
|
Mr.
Mamula
|
15
|
-
|
Mr.
Gould
|
100
|
50
|
K2
(Shenghuo)
|
203
|
177
|
Everest
|
8
|
-
|
Premium Finance
(insurance)
|
58
|
50
|
Mr.
Blumberg
|
223
|
45
|
Mr.
Grimm
|
49
|
-
|
Short-term
notes payable, including related parties
|
$1,026
|
$899
|
The
short-term notes payable in default to related parties was $646,000
of the $1,026,000 balance at December 31, 2019.
10.
SHORT-TERM CONVERTIBLE DEBT
Related
Party Convertible Note Payable – Short-Term
On June
5, 2016, the Company entered into a license agreement with a
distributor pursuant to which the Company granted the distributor
an exclusive license to manufacture, sell and distribute the
Company’s LuViva Advanced Cervical Cancer device and related
disposables in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar,
Philippines, Singapore, Thailand, and Vietnam. The distributor was
already the Company’s exclusive distributor in China, Macau
and Hong Kong, and the license will extend to manufacturing in
those countries as well.
As
partial consideration for, and as a condition to, the license, and
to further align the strategic interests of the parties, the
Company agreed to issue a convertible note to the distributor, in
exchange for an aggregate cash investment of $200,000. The note
will provide for a payment to the distributor of $240,000, due upon
consummation of any capital raising transaction by the Company
within 90 days and with net cash proceeds of at least $1.0 million.
As of December 31, 2019, and 2018, the Company had a note due of
$512,719 and $432,000, respectively. The note accrues interest at
20% per year on any unpaid amounts due after that date. The note
will be convertible into shares of the Company’s common stock
at a conversion price per share of $11,137, subject to customary
anti-dilution adjustment. The note will be unsecured and is
expected to provide for customary events of default. The Company
will also issue the distributor a five-year warrant exercisable
immediately for 22 shares of common stock at an exercise price
equal to the conversion price of the note, subject to customary
anti-dilution adjustment.
Convertible
Note Payable – Short-Term
On
March 12, 2018, the Company entered into a securities purchase
agreement with Eagle Equities, LLC, providing for the purchase by
Eagle of a convertible redeemable note in the principal amount of
$66,667. The note was fully funded on March 14, 2018, upon which
the Company received $51,000 of net proceeds (net of a 10% original
issue discount and other expenses). The note bears an interest rate
of 8% and are due and payable on March 12, 2019. The note may be
converted by Eagle at any time after twelve months from issuance
into shares of our common stock (as determined in the notes)
calculated at the time of conversion, except for the second note,
which also requires full payment by Eagle of the secured note it
issued to us before conversions may be made. The conversion price
of the notes will be equal to 60% of the lowest trading price of
the common stock for the 20 prior trading days including the day
upon which the Company receive a notice of conversion. The notes
may be prepaid in accordance with the terms set forth in the notes.
The notes also contain certain representations, warranties,
covenants and events of default including if the Company are
delinquent in our periodic report filings with the SEC and
increases in the amount of the principal and interest rates under
the notes in the event of such defaults. In the event of default,
at Eagle’s option and in its sole discretion, Eagle may
consider the notes immediately due and payable. During 2020, Eagle
provided a forbearance to the Company on the default after a
payment was made. As of December 31, 2019, the notes had been
converted and no balance remained outstanding. At December 31,
2018, the outstanding balance was $3,095, including unamortized
debt issuance costs of $1,751, and unamortized discount of $1,297
and accrued interest of $177. In addition, as of December 31, 2019
the beneficial conversion feature had been fully amortized. At
December 31, 2018, the Company recorded a $44,444 beneficial
conversion feature which $35,701 was amortized leaving and
unamortized balance of $8,743. As of December 31, 2019, the
beneficial conversion feature was fully amortized.
On May
15, 2019, the Company entered into a securities purchase agreement
with Eagle Equities, LLC, providing for the purchase by Eagle of a
convertible redeemable note in the principal amount of $57,750. The
note was fully funded on May 21, 2019, upon which the Company
received $45,000 of net proceeds (net of a 10% original issue
discount and other expenses). The note bears an interest rate of 8%
and is due and payable on May 15, 2020. The Company could have
prepaid the note, in whole or in part, for 115% of outstanding
principal and interest until 30 days from issuance, for 121% of
outstanding principal and interest at any time from 31 to 60 days
from issuance, for 127% of outstanding principal and interest at
any time from 61 to 90 days from issuance, for 133% of outstanding
principal and interest at any time from 91 to 120 days from
issuance, for 139% of outstanding principal and interest at any
time from 121 to 150 days from issuance and for 145% of outstanding
principal and interest at any time from 151 days from issuance to
180 days from issuance. The note may not be prepaid after the
180th day.
The note may be converted by Eagle at any time after five months
from issuance into shares of the Company common stock (as
determined in the notes) calculated at the time of conversion. The
conversion price of the notes will be equal to 60% of the average
of the two lowest closing bid prices of the Company’s common
stock shares as reported on OTC Markets exchange, for the 20 prior
trading days including the day upon which the Company receive a
notice of conversion is received by the Company. The notes may be
prepaid in accordance with the terms set forth in the notes. The
notes also contain certain representations, warranties, covenants
and events of default including if the Company are delinquent in
our periodic report filings with the SEC and increases in the
amount of the principal and interest rates under the notes in the
event of such defaults. In the event of default, at Eagle’s
option and in its sole discretion, Eagle may consider the notes
immediately due and payable. During 2020, Eagle provided a
forbearance to the Company on the default after a payment was made.
On May 15, 2019, the Company had recorded a $38,500 beneficial
conversion feature, $5,250 original issue discount and $7,500 of
debt issuance costs. As of December 31, 2019, the outstanding note
was for $25,651, which consisted of unamortized balance of $14,438
of a beneficial conversion feature, unamortized original issue
discount of $1,942, unamortized debt issuance costs of $2,774 and
interest of $1,166 included in accrued expenses on the accompanying
consolidated balance sheet.
On May
15, 2019, the Company entered into a securities purchase agreement
with Adar Bays, LLC, providing for the purchase by Adar of a
convertible redeemable note in the principal amount of $57,750. The
note was fully funded on May 21, 2019, upon which the Company
received $45,000 of net proceeds (net of a 10% original issue
discount and other expenses). The note bears an interest rate of 8%
and are due and payable on May 15, 2020. The Company could have
prepaid the note, in whole or in part, for 115% of outstanding
principal and interest until 30 days from issuance, for 121% of
outstanding principal and interest at any time from 31 to 60 days
from issuance, for 127% of outstanding principal and interest at
any time from 61 to 90 days from issuance, for 133% of outstanding
principal and interest at any time from 91 to 120 days from
issuance, for 139% of outstanding principal and interest at any
time from 121 to 150 days from issuance and for 145% of outstanding
principal and interest at any time from 151 days from issuance to
180 days from issuance. The note may not be prepaid after the
180th day.
The note may be converted by Adar at any time after five months
from issuance into shares of the Company common stock (as
determined in the notes) calculated at the time of conversion. The
conversion price of the notes will be equal to 60% of the average
of the two lowest closing bid prices of the Company’s common
stock shares as reported on OTC Markets exchange, for the 20 prior
trading days including the day upon which the Company receive a
notice of conversion is received by the Company. The notes may be
prepaid in accordance with the terms set forth in the notes. The
notes also contain certain representations, warranties, covenants
and events of default including if the Company are delinquent in
our periodic report filings with the SEC and increases in the
amount of the principal and interest rates under the notes in the
event of such defaults. In the event of default, at Adar’s
option and in its sole discretion, Adar may consider the notes
immediately due and payable. During 2020, Adar provided a
forbearance to the Company on the default after a payment was made.
On May 15, 2019, the Company had recorded a $38,500 beneficial
conversion feature, $5,250 original issue discount and $7,500 of
debt issuance costs. As of December 31, 2019, the note outstanding
increased to $84,780 as a default penalty of $27,030 was added to
the outstanding balance of the note, which consisted of unamortized
balance of $14,438 of a beneficial conversion feature, unamortized
original issue discount of $1,942, unamortized debt issuance costs
of $2,774 and interest of $3,190 included in accrued expenses on
the accompanying consolidated balance sheet.
The
following table summarizes the Convertible notes payable:
|
|
|
Shenghuo
|
$513
|
$432
|
Eagle
|
26
|
3
|
Adar
|
85
|
-
|
Debt discount and
issuance costs to be amortized
|
(9)
|
(10)
|
Debt discount
related to beneficial conversion
|
(29)
|
(45)
|
Convertible
notes payable, including related parties
|
$586
|
$380
|
The
convertible notes payable to related parties was $513,000 of the
$586,000 balance at December 31, 2019.
11.
CONVERTIBLE DEBT IN DEFAULT
Secured Promissory Note.
Effective
September 10, 2014, the Company sold a secured promissory note to
an accredited investor, GHS Investments, LLC (“GHS”),
with an initial principal amount of $1,275,000, for a purchase
price of $570,000 (less an original issue discount of $560,000 and
debt issuance costs of $130,000). The note is secured by the
Company’s current and future accounts receivable and
inventory and accrued interest at a rate of 18% per year. The note
has subsequently been assigned to different credited investors and
the terms of the note were amended extend the maturity until August
31, 2016. The balance of this note was reduced by a transfer of
$306,863 as part of a debt restructuring that occurred on December
7, 2016 (see – “Senior Secured Promissory Note”).
The holder may convert the outstanding balance into shares of
common stock at a conversion price per share equal to 75% of the
lowest daily volume average price of common stock during the five
days prior to conversion. The balance due on the note was $148,223
and $151,974 at December 31, 2019 and 2018,
respectively.
Senior Secured Promissory Note
Effective
February 12, 2016, the Company entered into a securities purchase
agreement with GPB Debt Holdings II LLC (“GPB”) for the
issuance of a $1,437,500 senior secured convertible note for an
aggregate purchase price of $1,029,000 (representing an original
issue discount of $287,500 and debt issuance costs of $121,000). On
May 28, 2016, the balance of the note was increased by $87,500 for
a total principal balance of $1,525,000. On December 7, 2016, the
Company entered into an exchange agreement with GPB and as a result
the principal balance increased by a transfer $312,500 (see –
“Senior Secured Promissory Note”) for a total principal
balance of $1,837,500. In addition, GPB received warrants for 2,246
shares of the Company’s common stock. The Company allocated
proceeds totaling $359,555 to the fair value of the warrants at
issuance and recorded an additional discount on the debt. The
warrant is exercisable at any time, pending availability of
sufficient authorized but unissued shares of the Company’s
common stock, at an exercise price per share equal to the
conversion price of the convertible note, subject to certain
customary adjustments and anti-dilution provisions contained in the
warrant. The warrant has a five-year term. As of December 31, 2019,
the exercise price had been adjusted to $0.04 and the number of
common stock shares exchangeable for was 35,937,500.
The
convertible note requires monthly interest payments at a rate of
17% per year and was due on February 12, 2018. Subject to resale
restrictions and the availability of sufficient authorized but
unissued shares of the Company’s common stock, the note is
convertible at a conversion price equal to 70% of the average
closing price per share for the five trading days prior to
issuance. The note is currently in default and has accrued interest
at a rate of 22% as the Company is past due on the required monthly
interest payments. Upon the occurrence of an event of default, the
holder may require the Company to redeem the convertible note at
120% of the outstanding principal balance, but as of December 31,
2019, had not done so. The note is secured by a lien on
substantially all of the Company’s assets.
As
of December 31, 2019, the balance due on the convertible debt was
$2,177,030, consisting of principal of $1,837,500 and a prepayment
penalty of $339,050, and $2,198,236 consisting of principal of
$1,837,500 and a prepayment penalty of $360,736, respectively.
Interest accrued on the note total $1,175,925 and $699,74 at
December 31, 2019 and 2018, respectively, and is included in
accrued expenses on the accompanying consolidated balance
sheet.
The
Company used a placement agent in connection with the transaction.
For its services, the placement agent received a cash placement fee
equal to 4% of the aggregate gross proceeds from the transaction
and a warrant to purchase shares of common stock equal to an
aggregate of 6% of the total number of shares underlying the
securities sold in the transaction, at an exercise price equal to,
and terms otherwise identical to, the warrant issued to the
investor. Finally, the Company agreed to reimburse the placement
agent for its reasonable out-of-pocket expenses.
In
connection with the transaction, on February 12, 2016, the Company
and GPB entered into a four-year consulting agreement, pursuant to
which the investor will provide management consulting services to
the Company in exchange for a royalty payment, payable quarterly,
equal to 3.85% of the Company’s revenues from the sale of
products. As of December 31, 2019, and 2018, GPB had earned
approximately $32,000 and $31,000 in royalties,
respectively.
Forbearance
On
August 8, 2017, the Company entered into a forbearance agreement
with GPB, with regard to the senior secured convertible note. Under
the forbearance agreement, GPB has agreed to forbear from
exercising certain of its rights and remedies (but not waive such
rights and remedies), arising as a result of the Company’s
failure to pay the monthly interest due and owing on the note. In
consideration for the forbearance, the Company agreed to waive,
release, and discharge GPB from all claims against GPB based on
facts existing on or before the date of the forbearance agreement
in connection with the note, or the dealings between the Company
and GPB, or the Company’s equity holders and GPB, in
connection with the note. Pursuant to the forbearance agreement,
the Company has reaffirmed its obligations under the note and
related documents and executed a confession of judgment regarding
the amount due under the note, which GPB may file upon any future
event of default by the Company. During the forbearance period, the
Company must continue to comply will all the terms, covenants, and
provisions of the note and related documents.
The
“Forbearance Period” shall mean the period beginning on
the date hereof and ending on the earliest to occur of: (i) the
date on which Lender delivers to Company a written notice
terminating the Forbearance Period, which notice may be delivered
at any time upon or after the occurrence of any Forbearance Default
(as hereinafter defined), and (ii) the date Company repudiates or
asserts any defense to any Obligation or other liability under or
in respect of this Agreement or the Transaction Documents or
applicable law, or makes or pursues any claim or cause of action
against Lender; (the occurrence of any of the foregoing clauses (i)
and (ii), a “Termination Event”). As used herein, the
term “Forbearance Default” shall mean: (A) the
occurrence of any Default or Event of Default other than the
Specified Default; (B) the failure of Company to timely comply with
any material term, condition, or covenant set forth in this
Agreement; (C) the failure of any representation or warranty made
by Company under or in connection with this Agreement to be true
and complete in all material respects as of the date when made; or
(D) Lender’s reasonable belief that Company: (1) has ceased
or is not actively pursuing mutually acceptable restructuring or
foreclosure alternatives with Lender; or (2) is not negotiating
such alternatives in good faith. Any Forbearance Default will not
be effective until one (1) Business Day after receipt by Company of
written notice from Lender of such Forbearance Default. Any
effective Forbearance Default shall constitute an immediate Event
of Default under the Transaction Documents.
Other
Convertible Debt in Default
Effective May 19,
2017, the Company entered into a securities purchase agreement with
GHS for the purchase of a $66,000 convertible promissory note for
the purchase of $60,000 in net proceeds (representing a 10%
original issue discount of $6,000). The accrued interest rate of 8%
per year until it matured in December 31, 2017. Beginning February
2018, the note is convertible, in whole or in part, at the
holder’s option, into shares of the Company’s stock at
a conversion price equal to 60% of the lowest trading price during
the 25 trading days prior to conversion. Upon the occurrence of an
event of default, the note will bear interest at a rate of 20% per
year and the holder of the note may require the Company to redeem
or convert the note at 150% of the outstanding principal balance.
At December 31, 2019, and 2018, the balance due on this total was
$83,094, including a default penalty of $37,926 and accrued
interest of $16,641, and $94,411 including a default penalty of
$37,926 and accrued interest of $517, respectively. GHS converted
$12,700 and $29,642 of principal and accrued interest during the
years ended December 31, 2019, respectively.
Effective March 20,
2018, the Company entered into a securities purchase with Auctus
Fund, LLC ("Auctus") for the issuance of a $150,000 convertible
promissory note and warrants exercisable for 4,262 shares of the
Company's common stock. At issuance, the Company recorded a $97,685
beneficial conversion feature, which was fully amortized at
December 31, 2018. The warrants are exercisable at any time, at an
exercise price equal to $0.04 per share, subject to certain
customary adjustments and price-protection provisions contained in
the warrant. The warrants have a five-year term. The note accrued
interest at a rate of 12% per year until it matured in December
2018. Beginning December 2018, the note is convertible, in whole or
in part, at the holder's option, into shares of the Company's stock
at a conversion price equal to 60% of the lowest trading price
during the 20 trading days prior to conversion. Upon the occurrence
of an event of default, the note will bear interest at a rate of
24% per year and the holder of the note may require the Company to
redeem or convert the note at 150% of the outstanding principal
balance. At December 31, 2019 and 2018, the balance due on this
total was $192,267, including a default penalty of $70,931, and
$133,870, respectively. Interest accrued on the note totals $45,629
and $517 at December 31, 2019 and 2018, respectively, and is
included in accrued expenses on the accompanying consolidated
balance sheet.
Auctus
converted $14,236 and $30,152 of principal and accrued interested
during the years ended December 31, 2019 and 2018,
respectively.
Effective May 17,
2018, the Company entered into a securities purchase agreement with
GHS for the purchase of a convertible promissory note with a
principal of $9,250 for a purchase price of $7,500 (representing an
original issue discount of $750 and debt issuance costs of $1,000).
The note accrued interest at a rate of 8% per year until it matured
June 17, 2019. Beginning February 2018, the note is convertible, in
whole or in part, at the holder's option, into shares of the
Company's stock at a conversion price equal to 70% of the lowest
trading price during the 25 trading days prior to conversion (if
the note cannot be converted due to Depository Trust Company freeze
then rate decreases to 60%). Upon the occurrence of an event of
default, the note will bear interest at a rate of 20% per year and
the holder of the note may require the Company to redeem or convert
the note at 150% of the outstanding principal balance. At December
31, 2019 and 2018, the balance due on this total was $14,187,
including a default penalty of $4,937, and $14,187, including a
default penalty of $4,937 and unamortized debt discount and debt
issuance costs of $742, respectively. Interest accrued on the note
totals $3,972 and $1,135 at December 31, 2019 and 2018,
respectively, and is included in accrued expenses on the
accompanying consolidated balance sheet.
Effective June 22,
2018, the Company entered into a securities purchase agreement with
GHS for the purchase of a $68,000 convertible promissory note for a
purchase price of $60,000 (representing an original issue discount
of $6,000 and debt issuance costs of $2,000). At issuance, the
Company recorded a $29,143 beneficial conversion feature, which was
fully amortized at December 31, 2019. The accrued interest at a
rate of 10% per year until it matured on June 22, 2019. Beginning
May 2019, the note is convertible, in whole or in part, at the
holder's option, into shares of the Company's stock at a conversion
price equal to 70% of the lowest trading price during the 25
trading days prior to conversion (if the note cannot be converted
due to Depository Trust Company freeze then rate decreases to 60%).
Upon the occurrence of an event of default, the note will bear
interest at a rate of 20% per year and the holder of the note may
require the Company to redeem or convert the note at 150% of the
outstanding principal balance. At December 31, 2019 and 2018, the
balance due on this total was $103,285, including a default penalty
of $35,285, and $103,285, including unamortized debt discount and
debt issuance costs of $6,162, respectively. Interest accrued on
the note totals $29,287 and $8,263 at December 31, 2019 and 2018,
respectively, and is included in accrued expenses on the
accompanying consolidated balance sheet.
Effective July 3,
2018, the Company entered into a securities purchase with Auctus
for the issuance of a $89,250 convertible promissory note. At
issuance, the Company recorded a $59,000 beneficial conversion
feature, which was fully amortized at December 31, 2019. The note
accrued interest at a rate of 12% per year until it matured in
April 2019. Beginning April 2019, the note is convertible, in whole
or in part, at the holder's option, into shares of the Company's
stock at a conversion price equal to 60% of the lowest trading
price during the 20 trading days prior to conversion. Upon the
occurrence of an event of default, the note will bear interest at a
rate of 24% per year and the holder of the note may require the
Company to redeem or convert the note at 150% of the outstanding
principal balance. At December 31, 2019 and 2018, the balance due
on this total was $90,641, including a default penalty of $56,852,
and $81,528, including unamortized debt discount and debt issuance
costs of $7,721, respectively. Interest accrued on the note totals
$16,436 and $5,385 at December 31, 2019 and 2018, respectively, and
is included in accrued expenses on the accompanying consolidated
balance sheet.
Effective March 29,
2019, the Company entered into a securities purchase with Auctus
for the issuance of a $65,000 convertible promissory note. At
issuance, the Company recorded a $65,000 beneficial conversion
feature, which was fully amortized at December 31, 2019. The note
accrued interest at a rate of 12% until it matured in December
2019. Beginning December 2019, the note is convertible, in whole or
in part, at the holder's option, into shares of the Company's stock
at a conversion price equal to 50% of the lowest trading price
during the 25 trading days prior to conversion. Upon the occurrence
of an event of default, the note will bear interest at a rate of
24% per year and the holder of the note may require the Company to
redeem or convert the note at 150% of the outstanding principal
balance. At December 31, 2019, the balance due on this total was
$106,210, including a default penalty of $41,210. Interest accrued
on the note totaled $142 at December 31, 2019 and is included in
accrued expenses on the accompanying consolidated balance
sheet.
The
following table summarizes the Convertible notes in
default:
|
|
|
GPB
|
$2,177
|
$2,198
|
GHS
|
349
|
364
|
Auctus
|
389
|
215
|
Convertible
notes in default
|
$2,915
|
$2,778
|
12.
LONG-TERM DEBT
Long-term
Debt – Related Parties
On July
24, 2019, Dr. Faupel and Mr. Cartwright agreed to an addendum to
the exchange agreement and to modify the terms of the original
exchange agreement. Under this modification Dr. Faupel and Mr.
Cartwright agreed to extend the note to be due in full on the third
anniversary of that agreement. The modification also included
simple interest at a 6% rate, with the principal and accrued
interest due in total at the date of maturity or September 4,
2021.
During
the quarter ended September 30, 2018, the Company entered into an
exchange agreement dated July 14, 2018, Dr Faupel, agreed to
exchange outstanding amounts due to him for loans, interest, bonus,
salary and vacation pay in the amount of $661,000 for a $207,000
promissory note dated September 4, 2018. As a result of the
exchange agreement, the Company recorded a gain for extinguishment
of debt of $199,000 and a capital contribution of $235,000 during
the year ended December 31, 2018. In the July 20, 2018 exchange
agreement, Dr, Cartwright, agreed to exchange outstanding amounts
due to him for loans, interest, bonus, salary and vacation pay in
the amount of $1,621,000 for a $319,000 promissory note dated
September 4, 2018. As a result of the exchange agreement, the
Company recorded a gain for extinguishment of debt of $840,000 and
a capital contribution of $432,000 during the year ended December
31, 2018.
The
table below summarizes the detail of the exchange
agreement:
For Dr.
Faupel:
Salary
|
$134
|
Bonus
|
20
|
Vacation
|
95
|
Interest on
compensation
|
67
|
Loans to
Company
|
196
|
Interest on
loans
|
149
|
Total
outstanding prior to exchange
|
$661
|
Amount forgiven
during the quarter ended September 30, 2018
|
(454)
|
Promissory
note dated September 4, 2018
|
$207
|
Interest accrued
through December 31, 2019
|
17
|
Balance
outstanding at December 31, 2019
|
$224
|
For Dr.
Cartwright:
Salary
|
$337
|
Bonus
|
675
|
Interest on
compensation
|
59
|
Loans to
Company
|
528
|
Interest on
loans
|
22
|
Total
outstanding prior to exchange
|
$1,621
|
Amount
forgiven during the quarter ended September 30, 2018
|
(1,302)
|
Promissory
note dated September 4, 2018
|
$319
|
Interest
accrued through December 31, 2019
|
26
|
Balance
outstanding at December 31, 2019
|
$345
|
Long-term
Convertible Notes Payable, net
On
December 17, 2019, the Company entered into a securities purchase
agreement and convertible note with Auctus. The convertible note
issued to Auctus will be for a total of $2.4 million. The first
tranche of $700,000 has been received and will have a maturity date
of December 17, 2021 and an interest rate of ten percent (10%). The
note may not be prepaid in whole or in part except as otherwise
explicitly allowed. Any amount of principal or interest on the note
which is not paid when due shall bear interest at the rate of the
lessor of 24% or the maximum permitted by law (the “default
interest”). The variable conversion prices shall equal the
lesser of: (i) the lowest trading price on the issue date, and (ii)
the variable conversion price. The variable conversion price shall
mean 95% multiplied by the market price (the market price means the
average of the five lowest trading prices during the period
beginning on the issue date and ending on the maturity date), minus
$0.04 per share, provided however that in no event shall the
variable conversion price be less than $0.15. If an event of
default under this note occurs and/or the note is not extinguished
in its entirety prior to December 17, 2020 the $0.15 price shall no
longer apply. In connection with the first tranche of $700,000, the
Company issued to 7,500,000 warrants to purchase common stock at an
exercise price of $0.20. The fair value of the warrants at the date
of issuance was $745,972 and was $635,000 allocated to the warrant
liability and a loss of $110,972 was recorded at the date of
issuance for the amount of the fair value in excess of the net
proceeds received of $635,000. The $700,000 proceeds were received
net of debt issuance costs of $65,000 (net cash of $635,000). The
Company used $65,000 of the proceeds to make a partial payment of
the $89,250 convertible promissory note issued on July 3, 2018 to
Auctus. At a future date, the second tranche of $400,000 will be
received when the Company registers the underlying shares. The last
tranche of $1.3 million will be received within 60 days of the S-1
registration statement becoming effective. The conversion price of
the notes will be at market value with a minimum conversion amount
of $0.15. The last two tranches will have warrants attached. As of
December 31, 2019, $700,000 remained outstanding and accrued
interest of $2,722. Further, as of December 31, 2019, the Company
had unamortized debt issuance costs of $63,000 and an unamortized
debt discount on warrants of $622,000, providing a net balance of
$15,000 that is carried in long-term convertible notes payable,
net.
In
addition, the Company determined that the conversion option needed
to be bifurcated from the debt arrangement and will valued at fair
value each reporting period. The initial value at the date of
issuance deemed to be $0 due to the presence of the $0.15 floor
price.
13.
INCOME (LOSS) PER COMMON SHARE
Basic
net income (loss) per share attributable to common stockholders
amounts are computed by dividing the net income (loss) plus
preferred stock dividends and deemed dividends on preferred stock
by the weighted average number of shares outstanding during the
year.
Diluted
net income (loss) per share attributable to common stockholders
amounts are computed by dividing the net income (loss) plus
preferred stock dividends, deemed dividends on preferred stock,
after-tax interest on convertible debt and convertible dividends by
the weighted average number of shares outstanding during the year,
plus Series C convertible preferred stock, convertible debt,
convertible preferred dividends and warrants convertible into
common stock shares.
The
following table sets forth pertinent data relating to the
computation of basic and diluted net loss per share attributable to
common shareholders.
In thousands
|
|
|
|
|
|
|
|
Net income (loss)
|
$( 1,921)
|
$900
|
|
Basic weighted average number of shares outstanding
|
3,302
|
462
|
|
Net income (loss) per share (basic)
|
$(0.58)
|
$1.95
|
|
Diluted weighted average number of shares outstanding
|
3,302
|
65,227
|
|
Net income (loss) per share (diluted)
|
$(0.58)
|
$0.0138
|
|
|
|
|
|
Dilutive equity instruments (number of equivalent
units):
|
|
|
|
Stock options
|
-
|
-
|
|
Preferred stock
|
-
|
-
|
|
Convertible debt
|
39,636
|
42,226
|
|
Warrants
|
30,208
|
22,530
|
|
Total Dilutive instruments
|
73,144
|
65,226
|
|
For
period of net loss, basic and diluted earnings per share are the
same as the assumed exercise of warrants and the conversion of
convertible debt are anit-dilutive.
14. SUBSEQUENT
EVENTS
During
January 2020, the Company received equity investments in the amount
of $103,000. These investors received a total of 206,000 common
stock shares and 206,000 warrants to purchase common stock shares
at a strike price of $0.25, 206,000 warrants to purchase common
stock shares at a strike price of $0.75 and 103 Series D preferred
stock (each Series D preferred stock shares converts into 3,000
shares of the Company’s common stock shares).
On
January 6, 2020, the Company entered into an exchange agreement
with Jones Day. The Company will exchange $1,744,768 of debt
outstanding for: $175,000, an unsecured promissory note in the
amount of $550,000; due 13 months form the date of issuance, that
may be called by the Company at any time prior to maturity upon a
payment of $150,000; and an unsecured promissory note in the
principal amount of $444,768, bearing an annualized interest rate
of 6.0% and due in four equal annual installments beginning on the
second anniversary of the date of issuance.
On
January 6, 2020, the Company entered into a finder’s fee
agreement. The finder will receive 5% cash and 5% warrants on all
funds it raises including bridge loans. The three-year common stock
share warrants will have an exercise price of $0.25. During 2019
and 2020, the finder helped the Company raise $300,000, therefore a
fee of $15,000 was paid and 60,000 warrants will be
issued.
On
January 15, 2020, the Company entered into a promissory note with
one of its vendors for the payment of a debt of $99,369. The debt
will be paid as follows: $18,000 due initially on January 16, 2020
and then $6,000 per month beginning on February 1, 2020 and on the
1st day of
each consecutive month following, until the above sum is paid in
full. The debt will bear simple interest at 18% following
default.
On
January 16, 2020, the Company entered into an exchange agreement
with GPB. This exchange agreement which has not been completed will
call for the exchange of $3,360,811 of debt outstanding as of
December 12, 2019 for: cash of $1,500,000; 1,860,811 common stock
shares; 7,185,000 warrants to purchase common stock shares at a
strike price of $0.20 for existing 2016 warrants; 1,860,811
warrants to purchase common stock shares at a strike price of
$0.25; 3,721,622 warrants to purchase common stock shares at a
strike price of $0.75; and 2,791 series D preferred stock shares
(each Series D preferred stock share converts into 3,000 shares of
the Company’s common stock shares). If the Company is able to
raise capital in excess of $4,000,000, the exchange amounts shall
be adjusted. If the financing is between $4,000,000 and $4,900,000,
for every $100,000 raised in excess of $4,000,000 the Company will
pay an additional $50,000 to pay down debt. If between $5,000,000
and $6,000,000 is raised thru financings, the Company will pay an
additional $1,000,000 to pay down debt. If the financing is in
excess of $6,000,000 then the Company will pay the entire debt
balance outstanding. In the event of alternative financings, the
Company may elect to pay GPB a total of $1,500,000 in cash to GPB
at which time GPB shall waive any security interest in the assets
of the Company, and GPB shall exchange any remaining debt from the
notes into the Series D unit offering. GPB shall have the right to
convert the outstanding notes into equity, but not the obligation.
A 9.99% blocker shall be in effect such that GPB agrees to restrict
its holdings of the Company’s common stock shares to less
than 9.99% of the total number of the Company’s outstanding
common stock shares at any one point in time. All royalty payments
owed to GPB pursuant thereto shall remain obligations of the
Company to GPB and shall remain in full force and effect. The
Company shall have 8 months from the execution date of this
exchange agreement, subject to early termination as forth below (in
“forbearance agreement”). The Company shall be entitled
to extend the forbearance agreement for four additional months for
a $50,000 per month payment. If after the financing is completed
and in the event of future financings or significant collaborations
with a partner generating sales greater than $1,000,000, the
Company agrees to buy back $500,000 of the Series D preferred stock
shares. The interest rate will revert to their original non default
rates. Also, all existing warrants issued prior to exchange
agreement will be canceled.
On
January 17, 2020, as part of the exchange agreement referred to
above the Company paid GPB $450,000.
In
addition, the Company is negotiating additional exchange agreements
that would potentially eliminate or convert debt into equity; as
well as convert certain forms of equity for other
equity.
On
January 22, 2020, the Company entered into a promotional agreement
with a consultant. The consultant will provide the Company investor
and public relations services. As compensation for these services,
the Company will issue a total of 5,000,000 common stock warrants
at a $0.25 strike price and expiring in three years, if the
following conditions occur: 1,250,000 common stock warrants, 6
months after the close of the Series D Preferred Stock units, if
the minimum common stock share price is a minimum of $0.50 based on
a 30-day VWAP, with a two year term; 1,250,000 common stock
warrants, 12 months after the close of the Series D Preferred Stock
units, if the minimum common stock share price is a minimum of
$0.75 based on a 30-day VWAP, with a one and half year term;
1,250,000 common stock warrants, 18 months after the close of the
Series D Preferred Stock units, if the minimum common stock share
price is a minimum of $1.00 based on a 30-day VWAP, with a one year
term; and 1,250,000 common stock warrants, 24 months after the
close of the Series D Preferred Stock units, if the minimum common
stock share price is a minimum of $1.25 based on a 30-day VWAP,
with a one year term. The consultant agrees to a 10.0% blocker at
any single point in time it cannot own 10.0% of the total common
stock shares outstanding.
On
March 31, 2020, the Company entered into a securities purchase
agreement with Auctus Fund, LLC for the issuance and sale to Auctus
of $112,750 in aggregate principal amount of a 12% convertible
promissory note. On March 31, 2020, the Company issued the note to
Auctus and issued 250,000 five-year common stock warrants at an
exercise price of $0.16. On April 3, 2020, the Company received net
proceeds of $100,000. The note matures on January 26, 2021 and
accrues interest at a rate of 12% per year. The Company may not
prepay the note, in whole or in part. After the 90th calendar day after
the issuance date, and ending on the later of maturity date and the
date of payment of the default amount, Auctus may convert the note,
at any time, in whole or in part, provided such conversion does not
provide Auctus with more than 4.99% of the outstanding common share
stock. The conversion may be made converted into shares of the
Company’s common stock, at a conversion price equal to the
lesser of: (i) the lowest Trading Price during the twenty-five (25)
trading day period on the latest complete trading prior to the
issue date and (ii) the variable conversion price (55% multiplied
by the market price, market price means the lowest trading price
for the common stock during the twenty-five (25) trading day period
ending on the latest complete trading day prior to the conversion
date. Trading price is the lowest trade price on the trading market
as reported. The note includes customary events of default
provisions and a default interest rate of 24% per
year.