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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the effective date of this
registration statement.
If any of the securities being registered on this
Form are to be offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the following
box. ☒
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering. ☐
If this Form is a post-effective amendment filed
pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If this Form is a post-effective amendment filed
pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If delivery of the Prospectus is expected to be
made pursuant to Rule 434, check the following
box. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,”“accelerated
filer,” and “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated
filer
☐ (Do
not check if a smaller reporting company)
Smaller reporting company
☒
Emerging growth company
☐
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the Securities Act.
☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities to Be Registered
Amount
to Be
Registered (1)
Proposed
Maximum
Offering Price
per Share
Proposed
Maximum
Aggregate
Offering Price
Amount of
Registration Fee
Shares of common
stock (2)
8,983,013
$0.35
$3,144,054.55
$408.10
Shares of common
stock underlying Series D Preferred Stock (3)
3,144,054.55
$0.35
$1,100,419.09
$142.83
Shares of common
stock underlying convertible promissory note (4)
4,666,667
$0.35
$1,633,333.45
$212.01
Shares of common
stock underlying warrants (5)
12,213,603
$0.20(10)
$2,442,720.60
$317.07
Shares of common
stock underlying warrants (6)
2,647,705
$0.25(10)
$661,926.25
$85.92
Shares of common
stock underlying warrants (7)
250,000
$0.50
$125,000.00
$16.23
Shares of common
stock underlying warrants (8)
2,647,705
$0.75(10)
$1,985,778.75
$257.75
Shares of common
stock underlying Series E Preferred Stock (9)
6,542,000
$0.32
$2,093,440.00
$271.73
Total
40,239,693
—
$12,409,243.20
$1,711.64
(1)
Pursuant to Rule
416 of the Securities Act of 1933, as amended, or the Securities
Act, the shares of common stock offered hereby also include such
presently indeterminate number of shares of the registrant’s
common stock as a result of stock splits, stock dividends or
similar transactions.
(2)
Represents (i)
1,526,000 shares of common stock issued in the private placement to
accredited investors in December 2019 (the “Series D
Preferred Offering”) and (ii) 7,457,013 shares of common
stock issued pursuant to certain exchange agreements between the
Registrants and certain of its creditors in December 2019 (the
“Exchange Agreements”).
(3)
Represents
2,289,000 shares of common stock issuable upon conversion of Series
D Preferred Stock sold in the Series D Offering.
(4)
Represents
4,666,667 shares of common stock issuable upon conversion of a
convertible promissory note issued to Auctus Fund LLC in December
2019 (the “Auctus Note”).
(5)
Represents (i)
4,713,603 shares of common stock issuable upon exercise of certain
warrants issued pursuant to certain exchange agreements between the
Registrants and certain of its creditors in December 2019 and (ii)
7,500,000 shares of common stock issuable upon exercise of the
warrants issued in connection with the Auctus Note, both at a
strike price of $0.20.
(6)
Represents (i)
1,526,000 shares of common stock issuable upon exercise of certain
warrants in the Series D Offering and (ii) 1,121,705 shares of
common stock issuable upon exercise of the warrants issued pursuant
to the Exchange Agreements, both at a strike price of
$0.25.
(7)
Represents 250,000
shares of common stock issuable upon exercise of the warrants
issued pursuant to the Exchange Agreements, at a strike price of
$0.50.
(8)
Represents (i)
1,526,000 shares of common stock issuable upon exercise of certain
warrants in the Series D Offering and (ii) 1,121,705 shares of
common stock issuable upon exercise of the warrants issued pursuant
to the Exchange Agreements, both at a strike price of
$0.75.
(9)
Represents
6,542,000 shares of common stock issuable upon conversion of Series
E Preferred Stock.
(10)
Proposed maximum
offering price per share is based on the exercise price of the
warrants in accordance with Rule 457(g).
The registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities
Act or until this Registration Statement shall become effective on
such date as the Securities and Exchange Commission (the
“SEC”) acting pursuant to said Section 8(a) may
determine.
2
The
information in this preliminary prospectus is not complete and may
be changed. These securities may not be sold until the registration
statement filed with the SEC is effective.
This prospectus relates to the resale of up to an
aggregate of 40,239,693 shares of common stock, par value $0.001
per share, of Guided Therapeutics, Inc. held by selling
stockholders, consisting of the following:
(i) 1,526,000 shares of common stock, 2,289,000 shares
of common stock issuable upon conversion of Series D Preferred
Stock, 1,526,000 shares of common stock issuable upon exercise of
certain warrants at a strike price of
$0.25, 1,526,000 shares of common stock issuable upon
exercise of certain warrants at a
strike price of $0.75 in the Series D Preferred Offering
during December 2019,
(ii) 7,457,013 shares of common stock issued, 4,713,603
shares of common stock issuable upon exercise of certain warrants
issued at a strike price of
$0.20, 1,121,705 shares of common stock issuable upon
exercise of the warrants issued at a
strike price of $0.25, 1,121,705 shares of common stock
issuable upon exercise of the warrants issued at a strike price of $0.75 and 250,000
shares of common stock issuable upon exercise of the warrants
issued at a strike price of $0.50 pursuant to the Exchange
Agreements, (iii) 4,666,667
shares of common stock issuable upon conversion and 7,500,000
shares of common stock issuable upon exercise of the warrants
issued at a strike price of $0.20 in
connection with the Auctus Note and (iv) 6,542,000 shares of
common stock issuable upon conversion of Series E Preferred
Stock.
This
registration does not mean that the selling stockholders named
herein will actually offer or sell any of these
shares. Information regarding the selling stockholders and the
time and manner in which they may offer and sell the shares under
this prospectus is provided under “Selling
Stockholders” and “Plan of Distribution” in this
prospectus. We have agreed to pay all the costs and expenses of
this registration. We will not receive any proceeds from the resale
of the above shares of our common stock by the selling
shareholders. However, we may receive proceeds from the exercise of
the warrants exercised other than pursuant to any applicable
cashless exercise provisions of the warrants. We are not offering
any securities pursuant to this prospectus. Our common stock is
listed for quotation on the OTC pink sheet marketplace operated by
OTC Markets Group, Inc., under the ticker symbol
“GTHP.” On September 8, 2020, the closing price of our
common stock was $0.35.
Following
the effectiveness of the registration statement of which this
prospectus forms a part, the sale and distribution of securities
offered hereby may be effected in one or more transactions that may
take place on the OTC pink sheet marketplace, including ordinary
brokers’ transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities
as principals, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage
fees or commissions may be paid by the selling stockholders. The
selling stockholders and intermediaries through whom such
securities are sold may be deemed “underwriters” within
the meaning of the Securities Act of 1933, as amended, or the
Securities Act, with respect to the securities offered hereby, and
any profits realized or commissions received may be deemed
underwriting compensation.
Investing in our common stock is highly speculative and involves a
significant degree of risk. See “Risk
Factors” beginning on
page 9 of this prospectus for a discussion of information that
should be considered before making a decision to purchase our
common stock.
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
Please
read this prospectus carefully. It describes our business, our
financial condition and our results of operations. We have prepared
this prospectus so that you will have the information necessary to
make an informed investment decision. You should rely only on the
information contained in this prospectus. We have not authorized
anyone to provide you with any information or to make any
representations about us, the securities being offered pursuant to
this prospectus or any other matter discussed in this prospectus,
other than the information and representations contained in this
prospectus. If any other information or representation is given or
made, such information or representation may not be relied upon as
having been authorized by us.
The
information contained in this prospectus is accurate only as of the
date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. Neither the delivery
of this prospectus nor any distribution of securities in accordance
with this prospectus shall, under any circumstances, imply that
there has been no change in our affairs since the date of this
prospectus. This prospectus will be updated and made available for
delivery to the extent required by the federal securities
laws.
This
prospectus includes estimates, statistics and other industry data
that we obtained from industry publications, research, surveys and
studies conducted by third parties and publicly available
information. Such data involves a number of assumptions and
limitations and contains projections and estimates of the future
performance of the industries in which we operate that are subject
to a high degree of uncertainty. This prospectus also includes data
based on our own internal estimates. We caution you not to give
undue weight to such projections, assumptions and
estimates.
This summary highlights selected information contained elsewhere in
this prospectus. To understand this offering fully, you should read
the entire prospectus carefully, including the “Risk
Factors” section, the financial statements and the notes to
the financial statements. Unless the context otherwise requires,
references contained in this prospectus to the “we,”“us,” or “our” or similar terminology
refers to Guide Therapeutics, Inc., a Delaware corporation and its
consolidated subsidiary.
Overview
We
are a medical technology company focused on developing innovative
medical devices that have the potential to improve healthcare. Our
primary focus is the sales and marketing of our LuViva®
Advanced Cervical Scan non-invasive cervical cancer detection
device. The underlying technology of LuViva primarily relates to
the use of biophotonics for the non-invasive detection of cancers.
LuViva is designed to identify cervical cancers and precancers
painlessly, non-invasively and at the point of care by scanning the
cervix with light, then analyzing the reflected and fluorescent
light.
LuViva
provides a less invasive and painless alternative to conventional
tests for cervical cancer screening and detection. Additionally,
LuViva improves patient well-being not only because it eliminates
pain, but also because it is convenient to use and provides rapid
results at the point of care. We focus on two primary applications
for LuViva: first, as a cancer screening tool in the developing
world, where infrastructure to support traditional cancer-screening
methods is limited or non-existent, and second, as a triage
following traditional screening in the developed world, where a
high number of false positive results cause a high rate of
unnecessary and ultimately costly follow-up tests.
Screening
for cervical cancer represents one of the most significant demands
on the practice of diagnostic medicine. As cervical cancer is
linked to a sexually transmitted disease—the human
papillomavirus (HPV)—every woman essentially becomes
“at risk” for cervical cancer simply after becoming
sexually active. In the developing world, there are approximately
2.0 billion women aged 15 and older who are potentially eligible
for screening with LuViva. Guidelines for screening intervals vary
across the world, but U.S. guidelines call for screening every
three years. Traditionally, the Pap smear screening test, or Pap
test, is the primary cervical cancer screening methodology in the
developed world. However, in developing countries, cancer screening
using Pap tests is expensive and requires infrastructure and skill
not currently existing, and not likely to be developed in the near
future, in these countries.
We
believe LuViva is the answer to the developing world’s
cervical cancer screening needs. Screening for cervical cancer in
the developing world often requires working directly with foreign
governments or non-governmental agencies (NGOs). By partnering with
governments or NGOs, we can provide immediate access to cervical
cancer detection to large segments of a nation’s population
as part of national or regional governmental healthcare programs,
eliminating the need to develop expensive and resource-intensive
infrastructures.
In
the developed world, we believe LuViva offers a more accurate and
ultimately cost-effective triage medical device, to be used once a
traditional Pap test or HPV test indicates the possibility of
cervical cancer. Due to the high number of false positive results
from Pap tests, traditional follow-on tests entail increased
medical treatment costs. We believe these costs can be minimized by
utilizing LuViva as a triage to determine whether and to what
degree follow-on tests are warranted.
We
believe our non-invasive cervical cancer detection technology can
be applied to the early detection of other cancers as well. In
2013, we announced a license agreement with Konica Minolta,
Inc. allowing us to manufacture and develop a non-invasive
esophageal cancer detection product from Konica Minolta based on
our biophotonic technology platform. Early market analyses of our
biophotonic technology indicated that skin cancer detection was
also promising, but currently we are focused primarily on the
large-scale commercialization of LuViva.
Our Potential Market
The Developing World
According
to the most recent data published by the World Health Organization
(WHO), cervical cancer is the fourth most frequent cancer in women
worldwide, with an estimated 570,000 new cases in 2018, an increase
of 40,000 cases from 2012. For women living in less developed
regions, however, cervical cancer is the second most common cancer,
and 9 out of 10 women who die from cervical cancer reside in low-
and middle-income countries. In 2018, GLOBOCAN, the international
cancer tracking agency, estimated that approximately 311,000 women
died from cervical cancer, with 85% of these deaths occurring in
low- and middle-income countries.
5
As
noted by the WHO, in developed countries, programs are in place
that enable women to get screened, making most pre-cancerous
lesions identifiable at stages when they can easily be treated.
Early treatment prevents up to 80% of cervical cancers in these
countries. In developing countries, however, limited access to
effective screening means that the disease is often not identified
until it is further advanced and symptoms develop. In addition,
prospects for treatment of such late-stage disease may be poor,
resulting in a higher rate of death from cervical cancer in these
countries.
We
believe that the greatest need and market opportunity for LuViva
lies in screening for cervical cancer in developing countries where
the infrastructure for traditional screening may be limited or
non-existent.
We
are actively working with distributors in the following countries
to implement government-sponsored screening programs: Turkey,
Indonesia, and Nigeria. The number of screening candidates in those
countries is approximately 131 million and Indonesia and Nigeria
represent 2 of the 10 most populous countries in the
world.
The Developed World
The
Pap test, which involves a sample of cervical tissue being placed
on a slide and observed in a laboratory, is currently the most
common form of cervical cancer screening. Since the introduction of
screening and diagnostic methods, the number of cervical cancer
deaths in the developed world has declined dramatically, due mainly
to the increased use of the Pap test. However, the Pap test has a
wide variation in sensitivity, which is the ability to detect the
disease, and specificity, which is the ability to exclude false
positives. A study by Duke University for the U.S. Agency for
Health Care Policy and Research published in 1999 showed Pap test
performance ranging from a 22%-95% sensitivity and 78%-10%
specificity, although new technologies improving the sensitivity
and specificity of the Pap test have recently been introduced and
are finding acceptance in the marketplace. Currently, about 50
million Pap tests are given annually in the United States, and
combined with a pelvic exam as the standard of care, has an average
price of approximately $380 per exam.
After
a Pap test returns a positive result for cervical cancer, accepted
protocol calls for a visual examination of the cervix using a
colposcope, usually followed by a biopsy, or tissue sampling, at
one or more locations on the cervix. This method looks for visual
changes attributable to cancer. There are about two million
colposcope examinations annually in the United States and Europe.
According to industry reports by MD Save and Costhelper Health,
leading online medical service providers, the average cost of a
colposcopy examination with biopsy in the United States is
currently $943.
Given
this landscape, we believe that there is a material need and market
opportunity for LuViva as a triage device in the developed world
where LuViva represents a more cost-effective method of verifying a
positive Pap test than the alternatives.
The LuViva Advanced Cervical Scan
LuViva
is designed to identify cervical cancers and precancers painlessly,
non-invasively and at the point of care by scanning the cervix with
light, then analyzing the light reflected from the cervix. The
information presented by the light would be used to indicate the
likelihood of cervical cancer or precancers. Our product, in
addition to detecting the structural changes attributed to cervical
cancer, is also designed to detect the biochemical changes that
precede the development of visual lesions. In this way, cervical
cancer may be detected earlier in its development, which should
increase the chances of effective treatment. In addition to the
device itself, operation of LuViva requires employment of our
single-use, disposable calibration and alignment cervical
guide.
To
date, thousands of women in multiple international clinical
settings have been tested with LuViva. As a result, more than 25
papers and presentations have been published regarding LuViva in a
clinical setting, including at the International Federation of
Gynecology and Obstetrics Congress in London in 2015 and at the
Indonesian National Obstetrics and Gynecology (POGI) Meeting in
Solo in 2016.
Internationally,
we contract with country-specific or regional distributors. We
believe that the international market will be significantly larger
than the U.S. market due to the international demand for cervical
cancer screening. We have executed formal distribution agreements
covering 54 countries and still have active contracts in place for
countries that cover roughly half of the world’s population,
including China and Southeast Asia (including Indonesia), Eastern
Europe and Russia as well as the Middle East (including Turkey). In
2020, we intend to focus on other large markets such as those in
the European Union, India and certain Latin American countries,
such as Mexico.
We
have previously obtained regulatory approval to sell LuViva in
Europe under our Edition 3 CE Mark. Additionally, LuViva has also
obtained marketing approval from Health Canada, COFEPRIS in Mexico,
Ministry of Health in Kenya and the Singapore Health Sciences
Authority. In addition, in 2018, we were approved for sales and
marketing in India. We currently are seeking regulatory approval to
market LuViva in the United States but have not yet received
approval from the U.S. Food and Drug Administration (FDA). As of
December 31, 2019, we have sold 140 LuViva devices and
approximately 76,780 single-use-disposable cervical guides to
international distributors.
6
We
believe our non-invasive cervical cancer detection technology can
be applied to the early detection of other cancers as
well. Since 2008, we have been working with Konica Minolta to
explore the feasibility of adapting our microporation and
biophotonic cancer detection technology to other areas of medicine
and to determine potential markets for these products in
anticipation of a development agreement. In February 2013, we
replaced our existing agreements with Konica Minolta with a new
agreement, pursuant to which, subject to the payment of a nominal
license fee due upon FDA approval, Konica Minolta has granted us a
five-year, world-wide, non-transferable and non-exclusive right and
license to manufacture and to develop a non-invasive esophageal
cancer detection product from Konica Minolta and based on our
biophotonic technology platform. The license permits us to use
certain related intellectual property of Konica Minolta. In return
for the license, we have agreed to pay Konica Minolta a royalty for
each licensed product we sell. We continue to seek new
collaborative partners to further develop our biophotonic
technology.
Manufacturing, Sales Marketing and Distribution
We
manufacture LuViva at our Norcross, Georgia facility. Most of the
components of LuViva are custom made for us by third-party
manufacturers. We adhere to ISO 13485:2003 quality standards in our
manufacturing processes. Our single-use cervical guides are
manufactured by a vendor that specializes in injection molding of
plastic medical products. On January 22, 2017, we entered into a
license agreement with Shandong Yaohua Medical Instrument
Corporation (“SMI”) pursuant to which we granted SMI an
exclusive global license to manufacture the LuViva device and
related disposables (subject to a carve-out for manufacture in
Turkey). On December 18, 2018, we entered into a co-development
agreement with Newmars Technologies, Inc. (“NTI”),
whereby NTI will perform final assembly of the LuViva device for
its contracted distribution countries in Eastern Europe and Russia
at its ISO 13485 facility in Hungary. This additional carve out has
been agreed to by SMI.
We
rely on distributors to sell our products. Distributors can be
country exclusive or cover multiple countries in a region. We
manage these distributors, provide them marketing materials and
train them to demonstrate and operate LuViva. We seek distributors
that have experience in gynecology and in introducing new
technology into their assigned territories. Currently, we rely on
SMI in distributing our products in the People's Republic of China,
Macau, Hong Kong and Taiwan; we rely on NTI in distributing our
products in Eastern Europe and Russia.
We
have only limited experience in the production planning, quality
system management, facility development, and production scaling
that will be needed to bring production to increased sustained
commercial levels. We will likely need to develop additional
expertise in order to successfully manufacture, market, and
distribute any future products.
Corporate History
We
were originally incorporated under the name “SpectRx,
Inc.” in Delaware in 1992, and subsequently changed our name
to Guided Therapeutics, Inc. on February 22, 2008. At the same
time, we renamed our wholly owned subsidiary, InterScan, Inc. which
originally had been incorporated as “Guided Therapeutics,
Inc.”
Principal Offices
Our
principal executive and operations facility is located at 5835
Peachtree Corners East, Suite B, Norcross, Georgia30092, and our
telephone number is (770) 242-8723.
7
The Offering
Common
Stock Outstanding:
13,096,066 shares
as of the date of this prospectus.
Common Stock Offered by Selling
Stockholders:
40,239,693 shares
Use
of Proceeds:
We will
not receive any proceeds from the sale of the common stock by the
selling stockholders. We would, however, receive proceeds upon the
exercise of the warrants held by the selling stockholders which, if
such warrants are exercised in full for cash, would be
approximately $5 million. Proceeds, if any, received from the
exercise of such warrants will be used for general corporate
purposes and working capital or for other purposes that our board
of directors, in their good faith, deem to be in the best interest
of our company. No assurances can be given that any of such
warrants will be exercised.
Quotation
of Common Stock:
Our
common stock is currently listed for quotation on the OTC pink
sheets under the symbol “GTHP.”
Risk
Factors:
An investment in our company is highly
speculative and involves a significant degree of
risk. See “Risk Factors” and other
information included in this prospectus for a discussion of factors
you should carefully consider before deciding to invest in shares
of our common stock.
An investment in our common stock involves substantial risks,
including the risks described below. You should carefully consider
the risks described below before purchasing our common stock. The
risks highlighted here are not the only ones that we may face. For
example, additional risks presently unknown to us or that we
currently consider immaterial or unlikely to occur could also
impair our operations. If any of the risks or uncertainties
described below or any such additional risks and uncertainties
actually occur, our business, prospects, financial condition or
results of operations could be negatively affected, and you might
lose all or part of your investment.
Risks Related to Our Business
Although we will be required to raise additional funds in 2020,
there is no assurance that such funds can be raised on terms that
we would find acceptable, on a timely basis, or at
all.
Additional
debt or equity financing will be required for us to continue as a
going concern. We may seek to obtain additional funds for the
financing of our cervical cancer detection business through
additional debt or equity financings and/or new collaborative
arrangements. Management believes that additional financing, if
obtainable, will be sufficient to support planned operations only
for a limited period. Management has implemented operating actions
to reduce cash requirements. Any required additional funding may
not be available on terms attractive to us, on a timely basis, or
at all. If we cannot obtain additional funds or achieve
profitability, we may not be able to continue as a going
concern.
Because
we must obtain additional funds through financing transactions or
through new collaborative arrangements in order to grow the
revenues of our cervical cancer detection product line, there
exists substantial doubt about our ability to continue as a going
concern. Therefore, it will be necessary to raise additional funds.
There can be no assurance that we will be able to raise these
additional funds. If we do not secure additional funding when
needed, we will be unable to conduct all of our product development
efforts as planned, which may cause us to alter our business plan
in relation to the development of our products. Even if we obtain
additional funding, we will need to achieve profitability
thereafter.
Our
independent registered public accountants’ report on our
consolidated financial statements as of and for the year ended
December 31, 2019, indicated that there was substantial doubt about
our ability to continue as a going concern because we had suffered
recurring losses from operations and had an accumulated deficit of
$139.6 million at December 31, 2019 summarized as
follows:
Accumulated
deficit, from inception to 12/31/2017
$138.6
million
Preferred
dividends
$ 0.1
million
Net
Profit for the year ended 12/31/2018
$ (1.0)
million
Accumulated
deficit, from inception to 12/31/2018
$137.7
million
Net
Loss for the year ended 12/31/2019
$ 1.9
million
Accumulated
deficit, from inception to 12/31/2019
$139.6
million
As
of June 30, 2020 we have an accumulated deficit of approximately
$143.6 million.
Our
management has implemented reductions in operating expenditures and
reductions in some development activities. We have determined to
make cervical cancer detection the focus of our business. We are
managing the development of our other programs only when funds are
made available to us via grants or contracts with government
entities or strategic partners. However, there can be no assurance
that we will be able to successfully implement or continue these
plans.
If we cannot obtain additional funds when needed, we will not be
able to implement our business plan.
We
require substantial additional capital to develop our products,
including completing product testing and clinical trials, obtaining
all required regulatory approvals and clearances, beginning and
scaling up manufacturing, and marketing our products. We have
historically financed our operations though the public and private
sale of debt and equity, funding from collaborative arrangements,
and grants. Any failure to achieve adequate funding in a timely
fashion would delay our development programs and could lead to
abandonment of our business plan. To the extent we cannot obtain
additional funding, our ability to continue to manufacture and sell
our current products, or develop and introduce new products to
market, will be limited. Further, financing our operations through
the public or private sale of debt or equity may involve
restrictive covenants or other provisions that could limit how we
conduct our business or finance our operations. Financing our
operations through collaborative arrangements generally means that
the obligations of the collaborative partner to fund our
expenditures are largely discretionary and depend on a number of
factors, including our ability to meet specified milestones in the
development and testing of the relevant product. We may not be able
to obtain an acceptable collaboration partner, and even if we do,
we may not be able to meet these milestones, or the collaborative
partner may not continue to fund our expenditures.
9
We do not have a long operating history, especially in the cancer
detection field, which makes it difficult to evaluate our
business.
The
Company has been in existence since 1992 and until 2008, as
SpectRx, Inc., developed and commercialized products for the adult
diabetes and infant jaundice markets. In 2008, we changed our name
to Guided Therapeutics Inc. and started development of our line of
cancer detection products, of which we began commercialization of
cervical cancer detection technology (the “LuViva Advanced
Cervical Scan”) in 2014. Because limited historical
information is available on our revenue trends and manufacturing
costs, it is difficult to evaluate our business. Our prospects
must be considered in light of the substantial risks, expenses,
uncertainties and difficulties encountered by entrants into the
medical device industry, which is characterized by increasing
intense competition and a high failure rate.
We have a history of losses, and we expect losses to
continue.
We
have never been profitable and we have had operating losses since
our inception. We expect our operating losses to continue as we
continue to expend substantial resources to complete
commercialization of our products, obtain regulatory clearances or
approvals; build our marketing, sales, manufacturing and finance
capabilities, and conduct further research and development. The
further development and commercialization of our products will
require substantial development, regulatory, sales and marketing,
manufacturing and other expenditures. We have only generated
limited revenues from product sales. Our accumulated deficit was
approximately $139.6 million at December 31, 2019.
We file federal taxes that may be subject to audit and adjustments
from time to time.
Although
we have been experiencing recurring losses, we are obligated to
file tax returns for compliance with IRS regulations and that of
applicable state jurisdictions. We have filed our 2018 federal and
state corporate tax returns. At December 31, 2019 and 2018, we have
approximately $75.8 and $77.2 million of net operating losses,
respectively. This net operating loss will be eligible to be
carried forward for tax purposes at federal and applicable states
level, but the use of such net operating losses may be subject to
restrictions under applicable tax law. A full valuation allowance
has been recorded related to the deferred tax assets generated from
the net operating losses.
We are currently delinquent with some of our federal payroll and
unemployment taxes and applicable state payroll and unemployment
tax filings
In
prior years, we have been delinquent in filing our payroll and
unemployment taxes. We are currently working with both the IRS and
the State of Georgia to establish a payment plan. We have been able
to abate some of the penalties associated with the late filings. We
will attempt to file future taxes on time and to make payments to
federal state agencies on time, but we cannot guarantee that we
will have adequate funds or the personnel necessary to make these
payments and filings.
Our ability to sell our products is subject to government
regulations, and we may not be able to obtain any necessary
clearances or approvals.
The
design, manufacturing, labeling, distribution and marketing of
medical device products are subject to extensive and rigorous
government regulation in most of the markets in which we sell, or
plan to sell, our products, which can be expensive and uncertain
and can cause lengthy delays before we can begin selling our
products in those markets.
In foreign countries, including European countries, we are subject
to government regulations, which could delay or prevent our ability
to sell our products in those jurisdictions.
In order for us to market our products in Europe
and some other international jurisdictions, we and our distributors
and agents must obtain required regulatory registrations or
approvals. We must also comply with extensive regulations regarding
safety, efficacy and quality in those jurisdictions. We may not be
able to obtain the required regulatory registrations or approvals,
or we may be required to incur significant costs in obtaining or
maintaining any regulatory registrations or approvals we receive.
Delays in obtaining any registrations or approvals required for
marketing our products, failure to receive these registrations or
approvals, or future loss of previously obtained registrations or
approvals would limit our ability to sell our products
internationally. For example, international regulatory bodies have
adopted various regulations governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. These regulations vary
from country to country. In order to sell our products in Europe, in
2018 we or our assigns must undergo an inspection and re-file for
ISO 13485:2016 and the CE Mark, which is an international symbol of
quality and compliance with applicable European medical device
directives. Failure to maintain ISO 13485:2016 certification or CE
mark certification or other international regulatory approvals
would prevent us from selling in some countries in the European
Union.
10
In the United States, we are subject to regulation by the U.S. FDA,
which could prevent us from selling our products
domestically.
In
order for us to market our products in the United States, we must
obtain clearance or approval from the U.S. Food and Drug
Administration, or U.S. FDA. We cannot be sure that:
●
we,
or any collaborative partner, will make timely filings with the
U.S. FDA;
●
the
U.S. FDA will act favorably or quickly on these
submissions;
●
we
will not be required to submit additional information or perform
additional clinical studies; or
●
we
will not face other significant difficulties and costs necessary to
obtain U.S. FDA clearance or approval.
It
can take several years from initial filing of a PMA application and
require the submission of extensive supporting data and clinical
information. The U.S. FDA may impose strict labeling or other
requirements as a condition of its clearance or approval, any of
which could limit our ability to market our products domestically.
Further, if we wish to modify a product after U.S. FDA approval of
a PMA application, including changes in indications or other
modifications that could affect safety and efficacy, additional
clearances or approvals will be required from the U.S. FDA. Any
request by the U.S. FDA for additional data, or any requirement by
the U.S. FDA that we conduct additional clinical studies, could
result in a significant delay in bringing our products to market
domestically and require substantial additional research and other
expenditures. Similarly, any labeling or other conditions or
restrictions imposed by the U.S. FDA could hinder our ability to
effectively market our products domestically. Further, there may be
new U.S. FDA policies or changes in U.S. FDA policies that could be
adverse to us.
Even if we obtain clearance or approval to sell our products, we
are subject to ongoing requirements and inspections that could lead
to the restriction, suspension or revocation of our
clearance.
We,
as well as any potential collaborative partners, will be required
to adhere to applicable regulations in the markets in which we
operate and sell our products, regarding good manufacturing
practice, which include testing, control, and documentation
requirements. Ongoing compliance with good manufacturing practice
and other applicable regulatory requirements will be strictly
enforced applicable regulatory agencies. Failure to comply with
these regulatory requirements could result in, among other things,
warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production,
failure to obtain premarket clearance or premarket approval for
devices, withdrawal of approvals previously obtained, and criminal
prosecution. The restriction, suspension or revocation of
regulatory approvals or any other failure to comply with regulatory
requirements would limit our ability to operate and could increase
our costs.
We depend on a limited number of distributors and any reduction,
delay or cancellation of an order from these distributors or the
loss of any of these distributors could cause our revenue to
decline.
For the fiscal years ended on December 31, 2018
and December 31, 2019, we cooperated with NTI, SMI, K2 Medical LLC,
Item Medical Technologies Group, and Medtact PTE, Ltd.,
distributors that have accounted for substantially all of our
limited revenues. As
a result, the termination of a purchase order with any one of these
distributors may result in the loss of substantially all of our
revenues. We are constantly working to develop new relationships
with existing or new distributors, but despite these efforts we may
not be successful at generating new orders to maintain similar
revenues as current purchase orders are filled. In addition, since
a significant portion of our revenues is derived from a relatively
few distributors, any financial difficulties experienced by any one
of these distributors, or any delay i n receiving payments from any
one of these distributors, could have a material adverse effect on
our business, results of operations, financial condition and cash
flows.
To successfully market and sell our products internationally, we
must address many issues with which we have limited
experience.
All
of our sales of LuViva to date have been to distributors outside of
the United States. We expect that substantially all of our business
will continue to come from sales in foreign markets, through
increased penetration in countries where we currently sell LuViva,
combined with expansion into new international markets. However,
international sales are subject to a number of risks,
including:
●
difficulties
in staffing and managing international operations;
●
difficulties
in penetrating markets in which our competitors’ products may
be more established;
●
reduced
or no protection for intellectual property rights in some
countries;
●
export
restrictions, trade regulations and foreign tax laws;
●
fluctuating
foreign currency exchange rates;
●
foreign
certification and regulatory clearance or approval
requirements;
●
difficulties
in developing effective marketing campaigns for unfamiliar, foreign
countries;
●
customs
clearance and shipping delays;
●
political
and economic instability; and
●
preference
for locally produced products.
11
If
one or more of these risks were realized, it could require us to
dedicate significant resources to remedy the situation, and even if
we are able to find a solution, our revenues may still
decline.
To market and sell LuViva internationally, we depend on
distributors and they may not be successful.
We
currently depend almost exclusively on third-party distributors to
sell and service LuViva internationally and to train our
international distributors, and if these distributors terminate
their relationships with us or under-perform, we may be unable to
maintain or increase our level of international revenue. We will
also need to engage additional international distributors to grow
our business and expand the territories in which we sell LuViva.
Distributors may not commit the necessary resources to market, sell
and service LuViva to the level of our expectations. If current or
future distributors do not perform adequately, or if we are unable
to engage distributors in particular geographic areas, our revenue
from international operations will be adversely
affected.
The coronavirus outbreak could adversely impact our
business.
In
December 2019, it was first reported that there had been an
outbreak of a novel strain of coronavirus, SARS-CoV-2, in China. As
the coronavirus continues to spread outside of China, including
throughout the United States, we may experience disruptions that
could severely impact our business and regulatory filings,
including:
●
impact
to the financial markets;
●
disruption
in our ability to sell our product in foreign markets;
●
disruption
on our ability to source materials;
●
disruption
in our ability to manufacture our devices and
disposables;
●
delays
or difficulties in completing our regulatory work;
●
limitations
on our employee resources ability to work, including because of
sickness of employees or their families or the desire of employees
to avoid contact with large groups of people; and
●
additional
repercussions on our ability to operate our business.
The
global outbreak of coronavirus continues to rapidly evolve. The
extent to which the coronavirus impacts our results will depend on
future developments, which are highly uncertain and cannot be
predicted, including new information which may emerge concerning
the severity of the coronavirus, the ultimate geographic spread of
the coronavirus, the duration of the outbreak, travel restrictions
imposed by countries we conduct our business, business closures or
business disruption in the world, a reduction in time spent out of
home and the actions taken throughout the world, including in our
markets, to contain the coronavirus or treat its impact. The future
impact of the outbreak is highly uncertain and cannot be predicted,
and we cannot provide any assurance that the outbreak will not have
a material adverse impact on our operations or future results or
filings with regulatory health authorities. The extent of the
impact to us, if any, will depend on future developments, including
actions taken to contain the coronavirus.
Risks Related to Our Intellectual Property
Our success largely depends on our ability to maintain and protect
the proprietary information on which we base our
products.
Our
success depends in large part upon our ability to maintain and
protect the proprietary nature of our technology through the patent
process, as well as our ability to license from other’s
patents and patent applications necessary to develop our products.
If any of our patents are successfully challenged, invalidated or
circumvented, or our right or ability to manufacture our products
was to be limited, our ability to continue to manufacture and
market our products could be adversely affected. In addition to
patents, we rely on trade secrets and proprietary know-how, which
we seek to protect, in part, through confidentiality and
proprietary information agreements. The other parties to these
agreements may breach these provisions, and we may not have
adequate remedies for any breach. Additionally, our trade secrets
could otherwise become known to or be independently developed by
competitors.
As
of December 31, 2019, we have been issued, or have rights to, 16
U.S. patents (including those under license). In addition, we have
filed for, or have rights to, two U.S. patents (including those
under license) that are still pending. We also have three granted
patents that apply to our interstitial fluid analysis system as
well as seven international patents that apply to our noninvasive
technologies. There are additional international patents and
pending applications. One or more of the patents we hold directly
or license from third parties, including those for our cervical
cancer detection products, may be successfully challenged,
invalidated or circumvented, or we may otherwise be unable to rely
on these patents. These risks are also present for the process we
use or will use for manufacturing our products. In addition, our
competitors, many of whom have substantial resources and have made
substantial investments in competing technologies, may apply for
and obtain patents that prevent, limit or interfere with our
ability to make, use and sell our products, either in the United
States or in international markets.
12
The
medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property
rights. In addition, the U.S. Patent and Trademark Office, or
USPTO, may institute interference proceedings. The defense and
prosecution of intellectual property suits, USPTO proceedings and
related legal and administrative proceedings are both costly and
time consuming. Moreover, we may need to litigate to enforce our
patents, to protect our trade secrets or know-how, or to determine
the enforceability, scope and validity of the proprietary rights of
others. Any litigation or interference proceedings involving us may
require us to incur substantial legal and other fees and expenses
and may require some of our employees to devote all or a
substantial portion of their time to the proceedings. An adverse
determination in the proceedings could subject us to significant
liabilities to third parties, require us to seek licenses from
third parties or prevent us from selling our products in some or
all markets. We may not be able to reach a satisfactory settlement
of any dispute by licensing necessary patents or other intellectual
property. Even if we reached a settlement, the settlement process
may be expensive and time consuming, and the terms of the
settlement may require us to pay substantial royalties. An adverse
determination in a judicial or administrative proceeding or the
failure to obtain a necessary license could prevent us from
manufacturing and selling our products.
We may be unable to commercialize our products if we are unable to
protect our proprietary rights, and we may be liable for
significant costs and damages if we face a claim of intellectual
property infringement by a third party.
Our
near and long-term prospects depend in part on our ability to
obtain and maintain patents, protect trade secrets and operate
without infringing upon the proprietary rights of others. In the
absence of patent and trade secret protection, competitors may
adversely affect our business by independently developing and
marketing substantially equivalent or superior products and
technology, possibly at lower prices. We could also incur
substantial costs in litigation and suffer diversion of attention
of technical and management personnel if we are required to defend
ourselves in intellectual property infringement suits brought by
third parties, with or without merit, or if we are required to
initiate litigation against others to protect or assert our
intellectual property rights. Moreover, any such litigation may not
be resolved in our favor.
Although
we and our licensors have filed various patent applications
covering the uses of our product candidates, patents may not be
issued from the patent applications already filed or from
applications that we might file in the future. Moreover, the patent
position of companies in the pharmaceutical industry generally
involves complex legal and factual questions and has been the
subject of much litigation. Any patents we own or license, now or
in the future, may be challenged, invalidated or circumvented. To
date, no consistent policy has been developed in the U.S. Patent
and Trademark Office (the “PTO”) regarding the breadth
of claims allowed in biotechnology patents.
In
addition, because patent applications in the U.S. are maintained in
secrecy until patent applications publish or patents issue, and
because publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, we cannot be
certain that we and our licensors are the first creators of
inventions covered by any licensed patent applications or patents
or that we or they are the first to file. The PTO may commence
interference proceedings involving patents or patent applications,
in which the question of first inventorship is contested.
Accordingly, the patents owned or licensed to us may not be valid
or may not afford us protection against competitors with similar
technology, and the patent applications licensed to us may not
result in the issuance of patents.
It
is also possible that our owned and licensed technologies may
infringe on patents or other rights owned by others, and licenses
to which may not be available to us. We may be unable to obtain a
license under such patent on terms favorable to us, if at all. We
may have to alter our products or processes, pay licensing fees or
cease activities altogether because of patent rights of third
parties.
In
addition to the products for which we have patents or have filed
patent applications, we rely upon unpatented proprietary technology
and may not be able to meaningfully protect our rights with regard
to that unpatented proprietary technology. Furthermore, to the
extent that consultants, key employees or other third parties apply
technological information developed by them or by others to any of
our proposed projects, disputes may arise as to the proprietary
rights to this information, which may not be resolved in our
favor.
We may be involved in lawsuits to protect or enforce our patents,
which could be expensive and time consuming.
The
pharmaceutical industry has been characterized by extensive
litigation regarding patents and other intellectual property
rights, and companies have employed intellectual property
litigation to gain a competitive advantage. We may become subject
to infringement claims or litigation arising out of patents and
pending applications of our competitors, or additional interference
proceedings declared by the PTO to determine the priority of
inventions. The defense and prosecution of intellectual property
suits, PTO proceedings, and related legal and administrative
proceedings are costly and time-consuming to pursue, and their
outcome is uncertain. Litigation may be necessary to enforce our
issued patents, to protect our trade secrets and know-how, or to
determine the enforceability, scope, and validity of the
proprietary rights of others. An adverse determination in
litigation or interference proceedings to which we may become a
party could subject us to significant liabilities, require us to
obtain licenses from third parties, or restrict or prevent us from
selling our products in certain markets. Although patent and
intellectual property disputes might be settled through licensing
or similar arrangements, the costs associated with such
arrangements may be substantial and could include our paying large
fixed payments and ongoing royalties. Furthermore, the necessary
licenses may not be available on satisfactory terms or at
all.
13
Competitors
may infringe our patents, and we may file infringement claims to
counter infringement or unauthorized use. This can be expensive,
particularly for a company of our size, and time-consuming. In
addition, in an infringement proceeding, a court may decide that a
patent of ours is not valid or is unenforceable or may refuse to
stop the other party from using the technology at issue on the
grounds that our patents do not cover its technology. An adverse
determination of any litigation or defense proceedings could put
one or more of our patents at risk of being invalidated or
interpreted narrowly.
Also,
a third party may assert that our patents are invalid and/or
unenforceable. There are no unresolved communications, allegations,
complaints or threats of litigation related to the possibility that
our patents are invalid or unenforceable. Any litigation or claims
against us, whether or not merited, may result in substantial
costs, place a significant strain on our financial resources,
divert the attention of management and harm our reputation. An
adverse decision in litigation could result in inadequate
protection for our product candidates and/or reduce the value of
any license agreements we have with third parties.
Interference
proceedings brought before the PTO may be necessary to determine
priority of invention with respect to our patents or patent
applications. During an interference proceeding, it may be
determined that we do not have priority of invention for one or
more aspects in our patents or patent applications and could result
in the invalidation in part or whole of a patent or could put a
patent application at risk of not issuing. Even if successful, an
interference proceeding may result in substantial costs and
distraction to our management.
Furthermore,
because of the substantial amount of discovery required in
connection with intellectual property litigation or interference
proceedings, there is a risk that some of our confidential
information could be compromised by disclosure. In addition, there
could be public announcements of the results of hearings, motions
or other interim proceedings or developments. If investors perceive
these results to be negative, the price of our common stock could
be adversely affected.
If we infringe the rights of third parties, we could be prevented
from selling products, forced to pay damages, and defend against
litigation.
If
our products, methods, processes and other technologies infringe
the proprietary rights of other parties, we could incur substantial
costs and we may have to: obtain licenses, which may not be
available on commercially reasonable terms, if at all; abandon an
infringing product candidate; redesign our products or processes to
avoid infringement; stop using the subject matter claimed in the
patents held by others; pay damages; and/or defend litigation or
administrative proceedings which may be costly whether we win or
lose, and which could result in a substantial diversion of our
financial and management resources.
Risks
Related to Our Sales Strategy
We may not be able to generate sufficient sales revenues to sustain
our growth and strategy plans.
Our
cervical cancer diagnostic activities have been financed to date
through a combination of government grants, strategic partners and
direct investment. Growing revenues for this product are the main
focus of our business. In order to effectively market the cervical
cancer detection product, additional capital will be
needed.
Additional product
lines involve the modification of the cervical cancer detection
technology for use in other cancers. These product lines are only
in the earliest stages of research and development and are
currently not projected to reach market for several years. Our goal
is to receive enough funding from government grants and contracts,
as well as payments from strategic partners, to fund development of
these product lines without diverting funds or other necessary
resources from the cervical cancer program.
Because our products, which use different technology or apply
technology in different ways than other medical devices, are or
will be new to the market, we may not be successful in launching
our products and our operations and growth would be adversely
affected.
Our
products are based on new methods of cancer detection. If our
products do not achieve significant market acceptance, our sales
will be limited and our financial condition may suffer. Physicians
and individuals may not recommend or use our products unless they
determine that these products are an attractive alternative to
current tests that have a long history of safe and effective use.
To date, our products have been used by only a limited number of
people, and few independent studies regarding our products have
been published. The lack of independent studies limits the ability
of doctors or consumers to compare our products to conventional
products.
14
If we are unable to compete effectively in the highly competitive
medical device industry, our future growth and operating results
will suffer.
The
medical device industry in general and the markets in which we
expect to offer products in particular, are intensely competitive.
Many of our competitors have substantially greater financial,
research, technical, manufacturing, marketing and distribution
resources than we do and have greater name recognition and
lengthier operating histories in the health care industry. We may
not be able to effectively compete against these and other
competitors. A number of competitors are currently marketing
traditional laboratory-based tests for cervical cancer screening
and diagnosis. These tests are widely accepted in the health care
industry and have a long history of accurate and effective use.
Further, if our products are not available at competitive prices,
health care administrators who are subject to increasing pressures
to reduce costs may not elect to purchase them. Also, a number of
companies have announced that they are developing, or have
introduced, products that permit non-invasive and less invasive
cancer detection. Accordingly, competition in this area is expected
to increase.
Furthermore, our
competitors may succeed in developing, either before or after the
development and commercialization of our products, devices and
technologies that permit more efficient, less expensive
non-invasive and less invasive cancer detection. It is also
possible that one or more pharmaceutical or other health care
companies will develop therapeutic drugs, treatments or other
products that will substantially reduce the prevalence of cancers
or otherwise render our products obsolete.
We have limited manufacturing experience, which could limit our
growth.
We do
not have manufacturing experience that would enable us to make
products in the volumes that would be necessary for us to achieve
significant commercial sales, and we rely upon our suppliers. In
addition, we may not be able to establish and maintain reliable,
efficient, full scale manufacturing at commercially reasonable
costs in a timely fashion. Difficulties we encounter in
manufacturing scale-up, or our failure to implement and maintain
our manufacturing facilities in accordance with good manufacturing
practice regulations, international quality standards or other
regulatory requirements, could result in a delay or termination of
production. In the past, we have had substantial difficulties in
establishing and maintaining manufacturing for our products and
those difficulties impacted our ability to increase sales.
Companies often encounter difficulties in scaling up production,
including problems involving production yield, quality control and
assurance, and shortages of qualified personnel.
Since we rely on sole source suppliers for several of the
components used in our products, any failure of those suppliers to
perform would hurt our operations.
Several
of the components used in our products or planned products, are
available from only one supplier, and substitutes for these
components could not be obtained easily or would require
substantial modifications to our products. Any significant problem
experienced by one of our sole source suppliers may result in a
delay or interruption in the supply of components to us until that
supplier cures the problem or an alternative source of the
component is located and qualified. Any delay or interruption would
likely lead to a delay or interruption in our manufacturing
operations. For our products that require premarket approval, the
inclusion of substitute components could require us to qualify the
new supplier with the appropriate government regulatory
authorities. Alternatively, for our products that qualify for
premarket notification, the substitute components must meet our
product specifications.
Because we operate in an industry with significant product
liability risk, and we have not specifically insured against this
risk, we may be subject to substantial claims against our
products.
The
development, manufacture and sale of medical products entail
significant risks of product liability claims. We currently have no
product liability insurance coverage beyond that provided by our
general liability insurance. Accordingly, we may not be adequately
protected from any liabilities, including any adverse judgments or
settlements, we might incur in connection with the development,
clinical testing, manufacture and sale of our products. A
successful product liability claim, or series of claims brought
against us that result in an adverse judgment against or settlement
by us in excess of any insurance coverage could seriously harm our
financial condition or reputation. In addition, product liability
insurance is expensive and may not be available to us on acceptable
terms, if at all.
The availability of third party reimbursement for our products is
uncertain, which may limit consumer use and the market for our
products.
In the
United States and elsewhere, sales of medical products are
dependent, in part, on the ability of consumers of these products
to obtain reimbursement for all or a portion of their cost from
third-party payors, such as government and private insurance plans.
Any inability of patients, hospitals, physicians and other users of
our products to obtain sufficient reimbursement from third-party
payors for our products, or adverse changes in relevant
governmental policies or the policies of private third-party payors
regarding reimbursement for these products, could limit our ability
to sell our products on a competitive basis. We are unable to
predict what changes will be made in the reimbursement methods used
by third-party health care payors. Moreover, third-party payors are
increasingly challenging the prices charged for medical products
and services, and some health care providers are gradually adopting
a managed care system in which the providers contract to provide
comprehensive health care services for a fixed cost per person.
Patients, hospitals and physicians may not be able to justify the
use of our products by the attendant cost savings and clinical
benefits that we believe will be derived from the use of our
products, and therefore may not be able to obtain third-party
reimbursement.
15
Reimbursement and
health care payment systems in international markets vary
significantly by country and include both government-sponsored
health care and private insurance. We may not be able to obtain
approvals for reimbursement from these international third-party
payors in a timely manner, if at all. Any failure to receive
international reimbursement approvals could have an adverse effect
on market acceptance of our products in the international markets
in which approvals are sought.
We have a substantial amount of indebtedness, which may adversely
affect our cash flow and our ability to operate our
business.
Our
outstanding indebtedness, which is considered ordinary course
payables and accrued payroll liabilities, was $4.2 million at
December 31, 2019.
The
terms of our indebtedness could have negative consequences to us,
such as:
●
we may be unable to
obtain additional financing to fund working capital, operating
losses, capital expenditures or acquisitions on terms acceptable to
us, or at all;
●
the amount of our
interest expense may increase if we are unable to make payments
when due;
●
our assets might be
subject to foreclosure if we default on our secured debt (see
“—We have outstanding
debt that is collateralized by a general security interest in all
of our assets, including our intellectual property. If we were to
fail to repay the debt when due, the holders would have the right
to foreclose on these assets.”);
●
our vendors or
employees may, and some have, instituted proceedings to collect on
amounts owed them;
●
we have to use a
substantial portion of our cash flows from operations to repay our
indebtedness, including ordinary course accounts payable and
accrued payroll liabilities, which reduces the amount of money we
have for future operations, working capital, inventory, expansion,
or general corporate or other business activities; and
●
we may be unable to
refinance our indebtedness on terms acceptable to us, or at
all.
Our
ability to meet our expenses and debt obligations will depend on
our future performance, which will be affected by financial,
business, economic, regulatory and other factors. We will be unable
to control many of these factors, such as economic conditions. We
cannot be certain that our earnings will be sufficient to allow us
to pay the principal and interest on our debt and meet any other
obligations. If we do not have enough money to service our debt, we
may be required, but unable, to refinance all or part of our
existing debt, sell assets, borrow money or raise equity on terms
acceptable to us, if at all.
We have outstanding debt that is collateralized by a general
security interest in all of our assets, including our intellectual
property. If we were to fail to repay the debt when due, the
holders would have the right to foreclose on these
assets.
At
April 7, 2020, we had notes outstanding that are collateralized by
a security interest in our current and future inventory and
accounts receivable. We also had a note outstanding that is
collateralized by a security interest in all of our assets,
including our intellectual property. When the debt is repaid, the
holders’ security interests on our assets will be
extinguished. However, if an event of default occurs under the
notes prior to their repayment, the holders may exercise their
rights to foreclose on these secured assets for the payment of
these obligations. Under “cross-default” provisions in
each of the notes, an event of default under one note is
automatically an event of default under the other notes. Any such
default and resulting foreclosure would have a material adverse
effect on our business, financial condition and results of
operations.
We are subject to restrictive covenants under the terms of our
outstanding secured debt. If we were to default under the terms of
these covenants, the holders would have the right to foreclose on
the assets that secure the debt.
The instruments governing our outstanding secured
debt contain restrictive covenants. For example, our senior secured
convertible note prohibits us from incurring additional
indebtedness for borrowed money, repurchasing any outstanding
shares of our common stock, or paying any dividends on our capital
stock, in each case without the note holder's prior written
consent, If we were to breach any of
these covenants, the holder could declare an event of default on
the note, and exercise its rights to foreclose on the assets
securing the note.
Our success depends on our ability to attract and retain
scientific, technical, managerial and finance
personnel.
Our ability to operate successfully
and manage our future growth depends
in significant part upon the continued service of key scientific,
technical, managerial and finance personnel, as well as our ability
to attract and retain additional highly qualified personnel in
these fields. We may not be able to attract and retain key
employees when necessary, which would limit our operations and
growth. In addition, if we are able to successfully develop and
commercialize our products, we will need to hire additional
scientific, technical, marketing, managerial and finance personnel.
We face intense competition for qualified personnel in these areas,
many of whom are often subject to competing employment
offers.
16
Certain provisions of our certificate of incorporation that
authorize the issuance of additional shares of preferred stock may
make it more difficult for a third party to effect a change in
control.
Our
certificate of incorporation authorizes our board of directors to
issue up to 5 million shares of preferred stock. Our undesignated
shares of preferred stock may be issued in one or more series, the
terms of which may be determined by the board without further
stockholder action. These terms may include, among other terms,
voting rights, including the right to vote as a series on
particular matters, preferences as to liquidation and dividends,
repurchase rights, conversion rights, redemption rights and sinking
fund provisions. The issuance of any preferred stock could diminish
the rights of holders of our common stock, and therefore could
reduce the value of our common stock. In addition, specific rights
granted to future holders of preferred stock could be used to
restrict our ability to merge with or sell assets to a third party.
The ability of our board to issue preferred stock could make it
more difficult, delay, discourage, prevent or make it more costly
to acquire or effect a change in control, which in turn could
prevent our stockholders from recognizing a gain in the event that
a favorable offer is extended and could materially and negatively
affect the market price of our common stock.
Risks
Related to Our Common Stock
The reverse stock split may decrease the liquidity of the shares of
our common stock.
On
March 29, 2019, a 1:800 reverse
stock split of all of our issued and outstanding common stock was
implemented. 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
liquidity of the shares of our common stock may be affected
adversely by the reverse stock split given the reduced number of
shares that were outstanding immediately following the reverse
stock split, especially if the market price of our common stock
does not increase as a result of the reverse stock split. In
addition, the reverse stock split may have increased the number of
stockholders who own odd lots of our common stock, creating the
potential for such stockholders to experience an increase in the
cost of selling their shares and greater difficulty effecting such
sales.
The number of shares of our common stock issuable upon the
conversion of our outstanding convertible debt and preferred stock
or exercise of outstanding warrants and options is
substantial.
As of
the date of this prospectus, our outstanding convertible debt was
convertible into an aggregate of 108,900,837 shares of our common
stock, and the outstanding shares of our Series C, Series C1,
Series C2, Series D and Series E preferred stock were convertible
into an aggregate of 18,098,770 shares of common stock. Also, as of
that date we had warrants outstanding that were exercisable for an
aggregate of 66,615,856 shares, contractual obligations to issue
2,132 shares, and outstanding options to purchase 50 shares. The
shares of common stock issuable upon conversion or exercise of
these securities would have constituted approximately 88.6% of the
total number of shares of common stock then issued and outstanding.
For more information regarding our warrants, please refer to
Footnote 11 – CONVERTIBLE
DEBT IN DEFAULT of our audited financial statements
for fiscal year ended December 31, 2019.
Further, under the
terms of our convertible debt and preferred stock, as well as
certain of our outstanding warrants, the conversion price or
exercise price, as the case may be, could be adjusted downward,
causing substantial dilution. See “—Adjustments to the conversion price for our
convertible debt and preferred stock, and the exercise price for
certain of our warrants, will dilute the ownership interests of our
existing stockholders.”
Adjustments to the conversion price of our convertible debt and
preferred stock, and the exercise price for certain of our
warrants, will dilute the ownership interests of our existing
stockholders.
Under
the terms of a portion of our convertible debt, the conversion
price fluctuates with the market price of our common stock.
Additionally, under the terms of our Series C preferred stock, any
dividends we choose to pay in shares of our common stock will be
calculated based on the then-current market price of our common
stock. Accordingly, if the market price of our common stock
decreases, the number of shares of our common stock issuable upon
conversion of the convertible debt or upon payment of dividends on
our outstanding Series C preferred stock will increase, and may
result in the issuance of a significant number of additional shares
of our common stock.
Under
the terms of our preferred stock and certain of our convertible
notes and outstanding warrants, the conversion price or exercise
price will be lowered if we issue common stock at a per share price
below the then-conversion price or then-exercise price for those
securities. Reductions in the conversion price or exercise price
would result in the issuance of a significant number of additional
shares of our common stock upon conversion or exercise, which would
result in dilution in the value of the shares of our outstanding
common stock and the voting power represented thereby.
17
Our stock is thinly traded, so you may be unable to sell at or near
ask prices or at all.
The
shares of our common stock are quoted in the OTC pink sheet
marketplace and thinly traded, meaning that the number of persons
interested in purchasing our common shares at or near ask prices at
any given time may be relatively small or non-existent. This
situation is attributable to a number of factors,
including:
●
we
are a small company that is relatively unknown to stock analysts,
stock brokers, institutional investors and others in the investment
community that generate or influence sales volume; and
●
stock
analysts, stock brokers and institutional investors may be
risk-averse and be reluctant to follow a company such as ours that
faces substantial doubt about its ability to continue as a going
concern or to purchase or recommend the purchase of our shares
until such time as we became more viable.
As a
consequence, our stock price may not reflect an actual or perceived
value. Also, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as
compared to a seasoned issuer that has a large and steady volume of
trading activity that will generally support continuous sales
without an adverse effect on share price. A broader or more active
public trading market for our common shares may not develop or if
developed, may not be sustained. Due to these conditions, you may
not be able to sell your shares at or near ask prices or at all if
you need money or otherwise desire to liquidate your
shares.
Trading in our common stock is subject to special sales practices
and may be difficult to sell.
Our
common stock is subject to the SEC’s “penny
stock” rule, which imposes special sales practice
requirements upon broker-dealers who sell such securities to
persons other than established distributors or accredited
investors. Penny stocks are generally defined to be an equity
security that has a market price of less than $5.00 per share. For
transactions covered by the rule, the broker-dealer must make a
special suitability determination for the purchaser and receive the
purchaser’s written agreement to the transaction prior to the
sale. Consequently, the rule may affect the ability of
broker-dealers to sell our securities and also may affect the
ability of our stockholders to sell their securities in any market
that might develop.
Stockholders should
be aware that, according to the SEC, the market for penny stocks
has suffered from patterns of fraud and abuse. Such patterns
include:
●
control
of the market for the security by one or a few broker-dealers that
are often related to the promoter or issuer;
●
manipulation
of prices through prearranged matching of purchases and sales and
false and misleading press releases;
●
“boiler
room” practices involving high-pressure sales tactics and
unrealistic price projections by inexperienced sales
persons;
●
excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
●
the
wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices
and with consequent investor losses.
Our
management is aware of the abuses that have occurred historically
in the penny stock market. Although we do not expect to be in a
position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns
from being established with respect to our common
stock.
Our need to raise additional capital in the near future or to use
our equity securities for payments could have a dilutive effect on
your investment.
In
order to continue operations, we will need to raise additional
capital. We may attempt to raise capital through the public or
private sale of our common stock or securities convertible into or
exercisable for our common stock. In addition, from time to time we
have issued our common stock or warrants in lieu of cash payments.
If we sell additional shares of our common stock or other equity
securities or issue such securities in respect of other claims or
indebtedness, such sales or issuances will further dilute the
percentage of our equity that you own. Depending upon the price per
share of securities that we sell or issue in the future, if any,
your interest in us could be further diluted by any adjustments to
the number of shares and the applicable exercise price required
pursuant to the terms of the agreements under which we previously
issued convertible securities.
An active trading market for our common stock may not develop or be
sustained.
An
investment in our company will likely require a long-term
commitment, with no certainty of return. Although our common stock
is listed for quotation on the OTC marketplace, trading has been
very limited, and we cannot predict whether an active market for
our common stock will ever develop in the future. In the
absence of an active trading market:
●
investors
may have difficulty buying and selling or obtaining market
quotations;
●
market
visibility for shares of our common stock may be limited;
and
●
a lack
of visibility for shares of our common stock may have a depressive
effect on the market price for shares of our common
stock.
18
The
OTC market is a relatively
unorganized, inter-dealer, over-the-counter market that
provides significantly less liquidity than NASDAQ or the NYSE
American (formerly known as the American Stock Exchange). This
illiquid trading market for our common stock may make it difficult
for you to dispose of your common stock at desirable prices or at
all.
The
lack of an active market impairs your ability to sell your shares
at the time you wish to sell them or at a price that you consider
reasonable. The lack of an active market may also reduce the fair
market value of your shares. An inactive market may also impair our
ability to raise capital to continue to fund operations by selling
shares and may impair our ability to acquire additional
intellectual property assets by using our shares as
consideration.
Even if a market for our common stock develops, the market price of
our common stock may be significantly volatile, which could result
in substantial losses for purchasers.
The
market price for our common stock may be significantly volatile and
subject to wide fluctuations in response to factors including the
following:
●
actual
or anticipated fluctuations in our quarterly or annual operating
results;
●
changes
in financial or operational estimates or projections;
●
conditions
in markets generally;
●
changes
in the economic performance or market valuations of companies
similar to ours; and
●
general
economic or political conditions in the United States or
elsewhere.
In
some cases, following periods of volatility in the market price of
a company’s securities, stockholders have often instituted
class action securities litigation against those companies. Such
litigation, if instituted, could result in substantial costs and
diversion of management attention and resources, which could
significantly harm our business operations and
reputation.
Our management collectively own a substantial majority of our
common stock and voting power.
Collectively,
our officers and directors own or exercise voting and investment
control of approximately 58.30% of our common stock as of the date
of this prospectus. As a result, investors may be prevented from
affecting matters involving our company, including:
●
the
composition of our Board of Directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers;
●
any
determinations with respect to mergers or other business
combinations;
●
our
acquisition or disposition of assets; and
●
our
corporate financing activities.
Furthermore,
this concentration of voting power could have the effect of
delaying, deterring or preventing a change of control or other
business combination that might otherwise be beneficial to our
stockholders. This significant concentration of share ownership may
also adversely affect the trading price for our common stock
because investors may perceive disadvantages in owning stock in a
company that is controlled by a small number of
stockholders.
Future sales of our common stock in the public market could lower
the price of our common stock and impair our ability to raise funds
in future securities offerings.
We
may issue a significant amount of shares of common stock upon
conversion of outstanding preferred stock or convertible notes, or
upon exercise of warrants. Future sales of a substantial number of
shares of our common stock in the public market, or the perception
that such sales may occur, could adversely affect the then
prevailing market price of our common stock and could make it more
difficult for us to raise funds in the future through a public
offering of our securities.
Our preferred stock ranks senior to our common stock in the event
of a bankruptcy, liquidation or winding up of our
assets.
As
of the date of this prospectus, we have 1,625.50 shares of Series E
preferred stock, 738 shares of Series D preferred stock, 1,049.25
shares of Series C1 preferred and 3,262.25 shares of Series C2
preferred stock outstanding. In the event of our bankruptcy,
liquidation or winding up, our assets will be available to pay
obligations on our preferred stock in preference to the holders of
our common stock. There is therefore a risk that in such a case,
our common stockholders may see no return on their investment if
our assets can only satisfy our obligations to holders of our
preferred stock
19
You may face significant restrictions on the resale of your shares
due to state “blue sky” laws.
Each
state has its own securities laws, often called “blue
sky” laws, which (1) limit sales of securities to a
state’s residents unless the securities are registered in
that state or qualify for an exemption from registration, and
(2) govern the reporting requirements for broker-dealers doing
business directly or indirectly in the state. Before a security is
sold in a state, there must be a registration in place to cover the
transaction, or it must be exempt from registration. The applicable
broker-dealer must also be registered in that state.
We
do not know whether our securities will be registered or exempt
from registration under the laws of any state. A determination
regarding registration will be made by those broker-dealers, if
any, who agree to serve as market makers for our common stock. We
have not yet applied to have our securities registered in any state
and will not do so until we receive expressions of interest from
investors resident in specific states after they have viewed this
prospectus. There may be significant state blue sky law
restrictions on the ability of investors to sell, and on purchasers
to buy, our securities. You should therefore consider the resale
market for our common stock to be limited, as you may be unable to
resell your shares without the significant expense of state
registration or qualification.
There may be limitations on the effectiveness of our internal
controls, and a failure of our control systems to prevent error or
fraud may materially harm our company.
Proper
systems of internal controls over financial accounting and
disclosure are critical to the operation of a public company. Given
the size of our company and the limited number of fulltime
employees that we have employed, there may be certain limitations
on the effectiveness of our internal controls. Moreover, we do not
expect that disclosure controls or internal control over financial
reporting will prevent all errors and all fraud, if any. A control
system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control
If securities or industry analysts do not publish research or
reports about our business, or if they change their recommendations
regarding our stock adversely, our stock price and trading volume
could decline.
The
trading market for our common stock will be influenced by the
research and reports that industry or securities analysts publish
about us or our business. We do not currently have and may never
obtain research coverage by industry or financial analysts. If no
or few analysts commence coverage of us, the trading price of our
stock would likely decrease. Even if we do obtain analyst coverage,
if one or more of the analysts who cover us downgrade our stock,
our stock price would likely decline. If one or more of these
analysts cease coverage of us or fail to regularly publish reports
on us, we could lose visibility in the financial markets, which in
turn could cause our stock price or trading volume to
decline.
Anti-takeover provisions in our charter documents and Delaware law
could discourage, delay or prevent a change in control of our
company and may affect the trading price of our common
stock.
We
are a Delaware corporation and the anti-takeover provisions of the
Delaware General Corporation Law may discourage, delay or prevent a
change in control by prohibiting us from engaging in a business
combination with an interested stockholder for a period of three
years after the person becomes an interested stockholder, even if a
change in control would be beneficial to our existing
stockholders.
In
addition, our certificate of incorporation, as amended, and bylaws,
as amended, may discourage, delay or prevent a change in our
management or control over us that stockholders may consider
favorable. In particular, our certificate of incorporation and
bylaws, among other matters:
●
permit
our Board of Directors to issue up to 5,000,000 shares of preferred
stock, with any rights, preferences and privileges as they may
designate;
●
provide
that all vacancies on our Board of Directors, including as a result
of newly created directorships, may, except as otherwise required
by law, be filled by the affirmative vote of a majority of
directors then in office, even if less than a quorum;
●
provide
that stockholders seeking to present proposals before a meeting of
stockholders or to nominate candidates for election as directors at
a meeting of stockholders must provide advance notice in writing,
and also specify requirements as to the form and content of a
stockholder’s notice; and
●
do not
provide for cumulative voting rights, thereby allowing the holders
of a majority of the shares of common stock entitled to vote in any
election of directors to elect all of the directors standing for
election;
20
The financial and operational projections that we may make from
time to time are subject to inherent risks.
The
projections that our management may provide from time to time
(including, but not limited to, those relating to potential peak
sales amounts, product approval, production and supply dates,
commercial launch dates, and other financial or operational
matters) reflect numerous assumptions made by management, including
assumptions with respect to our specific as well as general
business, economic, market and financial conditions and other
matters, all of which are difficult to predict and many of which
are beyond our control. Accordingly, there is a risk that the
assumptions made in preparing the projections, or the projections
themselves, will prove inaccurate. There will be differences
between actual and projected results, and actual results may be
materially different from those contained in the projections. The
inclusion of the projections in this prospectus should not be
regarded as an indication that we or our management or
representatives considered or consider the projections to be a
reliable prediction of future events, and the projections should
not be relied upon as such.
We do not intend to pay dividends on our common stock.
We
have never declared or paid any cash dividend on our common stock.
We currently intend to retain any future earnings and do not expect
to pay any dividends for the foreseeable future. Therefore, you
should not invest in our common stock in the expectation that you
will receive dividends.
This
prospectus contains a number of “forward-looking
statements”. Specifically, all statements other than
statements of historical facts included in this prospectus
regarding our financial position, business strategy and plans and
objectives of management for future operations are forward-looking
statements. These forward-looking statements are based on the
beliefs of management at the time these statements were made, as
well as assumptions made by and information currently available to
management. When used in this prospectus and the documents
incorporated by reference herein, the words
“anticipate,”“believe,”“estimate,”“expect,”“may,”“will,”“continue” and
“intend,” and words or phrases of similar import, as
they relate to our financial position, business strategy and plans,
or objectives of management, are intended to identify
forward-looking statements. These statements reflect our current
view with respect to future events and are subject to risks,
uncertainties and assumptions related to various
factors.
You
should understand that the following important factors, in addition
to those discussed in our periodic reports to be filed with the SEC
under the Exchange Act, could affect our future results and could
cause those results to differ materially from those expressed in
such forward-looking statements:
A
variety of factors, some of which are outside our control, may
cause our operating results to fluctuate significantly. They
include:
●
our
lack of operating history, especially in the cancer detection
field;
●
our
potential lack of the capital resources needed to progress our
business plan;
●
acceptance
of our device and application of the biophotonic technology (namely
the detection of the cervical cancer by scanning the cervix with
light, then analyzing the light reflected from the cervix) by
physicians and potential commercial collaborators;
●
our
current and future capital requirements and our ability to satisfy
our capital needs;
●
our
ability to obtain approvals from the FDA or other regulatory
agencies in different jurisdictions;
●
our
ability to develop and diversify our network of distributors and
supply chains;
●
our
ability to obtain, maintain or protect the validity of our patents
and other intellectual property;
●
our
ability to internally develop new inventions and intellectual
property;
●
our
ability to retain key executive members and seasonal marketing
professionals; and
●
interpretations
of current laws and the passages of future laws, rules and
regulations applicable to our business.
Although
we believe that our expectations (including those on which our
forward-looking statements are based) are reasonable, we cannot
assure you that those expectations will prove to be correct. Should
any one or more of these risks or uncertainties materialize, or
should any underlying assumptions prove incorrect, actual results
may vary materially from those described in our forward-looking
statements as anticipated, believed, estimated, expected or
intended.
Except
for our ongoing obligations to disclose material information under
the federal securities laws, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a
result of new information, future events or any other reason. All
subsequent forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to
herein. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus and the
documents incorporated by reference herein might not
occur.
We
will not receive any proceeds from the sale of the common stock by
the selling stockholders. However, we may receive proceeds from the
sale of securities upon the exercise of the warrants issued to the
selling stockholders which, if such warrants are exercised in full
for cash, would be approximately $5 million. As of the date of this
prospectus, we have not received proceeds from such
exercises.
Any
net proceeds we receive will be used for general corporate and
working capital or other purposes that our board of directors deems
to be in the best interest of our company. As of the date of this
prospectus, we cannot specify with certainty the particular uses
for the net proceeds we may receive. Accordingly, we will retain
broad discretion over the use of these proceeds, if
any.
We
have never declared or paid any cash dividend on our common stock
or preferred stock as of September 3, 2020. We do not anticipate
paying any cash dividends on our common stock in the foreseeable
future and we intend to retain all of our earnings, if any, to
finance our growth and operations and to fund the expansion of our
business. Payment of any dividends will be made in the discretion
of our board of directors, after its taking into account various
factors, including our financial condition, operating results,
current and anticipated cash needs and plans for expansion. Any
dividends that may be declared or paid on our common stock, must
also be paid in the same consideration or manner, as the case may
be, on our shares of preferred stock, if any.
The
selling stockholders will offer common stock at the prevailing
market prices or privately negotiated price.
The
offering price of our common stock does not necessarily bear any
relationship to our book value, assets, past operating results,
financial condition or any other established criteria of value. The
facts considered in determining the offering price were our
financial condition and prospects, our limited operating history
and the general condition of the securities market.
In
addition, there is no assurance that our common stock will trade at
market prices in excess of the offering price as prices for common
stock in any public market will be determined in the marketplace
and may be influenced by many factors, including the depth and
liquidity.
25
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER
MATTERS
Holders of Common Stock
As
of September 3, 2020, we have approximately 137 holders of record
of our common stock. The number of record holders does not include
persons, if any, who hold our common stock in nominee or
“street name” accounts through brokers.
Market for Common Stock
Our common stock is quoted on the
OTC pink sheet marketplace under the symbol
“GTHP.”
On March 29, 2019, a
1:800 reverse stock split of all of our issued and outstanding
common stock was implemented. 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.
These
sales prices were obtained from the OTC Market Group, Inc. and do
not necessarily reflect actual transactions, retail markups, mark
downs or commissions. As of September 8, 2020, the last reported
sales price of a share of our common stock on the OTC pink sheet
marketplace was $0.35. No assurance can be given that an
established public market will develop in our common stock, or if
any such market does develop, that it will continue or be sustained
for any period of time.
Transfer Agent
Our
stock transfer agent is Computershare Limited, which is located at
462 South 4th Street, Suite 1600, Louisville, KY40202, Telephone:
(800) 962-4284.
Securities Authorized for Issuance under Equity Compensation
Plans
The
following table indicates as of the date of this prospectus the
shares of common stock authorized for issuance under our stock
option plans, subject to approval by our majority
stockholders:
Plan
category
Number of
securities to be issued upon exercise of outstanding options,
warrants and rights
Weighted-average
exercise price of outstanding options, warrants and
rights
Number of
securities
remaining
available for future issuance under equity compensation plans
(excluding securities reflected in column(a))
(a)
(b)
( c
)
Equity compensation
plans approved by security holders
47
$58,083
-
Equity compensation
plans not approved by security holders
-
-
-
TOTAL
47
$58,083
-
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Statements in this report which express "belief,""anticipation" or
"expectation," as well as other statements which are not historical
facts, are forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical
results or anticipated results, including those that may be set
forth under "Risk Factors" below and elsewhere in this report, as
well as in our annual report on Form 10-K for the year ended
December 31, 2019 and subsequently filed quarterly reports on Form
10-Q. Examples of these uncertainties and risks include, but are
not limited to.
●
access to
sufficient debt or equity capital to meet our operating and
financial needs;
●
the
extent of dilution of the holdings of our existing stockholders
upon the issuance, conversion or exercise of securities issued as
part of our capital raising efforts;
●
the
extent to which certain debt holders may call the notes to be
paid;
●
the
effectiveness and ultimate market acceptance of our products and
our ability to generate sufficient sales revenues to sustain our
growth and strategy plans;
26
●
whether
our products in development will prove safe, feasible and
effective;
●
whether
and when we or any potential strategic partners will obtain
required regulatory approvals in the markets in which we plan to
operate;
●
our
need to achieve manufacturing scale-up in a timely manner, and our
need to provide for the efficient manufacturing of sufficient
quantities of our products;
●
the
lack of immediate alternate sources of supply for some critical
components of our products;
●
our
ability to establish and protect the proprietary information on
which we base our products, including our patent and intellectual
property position;
●
the
need to fully develop the marketing, distribution, customer service
and technical support and other functions critical to the success
of our product lines;
●
the
dependence on potential strategic partners or outside investors for
funding, development assistance, clinical trials, distribution and
marketing of some of our products;
●
COVID-19
risks could impact our operating
business, including but not limited to, the sourcing of materials
for product candidates, manufacture of supplies for preclinical
and/or clinical studies, delays in clinical operations, which may
include the availability or the continued availability of patients
for trials due to such things as quarantines, conduct of patient
monitoring and clinical trial data retrieval at investigational
study sites; and
●
other
risks and uncertainties described from time to time in our reports
filed with the SEC.
The
following discussion should be read in conjunction with our
financial statements and notes thereto included elsewhere in this
report.
Overview
We
are a medical technology company focused on developing innovative
medical devices that have the potential to improve healthcare. Our
primary focus is the sales and marketing of our LuViva®
Advanced Cervical Scan non-invasive cervical cancer detection
device. The underlying technology of LuViva primarily relates to
the use of biophotonics for the non-invasive detection of cancers.
LuViva is designed to identify cervical cancers and precancers
painlessly, non-invasively and at the point of care by scanning the
cervix with light, then analyzing the reflected and fluorescent
light.
LuViva
provides a less invasive and painless alternative to conventional
tests for cervical cancer screening and detection. Additionally,
LuViva improves patient well-being not only because it eliminates
pain, but also because it is convenient to use and provides rapid
results at the point of care. We focus on two primary applications
for LuViva: first, as a cancer screening tool in the developing
world, where infrastructure to support traditional cancer-screening
methods is limited or non-existent, and second, as a triage
following traditional screening in the developed world, where a
high number of false positive results cause a high rate of
unnecessary and ultimately costly follow-up tests.
We
are a Delaware corporation, originally incorporated in 1992 under
the name “SpectRx, Inc.,” and, on February 22, 2008,
changed our name to Guided Therapeutics, Inc. At the same time, we
renamed our wholly owned subsidiary, InterScan, which originally
had been incorporated as “Guided
Therapeutics.”
Since
our inception, we have raised capital through the public and
private sale of debt and equity, funding from collaborative
arrangements, and grants.
Our
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. We have experienced operating losses since our inception and,
as of June 30, 2020 we have an accumulated deficit of approximately
$143.6 million. To date, we have engaged primarily in research and
development efforts and the early stages of marketing our products.
We do not have significant experience in manufacturing, marketing
or selling our products. We may not be successful in growing sales
for our products. Moreover, required regulatory clearances or
approvals may not be obtained in a timely manner, or at all. Our
products may not ever gain market acceptance and we may not ever
generate significant revenues or achieve profitability. The
development and commercialization of our products requires
substantial development, regulatory, sales and marketing,
manufacturing and other expenditures. We expect our operating
losses to continue for the foreseeable future as we continue to
expend substantial resources to complete commercialization of our
products, obtain regulatory clearances or approvals, build our
marketing, sales, manufacturing and finance capabilities, and
conduct further research and development.
Our
product revenues to date have been limited. In 2019, the majority
of our revenues were from the sale of LuViva devices and
disposables. We expect that the majority of our revenue in 2020
will be derived from revenue from the sale of LuViva devices and
disposables.
27
Current Demand for LuViva
Based
on discussions with our distributors, we expect to generate
purchase orders for approximately up to $1.0 million in LuViva
devices and disposables in 2020 and expect those purchase orders to
result in actual sales of up to $0.5 million in 2020, representing
what we view as current demand for our products. We cannot be
assured that we will generate all or any of these additional
purchase orders, or that existing orders will not be canceled by
the distributors or that parts to build product will be available
to meet demand, such that existing orders will result in actual
sales. Because we have a short history of sales of our products, we
cannot confidently predict future sales of our products beyond this
time frame and cannot be assured of any particular amount of sales.
Accordingly, we have not identified any particular trends with
regard to sales of our products.
Recent Developments
A
1:800 reverse stock split of all of our 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 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
2,135,478,405 shares of Common Stock to 2,669,348 shares as of that
date.
Critical Accounting Policies
Our
material accounting policies, which we believe are the most
critical to investors understanding of our financial results and
condition, are discussed below. Because we are still early in our
enterprise development, the number of these policies requiring
explanation is limited. As we begin to generate increased revenue
from different sources, we expect that the number of applicable
policies and complexity of the judgments required will
increase.
Revenue
Recognition: ASC 606
Revenue from Contracts with Customers establishes a single and
comprehensive framework which sets out how much revenue is to be
recognized, and when. The core principle is that a vendor should
recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the vendor expects to be entitled in exchange for those
goods or services. Revenue will now be recognized by a vendor when
control over the goods or services is transferred to the customer.
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.
Valuation of Deferred
Taxes: We account for
income taxes in accordance with the liability method. Under the
liability method, we recognize deferred assets and liabilities
based upon anticipated future tax consequences attributable to
differences between financial statement carrying amounts of assets
and liabilities and their respective tax bases. We establish a
valuation allowance to the extent that it is more likely than not
that deferred tax assets will not be utilized against future
taxable income.
Valuation of Equity Instruments
Granted to Employee, Service Providers and
Investors: On the date of
issuance, the instruments are recorded at their fair value as
determined using either the Black-Scholes valuation model or Monte
Carlo Simulation mode.
28
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.
Allowance for Accounts
Receivable: We estimate
losses from the inability of our distributors to make required
payments and periodically review the payment history of each of our
distributors, as well as their financial condition, and revise our
reserves as a result.
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
purchased.
Sales
Revenue, Cost of Sales and Gross Profit from Devices and
Disposables: Revenues from
the sale of LuViva devices for the three months ended June 30, 2020
and 2019 were approximately nil and $1,000, respectively. Revenues
for the three months ended June 30, 2020 were approximately, $1,000
or 100% lower when compared to the same period in 2019, due to no
sales activity in 2020. Related cost of sales was approximately
$6,000 and $65,000 in the three months ended June 30, 2020 and
2019, respectively. Cost of sales for the three months ended June30, 2020, were approximately, $59,000 or 91% lower when compared to
the same period in 2019, due to no sales activity in 2020. This
resulted in a gross loss of approximately $6,000 on the sales of
devices and disposables for the three months ended June 30, 2020
compared with a gross loss of approximately $64,000 for the same
period in 2019.
Research
and Development Expenses: Research and development expenses for the
three months ended June 30, 2020, increased to approximately
$55,000, from approximately $43,000 for the same period in 2019.
The increase of $12,000, or 28%, was primarily due to research and
development clinical costs not billed for in prior
periods.
Sales and
Marketing Expenses: Sales
and marketing expenses for the three months ended June 30, 2020,
increased to approximately $37,000, compared to $31,000 for the
same period in 2019. The increase, of approximately $6,000, or 19%
was primarily due to investor relations
expenses.
General and
Administrative Expense: General and administrative expenses for the
three months ended June 30, 2020, increased to approximately
$271,000, compared to $189,000 for the same period in 2019. The
increase of approximately $82,000, or 43%, was primarily related to
higher compensation and insurance expenses incurred during the same
period. For 2020, general and administrative expenses consisted
primarily of professional fees, insurance, and paid and accrued
compensation costs.
Other
Income: Other income for
the three months ended June 30, 2020, increased to approximately
$50,000, compared to $16,000 for the same period in 2019. The
increase of approximately $34,000 or 213% was primarily a result of
a reversal of accrued employment placement
fees.
Interest
Expense: Interest expense
for the three months ended June 30, 2020 increased to approximately
$308,000, compared to $264,000 for the same period in 2019. The
increase of approximately $44,000, or 17%, was primarily related to
amortization expense of and interest recorded for the value of the
beneficial conversion feature on convertible debt outstanding and
amortization of debt issuance costs.
Gain from
Extinguishment of Debt: Loss from extinguishment of debt for the
three months ended June 30, 2020 increased to approximately
$343,000, compared to nil for the same period in 2019. The increase
of approximately $343,000, or 100%, was primarily related to debt
that had been eliminated from debt exchange
agreements.
29
Fair Value
of Warrants Recovery/Expense: Fair value of warrants expense for the three
months ended June 30, 2020, increased to approximately $5,779,000
compared to fair value of warrants expense of $2,088,000 for the
same period in 2019. The increase of approximately $3,691,000, or
177% was primarily due to an increase in the number of common stock
warrants outstanding, the exchange of common stock warrants for
fixed price common stock warrants, the exchange of debt and for
favorable significant changes in warrant conversion prices and
increase in stock price in the three months ended June 30,2020.
Net
Income/Loss: Net loss
attributable to common stockholders increased to approximately
$6,766,000, or $0.57 per share, on for the three months ended June30, 2020, from a net loss of $2,654,000, or $0.81 per share, for
the same period in 2019. The increase in the net loss of
$4,112,000, or 155% was for reasons outlined above. As stated
previously, our net income for the three months ended June 30,2020, was primarily a result of changes in the fair value of
warrants, due to increases in the stock price in the three months
ended in June 30, 2020.
There
was no income tax benefit recorded for the three months ended June30, 2020 or 2019, due to recurring net operating
losses.
Sales
Revenue, Cost of Sales and Gross Loss from Devices and
Disposables: Revenues from
the sale of LuViva devices for the six months ended June 30, 2020
and 2019 were approximately nil and $19,000, respectively. Revenues
for the six months ended June 30, 2020 were approximately, $19,000
or 100% lower when compared to the same period in 2019, due to no
sales activity in 2020. Related cost of sales were approximately
$6,000 and $66,000 in the six months ended June 30, 2020 and 2019,
respectively. Cost of sales for the six months ended June 30, 2020,
were approximately, $60,000 or 91% lower when compared to the same
period in 2019, due to no sales activity in 2020. This resulted in
a gross loss of approximately $6,000 on the sales of devices and
disposables for the six months ended June 30, 2020 compared with a
gross loss of approximately 47,000 for the same period in 2019. A
decrease of $41,000 or 87% lower when compared to the same period
in 2019.
Research
and Development Expenses: Research and development expenses for the
six months ended June 30, 2020, decreased to approximately $80,000,
from approximately $90,000 to the same period in 2019. The decrease
of $10,000, or 11%, was primarily due to decrease in research and
development payroll expenses.
Sales and
Marketing Expenses: Sales
and marketing expenses for the six months ended June 30, 2020,
decreased to approximately $71,000, compared to $76,000 for the
same period in 2018. The decrease, of approximately $5,000, or 6%
was primarily due to lower payroll expenses for payroll
expenses.
General and
Administrative Expense: General and administrative expenses for the
six months ended June 30, 2020, increased to approximately
$453,000, compared to $371,000 for the same period in 2019. The
increase of approximately $82,000, or 22%, was primarily related to
higher compensation and insurance expenses incurred during the same
period. For 2020, general and administrative expenses consisted
primarily of professional fees, insurance, and paid and accrued
compensation costs.
Other
Income: Other income for
the six months ended June 30, 2020, increased to approximately
$51,000, compared to $19,000 for the same period in 2019. The
increase of approximately $32,000 or 169% was primarily a result of
a reversal of accrued employment placement
fees.
Interest
Expense: Interest expense
for the six months ended June 30, 2020 decreased to approximately
$594,000, compared to $634,000 for the same period in 2019. The
decrease of approximately $40,000, or 6%, was primarily related to
amortization expense of and interest recorded for the value of the
beneficial conversion feature on convertible debt outstanding and
amortization of debt issuance costs.
Fair Value
of Warrants Recovery and Expense: Fair value of warrants expense for the six
months ended June 30, 2020, increased to approximately $2,551,000
compared to fair value of warrants expense of $1,679,000 for the
same period in 2019. The increase of approximately $872,000, or 52%
was primarily due to favorable significant changes in warrant
conversion prices and increase in stock price in the six months
ended June 30, 2020.
Gain from
extinguishment of debt: Loss from extinguishment of debt for the six
months ended June 30, 2020 increased to approximately $316,000,
compared to nil for the same period in 2019. The increase of
approximately $316,000, or 100%, was primarily related to debt that
had been eliminated from debt exchange
agreements.
Net
Income/Loss: Net loss
attributable to common stockholders increased to approximately
$4,049,000, or $0.48 per share for the six months ended June 30,2020, from a net loss of $2,878,000, or $0.87 per share, for the
same period in 2019. The increase in the net loss of $1,171,000, or
41% was for reasons outlined above. As stated previously, our net
loss for the six months ended June 30, 2020, was primarily a result
of changes in the fair value of warrants, due to increases in the
stock price in the six months ended in June 30,2020.
There
was no income tax benefit recorded for the six months ended June30, 2020 or 2019, due to recurring net operating
losses.
30
Comparison of 2019 and 2018
Sales
Revenue, Cost of Sales and Gross Loss from Devices and
Disposables: Revenues from
the sale of LuViva devices for 2019 and 2018 were approximately
$36,000 and $57,000, respectively. Revenues in 2019 were
approximately, $21,000 or 37% lower when compared to the same
period in 2018, due to lack of funding to support sales and
marketing efforts. Related costs of sales were approximately
$70,000 and $89,000 in 2019 and 2018, respectively. Costs of sales
in 2019, were approximately, $19,000 or 21% lower when compared to
the same period in 2018, due to lower sales and cost of sales in
the same period. This resulted in a gross loss of approximately
$34,000 on the sales of devices and disposables for 2019 compared
with a gross loss of approximately $32,000 for the same period in
2018.
Research
and Development Expenses: Research and development expenses for 2019,
decreased to approximately $122,000, from approximately $244,000 in
2018. The decrease of $122,000, or 50%, was primarily due to cost
reduction plans in research and development payroll
expenses.
Sales and
Marketing Expenses: Sales
and marketing expenses for 2019, decreased to approximately
$87,000, compared to $195,000 in 2018. The decrease, of
approximately $108,000, or 55% was primarily due to Company-wide
expense reduction and cost savings efforts.
General and
Administrative Expense: General and administrative expenses for
2019, decreased to approximately $694,000, compared to $1,077,000
for the same period in 2018. The decrease of approximately
$383,000, or 36%, was primarily related to lower compensation and
option expenses incurred during the same period. For 2019, general
and administrative expenses consisted primarily of professional
fees, insurance, and paid and accrued compensation
costs.
Other
Income: Other income was
approximately $48,000 in 2019, compared to $54,000 in the same
period in 2018, a decrease of $6,000 or 11%. Other income consists
of refunds from prior years for insurance
policies.
Interest
Expense: Interest expense
for 2019 decreased to approximately $1,412,000, compared to
$1,763,000 for the same period in 2018. The decrease of
approximately $351,000, or 20%, was primarily related to a decrease
in the amortization expense of and interest recorded for the value
of the beneficial conversion feature on convertible debt
outstanding and amortization of debt issuance
costs.
Fair Value
of Warrants Recovery and Expense: Fair value of warrants recovery for 2019,
decreased to approximately $380,000 compared to $3,234,000 for the
same period in 2018. The decrease of approximately $2,854,000, or
88% was primarily due to the less favorable significant changes in
warrant conversion prices and decrease in stock price, in the
fiscal year ended December 31, 2019.
Gain from
extinguishment of debt: Gain from the restructuring and exchange of
debt due to officers for 2019, decreased to approximately nil
compared to $1,039,000 for the same period in 2018. The decrease of
approximately $1,039,000 or 100% was primarily due to having no
exchanges of debt for equity in 2019 than in the same period in
2018.
Net loss /
profit: Net loss
attributable to common stockholders increased to approximately
$1,921,000, or $0.58 per share, in 2019, from a net profit of
$900,000, or $1.95 per share, in 2018. The increase in the net loss
of $2,821,000, or 313% was for reasons outlined above. As stated
previously, our net loss for the year ended December 31, 2019 was
primarily realized due $1.4 million, of amortization expense of and
interest recorded for the value of the beneficial conversion
feature on convertible debt outstanding and amortization of debt
issuance costs and the other items as described above. Our net
profit for the year ended December 31, 2018 was primarily realized
due to a $3.2 million gain in the fair value of warrants recorded
in 2018 and a $1.0 million gain from extinguishment of
debt.
There
was no income tax benefit recorded for 2019 or 2018, due to
recurring net operating losses.
Liquidity and Capital Resources
Since
our inception, we have raised capital through the public and
private sale of debt and equity, funding from collaborative
arrangements, and grants. At June 30, 2020, we had cash of
approximately $763,000 and a negative working capital of
approximately $7,831,000.
Our
major cash flows for the six months ended June 30, 2020 consisted
of cash out-flows of $0.9 million from operations, including
approximately $4.0 million of net loss, (as stated previously, our
net loss for the six months ended June 30, 2020, was primarily a
result of changes in the fair value of warrants, the decrease in
the number of common stock warrants outstanding, and the exchange
of common stock warrants for fixed price common stock warrants),
and a net change from financing activities of $0.8 million; which
primarily represented the proceeds received from issuance of common
stock and warrants, loans and payments made on notes
payable.
31
Capital resources for 2020
During
January and April 2020, we received equity investments in the
amount of $128,000. These investors received a total of 256,000
common stock shares and 256,000 warrants issued to purchase common
stock shares at a strike price of $0.25, 256,000 warrants to
purchase common stock shares at a strike price of $0.75 and 128
Series D preferred stock (if the Investor elects to convert their
Series D preferred stock, each Series D preferred stock shares
converts into 3,000 shares of the our common stock shares). Of the
amount invested $38,000 was from related parties.
On
January 6, 2020, we entered into an exchange agreement with Jones
Day. We have not performed the initial terms of the exchange
agreement. We 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 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 8, 2020, we exchanged $2,064,366 in debt for several equity
instruments (noted below) that were determined to have a total fair
value of $2,065,548, resulting in a loss on extinguishment of debt
of $1,183 which is recorded in other income (expense) on the
accompanying consolidated statements of operations. We also issued
6,957,013 warrants to purchase common stock shares; with exercise
prices of $0.25, $0.75 and $0.20.
On
June 3, 2020, we exchanged $328,422 in debt from Auctus,
(summarized in footnote 10: Convertible Notes), for 500,000 common
stock shares and 700,000 warrants to purchase common stock shares.
The fair value of the common stock shares was $250,000 (based on a
$0.50 fair value for our stock) and of the warrants to purchase
common stock shares was $196,818 (based on a $0.281 black scholes
fair valuation). This resulted in a net loss on extinguishment of
debt of $118,396 ($446,818 fair value less the $328,422 of
exchanged debt).
On
June 30, 2020, we exchanged $125,000 in debt (during June 2020,
$125,000 in payables had been converted into short-term debt) from
Mr. James Clavijo, for 500,000 common stock shares and 250,000
warrants to purchase common stock shares. The fair value of the
common stock shares was $250,000 (based on a $0.50 fair value for
our stock) and of the warrants to purchase common stock shares was
$99,963 (based on a $0.40 black scholes fair valuation). This
resulted in a net loss on extinguishment of debt of $224,963
($349,963 fair value less the $125,000 of exchanged debt). After
the exchange transaction a balance was due Mr. Clavijo of $10,213
which was paid.
The
following table summarizes the debt exchanges:
Total Debt and
Accrued Interest
Total
Debt
Total Accrued
Interest
Common Stock
Shares
Warrants
(Exercise $0.25)
Warrants
(Exercise $0.75)
Warrants
(Exercise $0.20)
Warrants
(Exercise $0.15)
Warrants
(Exercise $0.20)
Aquarius
$145,544
107,500
38,044
291,088
145,544
145,544
-
-
K2
Medical (Shenghuo)3
803,653
771,927
31,726
1,905,270
704,334
704,334
496,602
-
Mr.
Blumberg
305,320
292,290
13,030
1,167,630
119,656
119,656
928,318
-
Mr.
Case
179,291
150,000
29,291
896,456
-
-
896,456
-
Mr.
Grimm
51,050
50,000
1,050
255,548
-
-
255,548
-
Mr.
Gould
111,227
100,000
11,227
556,136
-
-
556,136
-
Mr.
Mamula
15,577
15,000
577
77,885
-
-
77,885
-
Dr.
Imhoff2
400,417
363,480
36,937
1,699,255
100,944
100,944
1,497,367
-
Ms.
Rosenstock1
50,000
50,000
-
100,000
50,000
50,000
-
--
Mr.
James2
2,286
2,000
286
7,745
1,227
1,227
5,291
-
Auctus
328,422
249,119
79,303
500,000
700,000
Mr.
Clavijo
125,000
125,000
-
500,000
500,000
$2,517,787
$2,276,316
$241,471
7,957,013
1,121,705
1,121,705
4,713,603
700,000
500,000
1Ms. Rosenstock also forgave $28,986 in
debt.
2Mr. Imhoff and Mr. James are members of the board
of directors and therefore related parties.
3Our COO and director, Mark Faupel, is a
shareholder of Shenghuo, and a former director, Richard Blumberg,
is a managing member of Shenghuo.
32
On
January 16, 2020, we 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 the 2016 warrants issued; 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.
On
March 31, 2020, we 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, we 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, we received net proceeds of
$100,000. The note matures on January 26, 2021 and accrues interest
at a rate of 12% per year.
On
May 4, 2020, we received a loan from the Small Business
Administration (SBA) pursuant to the Paycheck Protection Program
(PPP) as part of the Coronavirus Aid, Relief, and Economic Security
Act (CARES Act) in the amount of $50,184.
On
May 20, 2020, the Company received a $70,000 loan from Mr.
Blumberg, which was paid off in June 2020.
On
May 22, 2020, we entered into an exchange agreement with Auctus.
Based on this agreement we exchanged three outstanding notes, in
the amounts of $150,000, $89,250, and $65,000 for a total amount
$304,250 of debt outstanding, as well as any accrued interest and
default penalty, for: $160,000 in cash payments (payable in monthly
payments of $20,000), converted a portion of the notes pursuant to
original terms of the notes into 500,000 restricted common stock
shares (shares were issued on June 3, 2020); and 700,000 warrants
issued to purchase common stock shares with an exercise price of
$0.15. The fair value of the common stock shares was $250,000
(based on a $0.50 fair value for our stock) and of the warrants to
purchase common stock shares was $196,818 (based on a $0.281 black
scholes fair valuation). This resulted in a net loss on
extinguishment of debt of $118,396 ($446,818 fair value less the
$328,422 of exchanged debt). As of June 30, 2020, a balance of
$140,000 remained to be paid for these exchanged
loans.
On
May 27, 2020, we received the second tranche in the amount of
$400,000, from the December 17, 2019, securities purchase agreement
and convertible note with Auctus. The net amount paid to us was
$313,000 This second tranche is part of the convertible note issued
to Auctus for a total of $2.4 million of which $700,000 has already
been provided by Auctus. The notes maturity date is December 17,2021 and an interest rate of ten percent (10%).
During
June and July 2020, we received equity investments in the amount of
$1,625,500. These investors will receive 1,625.5 Series E Preferred
Stock (each Series E Preferred Stock share converts into 4,000
shares of our common stock shares). The Series E Preferred Stock
will have cumulative dividends at the rate per share of 6% per
annum. The stated value of the Series E Preferred Stock is
$1,000.
Capital resources for 2019
Auctus Note
On
December 17, 2019, we 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%).
Series D Financing
During
December 2019 and January 2020, the Company received equity
investments in the amount of $738,000. These investors received a
total of 1,476,000 common stock shares and 1,476,000 warrants to
purchase common stock shares at a strike price of $0.25, 1,476,000
warrants to purchase common stock shares at a strike price of $0.75
and 738 Series D preferred stock shares (each Series D preferred
stock share converts into 3,000 shares of the Company’s
common stock shares). Of the amount invested $388,000 was from
related parties.
On
February 14, 2019, we entered into a Purchase and Sale Agreement
with Everest Business Funding for the sale of its accounts
receivable. The transaction provided us with $48,735 after $1,265
in debt issuance costs (bank costs) for a total purchase amount of
$50,000, in which we would have to repay $68,500. At a minimum we
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. As of June 30, 2020, the balance of $68,121 had
been paid in full.
33
On
May 15, 2019, we 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 we 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 note may be converted by Eagle at
any time after five months from issuance into shares of our common
stock (as determined in the notes) calculated at the time of
conversion. The conversion price of the notes will be equal to 60%
of the average of the two lowest closing bid prices of our common
stock shares as reported on OTC Markets exchange, for the 20 prior
trading days including the day upon which we 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 we are delinquent in our periodic report filings with
the SEC and increases in the amount of the principal and interest
rates under the notes in the event of such defaults. In the event
of default, at Eagle’s option and in its sole discretion,
Eagle may consider the notes immediately due and payable. As of
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 14, 2020, the outstanding note was paid
off.
On
May 15, 2019, we 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 we 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 note may be converted by Adar at any time after
five months from issuance into shares of our common stock (as
determined in the notes) calculated at the time of conversion. The
conversion price of the notes will be equal to 60% of the average
of the two lowest closing bid prices of our common stock shares as
reported on OTC Markets exchange, for the 20 prior trading days
including the day upon which we 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 we 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. In addition, we 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. On
May 22, 2020, the outstanding note was paid off.
See
“—Recent Developments” for information regarding
capital-raising activities since December 31, 2019.
We
will be required to raise additional funds through public or
private financing, additional collaborative relationships or other
arrangements, as soon as possible. We cannot be certain that our
existing and available capital resources will be sufficient to
satisfy our funding requirements through 2020. We are evaluating
various options to further reduce our cash requirements to operate
at a reduced rate, as well as options to raise additional funds,
including loans.
Generally,
substantial capital will be required to develop our products,
including completing product testing and clinical trials, obtaining
all required U.S. and foreign regulatory approvals and clearances,
and commencing and scaling up manufacturing and marketing our
products. Any failure to obtain capital would have a material
adverse effect on our business, financial condition and results of
operations. Based on discussions with our distributors, we expect
to generate purchase orders for up to $1.0 million in LuViva
devices and disposables in 2020 and expect those purchase orders to
result in actual sales of up to $0.5 million in 2020, representing
what we view as current demand for our products. We cannot be
assured that we will generate all or any of these additional
purchase orders, or that existing orders will not be canceled by
the distributors or that parts to build product will be available
to meet demand, such that existing orders will result in actual
sales. Because we have a short history of sales of our products, we
cannot confidently predict future sales of our products beyond this
time frame and cannot be assured of any particular amount of sales.
Accordingly, we have not identified any particular trends with
regard to sales of our products.
Our
financial statements have been prepared and presented on a basis
assuming we will continue as a going concern. The above factors
raise substantial doubt about our ability to continue as a going
concern, as more fully discussed in Note 1 to the consolidated
financial statements contained herein and in the report of our
independent registered public accounting firm accompanying our
financial statements contained in our annual report on Form 10-K
for the year ended December 31, 2019.
Contingencies
Based
on the current outbreak of the Coronavirus SARS-CoV-2, the pathogen
responsible for COVID-19, which has already had an impact on
financial markets, there could be additional repercussions in our
operating business, including but not limited to, the sourcing of
materials for product candidates, manufacture of supplies for
preclinical and/or clinical studies, delays in clinical operations,
which may include the availability or the continued availability of
patients for trials due to such things as quarantines, conduct of
patient monitoring and clinical trial data retrieval at
investigational study sites.
34
The
future impact of the outbreak is highly uncertain and cannot be
predicted, and we cannot provide any assurance that the outbreak
will not have a material adverse impact on our operations or future
results or filings with regulatory health authorities. The extent
of the impact, if any, we will depend on future developments,
including actions taken to contain the coronavirus.
Off-Balance Sheet Arrangements
We
have no material off-balance sheet arrangements, no special purpose
entities, and no activities that include non-exchange-traded
contracts accounted for at fair value.
Government Regulation and
Product Approval
The
medical devices that we manufacture are subject to regulation by
numerous regulatory bodies, including the China Food and Drug
Administration (the “CFDA”), the U.S. FDA, and
comparable international regulatory agencies. These agencies
require manufacturers of medical devices to comply with applicable
laws and regulations governing the development, testing,
manufacturing, labeling, marketing and distribution of medical
devices. Devices are generally subject to varying levels of
regulatory control, the most comprehensive of which requires that a
clinical evaluation program be conducted before a device receives
approval for commercial distribution.
United States Government Regulation
Government
authorities in the United States, at the federal, state and local
level, and in other countries extensively regulate, among other
things, the research, development, testing, manufacture, packaging,
storage, recordkeeping, labeling, advertising, promotion,
distribution, marketing, import and export of the medical devices
such as those we are developing. The processes for obtaining
regulatory approvals in the United States and in foreign countries,
along with subsequent compliance with applicable statutes and
regulations, require the expenditure of substantial time and
financial resources.
In
the United States, the FDA regulates drugs under the Federal Food,
Drug, and Cosmetic Act, or FDCA, and its implementing regulations.
The process of obtaining regulatory approvals and the subsequent
compliance with appropriate federal, state, local and foreign
statutes and regulations requires the expenditure of substantial
time and financial resources. Failure to comply with the applicable
United States requirements at any time during the product
development process, approval process or after approval, may
subject an applicant to a variety of administrative or judicial
sanctions, such as the FDA’s refusal to approve pending new
drug applications, or NDAs, withdrawal of an approval, imposition
of a clinical hold, issuance of warning or untitled letters,
product recalls, product seizures, total or partial suspension of
production or distribution, injunctions, fines, refusals of
government contracts, restitution, disgorgement or civil or
criminal penalties.
In
the United States, permission to distribute a new device generally
can be met in one of two ways. The first process requires that a
pre-market notification (510(k) Submission) be made to the U.S. FDA
to demonstrate that the device is as safe and effective as, or
substantially equivalent to, a legally marketed device that is not
subject to premarket approval (PMA). A legally marketed device is a
device that (1) was legally marketed prior to May 28, 1976, (2) has
been reclassified from Class III to Class II or I, or (3) has been
found to be substantially equivalent to another legally marketed
device following a 510(k) Submission. The legally marketed device
to which equivalence is drawn is known as the
“predicate” device. Applicants must submit descriptive
data and, when necessary, performance data to establish that the
device is substantially equivalent to a predicate device. In some
instances, data from human clinical studies must also be submitted
in support of a 510(k) Submission. If so, these data must be
collected in a manner that conforms with specific requirements in
accordance with federal regulations. The U.S. FDA must issue an
order finding substantial equivalence before commercial
distribution can occur. Changes to existing devices covered by a
510(k) Submission which do not significantly affect safety or
effectiveness can generally be made by us without additional 510(k)
Submissions.
The
second process requires that an application for premarket approval
(PMA) be made to the U.S. FDA to demonstrate that the device is
safe and effective for its intended use as manufactured. This
approval process applies to most Class III devices, including
LuViva. In this case, two steps of U.S. FDA approval are generally
required before marketing in the United States can begin. First,
investigational device exemption (IDE) regulations must be complied
with in connection with any human clinical investigation of the
device in the United States. Second, the U.S. FDA must review the
PMA application, which contains, among other things, clinical
information acquired under the IDE. The U.S. FDA will approve the
PMA application if it finds that there is a reasonable assurance
that the device is safe and effective for its intended
purpose.
We
completed enrollment in our U.S. FDA pivotal trial of LuViva in
2008 and, after the U.S. FDA requested two-years of follow-up data
for patients enrolled in the study, the U.S. FDA accepted our
completed PMA application on November 18, 2010, effective September23, 2010, for substantive review. On March 7, 2011, we announced
that the U.S. FDA had inspected two clinical trial sites and
audited our clinical trial data base systems as part of its review
process and raised no formal compliance issues. On January 20,2012, we announced our intent to seek an independent panel review
of our PMA application after receiving a
“not-approvable” letter from the U.S. FDA. On November14, 2012 we filed an amended PMA with the U.S. FDA. On September 6,2013, we received a letter from the U.S. FDA with additional
questions and met with the U.S. FDA on May 8, 2014 to discuss our
response. On July 25, 2014, we announced that we had responded to
the U.S. FDA’s most recent questions.
35
We
received a “not-approvable” letter from the U.S. FDA on
May 15, 2015. We had a follow up meeting with the U.S. FDA to
discuss a path forward on November 30, 2015, at which we agreed to
submit a detailed clinical protocol for U.S. FDA review so that
additional studies can be completed. We held a follow up
teleconference with FDA on January 28, 2020 and filed a
pre-submission document to the Agency on February 17, 2020 that
summarized the clinical protocol to be submitted for FDA review.
These studies may not be completed in 2020, although we intend to
pursue FDA approval and start studies in 2020 once funds are
available. We remain committed to obtaining U.S. FDA approval, but
at the same time we are focused on international sales growth,
where we believe the commercial opportunities are larger and the
clinical need is more significant.
Regulatory
approvals and clearances, if granted, may include significant
labeling limitations and limitations on the indicated uses for
which the product may be marketed. In addition, to obtain
regulatory approvals and clearances, the U.S. FDA and some foreign
regulatory authorities impose numerous other requirements with
which medical device manufacturers must comply. U.S. FDA
enforcement policy strictly prohibits the marketing of approved
medical devices for unapproved uses. Any products we manufacture or
distribute under U.S. FDA clearances or approvals are subject to
pervasive and continuing regulation by the U.S. FDA. The U.S. FDA
also requires us to provide it with information on death and
serious injuries alleged to have been associated with the use of
our products, as well as any malfunctions that would likely cause
or contribute to death or serious injury.
The
U.S. FDA requires us to register as a medical device manufacturer
and list our products. We are also subject to inspections by the
U.S. FDA and state agencies acting under contract with the U.S. FDA
to confirm compliance with good manufacturing practice. These
regulations require that we manufacture our products and maintain
documents in a prescribed manner with respect to manufacturing,
testing, quality assurance and quality control activities. The U.S.
FDA also has promulgated final regulatory changes to these
regulations that require, among other things, design controls and
maintenance of service records.
Distributors
of medical devices may also be required to comply with other
foreign regulatory agencies, and we or our distributors currently
have marketing approval for LuViva from Health Canada, COFEPRIS in
Mexico, the Ministry of Health in Kenya, and the Singapore Health
Sciences Authority. The time required to obtain these foreign
approvals to market our products may be longer or shorter than that
required in China or the United States, and requirements for those
approvals may differ from those required by the CFDA or the U.S.
FDA.
We
are also subject to a variety of other controls that affect our
business. Labeling and promotional activities are subject to
scrutiny by the U.S. FDA and, in some instances, by the U.S.
Federal Trade Commission. The U.S. FDA actively enforces
regulations prohibiting marketing of products for unapproved users.
We are also subject, as are our products, to a variety of state and
local laws and regulations in those states and localities where our
products are or will be marketed. Any applicable state or local
regulations may hinder our ability to market our products in those
regions. Manufacturers are also subject to numerous federal, state
and local laws relating to matters such as safe working conditions,
manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous
substances. We may be required to incur significant costs to comply
with these laws and regulations now or in the future. These laws or
regulations may have a material adverse effect on our ability to do
business.
European Union Regulation
In
the European Union, medical devices are required to comply with the
Medical Devices Directive and obtain CE Mark certification in order
to market medical devices. The CE Mark certification, granted
following approval from an independent “Notified Body,”
is an international symbol of adherence to quality assurance
standards and compliance with applicable European Medical Devices
Directives. From 2017 through 2019, we were unable to pay the
annual registration fees to maintain our ISO 13485:2003
certification and our CE Mark. Once our financing is completed, we
will make the required payments and reobtain both certifications.
In addition, our December 21, 2018 agreement with NTI, described
above, will allow final assembly at their ISO 13485:2016 accredited
facility. Once all inspections have been passed for LuViva, this
will allow an alternative path for obtaining the CE
Mark.
China Regulation
China
has a regulatory regime similar to that of the European Union, but
due to interaction with the U.S. regulatory regime, the CFDA also
shares some similarities with its U.S. counterpart. Devices are
classified by the CFDA’s Center for Medical Device Evaluation
(CMDE) into three categories based on medical risk, with the level
of regulatory oversight determined by degree of risk and
invasiveness. CMDE’s device classifications and definitions
are as follows:
●
Class
I device: The safety and effectiveness of the device can be ensured
through routine administration.
●
Class
II device: Further control is required to ensure the safety and
effectiveness of the device.
●
Class
III device: The device is implanted into the human body; used for
life support or sustenance; or poses potential risk to the human
body, and thus must be strictly controlled in respect to safety and
effectiveness.
Based
on the above definitions and several discussions with regulatory
consultants and potential partners, we believe that LuViva is most
likely to be classified as a Class II device, however, this is not
certain and the CFDA may determine that LuViva requires a Class III
registration. Class III registrations are granted by the national
CFDA office while Class I and II registrations occur at the
provincial level. Typically, registration granted at the provincial
level allows a medical device to be marketed in all of
China’s provinces.
36
While
Class I devices usually do not require clinical trial data from
Chinese patients and Class III devices almost always do, Class II
medical devices sometimes do and sometimes do not require Chinese
clinical trials, and this determination may depend on the claim for
the device and quality of clinical trials conducted outside of
China. If clinical trials conducted in China are required, they
usually are less burdensome for Class II devices than Class III
devices.
CFDA
labs also conduct electrical, mechanical and electromagnetic
emission safety testing for medical devices similar to those
required for the CE Mark. As is the case with the U.S. FDA,
manufacturers in China undergo periodic inspections and must comply
with international quality standards such as ISO 13485 for medical
devices. As part of our agreement with SMI, SMI will underwrite the
cost of securing approval of LuViva with the CFDA.
Although
our marketing and distribution partners around the world assist in
the regulatory approval process, ultimately, we are be responsible
for obtaining and maintaining regulatory approvals for our
products. The inability or failure to comply with the varying
regulations or the imposition of new regulations would materially
adversely affect our business, financial condition and results of
operations.
The
process of obtaining clearance to market products is costly and
time-consuming in virtually all of the major markets in which we
sell, or expect to sell, our products and may delay the marketing
and sale of our products. Countries around the world have recently
adopted more stringent regulatory requirements, which are expected
to add to the delays and uncertainties associated with new product
releases, as well as the clinical and regulatory costs of
supporting those releases. No assurance can be given that our
products will be approved on a timely basis in any particular
jurisdiction, if at all. In addition, regulations regarding the
development, manufacture and sale of medical devices are subject to
future change. We cannot predict what impact, if any, those changes
might have on our business. Failure to comply with regulatory
requirements could have a material adverse effect on our business,
financial condition and results of operations.
Noncompliance
with applicable requirements can result in import detentions,
fines, civil penalties, injunctions, suspensions or losses of
regulatory approvals or clearances, recall or seizure of products,
operating restrictions, denial of export applications, governmental
prohibitions on entering into supply contracts, and criminal
prosecution. Failure to obtain regulatory approvals or the
restriction, suspension or revocation of regulatory approvals or
clearances, as well as any other failure to comply with regulatory
requirements, would have a material adverse effect on our business,
financial condition and results of operations.
Employees and Consultants
As
of the date of this prospectus, we have five regular employees and
three consultants to provide services to us on a full-time or
part-time basis. Of the eight people employed or engaged by us, two
are engaged in engineering, manufacturing and development, two are
engaged in sales and marketing activities, one is engaged in
clinical testing and regulatory affairs, and three are engaged in
administration and accounting. No employees are covered by
collective bargaining agreements, and we believe we maintain good
relations with our employees. Each of our employees has entered
into confidentiality, intellectual property assignment and
non-competition agreements with us.
Facilities
Our
corporate offices, which also comprise our administrative, research
and development, marketing and production facilities, are located
at 5835 Peachtree Corners East, Suite B, Norcross, Georgia30092,
where we lease approximately 12,800 square feet under a lease that
expires in March 2021.
Corporate History
We
were originally incorporated under the name “SpectRx,
Inc.” in Delaware in 1992, and subsequently changed our name
to Guided Therapeutics, Inc. on February 22, 2008. At the same
time, we renamed our wholly owned subsidiary, InterScan, Inc. which
originally had been incorporated as “Guided Therapeutics,
Inc.”
We
are a medical technology company focused on developing innovative
medical devices that have the potential to improve healthcare. Our
primary focus is the sales and marketing of our LuViva®
Advanced Cervical Scan non-invasive cervical cancer detection
device. The underlying technology of LuViva primarily relates to
the use of biophotonics for the non-invasive detection of cancers.
LuViva is designed to identify cervical cancers and precancers
painlessly, non-invasively and at the point of care by scanning the
cervix with light, then analyzing the reflected and fluorescent
light.
LuViva
provides a less invasive and painless alternative to conventional
tests for cervical cancer screening and detection. Additionally,
LuViva improves patient well-being not only because it eliminates
pain, but also because it is convenient to use and provides rapid
results at the point of care. We focus on two primary applications
for LuViva: first, as a cancer screening tool in the developing
world, where infrastructure to support traditional cancer-screening
methods is limited or non-existent, and second, as a triage
following traditional screening in the developed world, where a
high number of false positive results cause a high rate of
unnecessary and ultimately costly follow-up tests.
Screening
for cervical cancer represents one of the most significant demands
on the practice of diagnostic medicine. As cervical cancer is
linked to a sexually transmitted disease—the human
papillomavirus (HPV)—every woman essentially becomes
“at risk” for cervical cancer simply after becoming
sexually active. In the developing world, there are approximately
2.0 billion women aged 15 and older who are potentially eligible
for screening with LuViva. Guidelines for screening intervals vary
across the world, but U.S. guidelines call for screening every
three years. Traditionally, the Pap smear screening test, or Pap
test, is the primary cervical cancer screening methodology in the
developed world. However, in developing countries, cancer screening
using Pap tests is expensive and requires infrastructure and skill
not currently existing, and not likely to be developed in the near
future, in these countries.
We
believe LuViva is the answer to the developing world’s
cervical cancer screening needs. Screening for cervical cancer in
the developing world often requires working directly with foreign
governments or non-governmental agencies (NGOs). By partnering with
governments or NGOs, we can provide immediate access to cervical
cancer detection to large segments of a nation’s population
as part of national or regional governmental healthcare programs,
eliminating the need to develop expensive and resource-intensive
infrastructures.
In
the developed world, we believe LuViva offers a more accurate and
ultimately cost-effective triage medical device, to be used once a
traditional Pap test or HPV test indicates the possibility of
cervical cancer. Due to the high number of false positive results
from Pap tests, traditional follow-on tests entail increased
medical treatment costs. We believe these costs can be minimized by
utilizing LuViva as a triage to determine whether and to what
degree follow-on tests are warranted.
We
believe our non-invasive cervical cancer detection technology can
be applied to the early detection of other cancers as well. In
2013, we announced a license agreement with Konica Minolta,
Inc. allowing us to manufacture and develop a non-invasive
esophageal cancer detection product from Konica Minolta based on
our biophotonic technology platform. Early market analyses of our
biophotonic technology indicated that skin cancer detection was
also promising, but currently we are focused primarily on the
large-scale commercialization of LuViva. We have not advanced
beyond basis R&D regarding whether our technology can be
adapted for other cancers.
Cancer
Cancer
is a group of many related diseases. All forms of cancer involve
the out-of-control growth and spread of abnormal cells. Normal
cells grow, divide, and die in an orderly fashion. Cancer cells,
however, continue to grow and divide and can spread to other parts
of the body. In America, half of all men and one-third of all women
will develop some form of cancer during their lifetimes. According
to the American Cancer Society, the sooner a cancer is found and
treatment begins, the better a patient’s chances are of being
cured. We began investigating the applications of our biophotonic
technology to cancer detection before 1997, when we initiated a
preliminary market analysis. We concluded that our biophotonic
technology had applications for the detection of a variety of
cancers through the exposure of tissue to light. We selected
detection of cervical cancer and skin cancer from a list of the ten
most promising applications to pursue initially, and ultimately
focused primarily on our LuViva cervical cancer detection
device.
Cervical
cancer is a cancer that begins in the lining of the cervix (which
is located in the lower part of the uterus). Cervical cancer forms
over time and may spread to other parts of the body if left
untreated. There is generally a gradual change from a normal cervix
to a cervix with precancerous cells to cervical cancer. For some
women, precancerous changes may go away without any treatment.
While the majority of precancerous changes in the cervix do not
advance to cancer, if precancers are treated, the risk that they
will become cancers can be greatly reduced.
38
The Developing World
According
to the most recent data published by the WHO, cervical cancer is
the fourth most frequent cancer in women worldwide, with an
estimated 570,000 new cases in 2018, an increase of 40,000 cases
from 2012. For women living in less developed regions, however,
cervical cancer is the second most common cancer, and 9 out of 10
women who die from cervical cancer reside in low- and middle-income
countries. In 2018, GLOBOCAN, the international cancer tracking
agency, estimated that approximately 311,000 women died from
cervical cancer, with 85% of these deaths occurring in low- and
middle-income countries.
As
noted by the WHO, in developed countries, programs are in place
that enable women to get screened, making most pre-cancerous
lesions identifiable at stages when they can easily be treated.
Early treatment prevents up to 80% of cervical cancers in these
countries. In developing countries, however, limited access to
effective screening means that the disease is often not identified
until it is further advanced and symptoms develop. In addition,
prospects for treatment of such late-stage disease may be poor,
resulting in a higher rate of death from cervical cancer in these
countries.
We
believe that the greatest need and market opportunity for LuViva
lies in screening for cervical cancer in developing countries where
the infrastructure for traditional screening may be limited or
non-existent.
We
are actively working with distributors in the following countries
to implement government-sponsored screening programs: Turkey,
Indonesia, and Nigeria. The number of screening candidates in those
countries is approximately 131 million and Indonesia and Nigeria
represent 2 of the 10 most populous countries in the
world.
The Developed World
The
Pap test, which involves a sample of cervical tissue being placed
on a slide and observed in a laboratory, is currently the most
common form of cervical cancer screening. Since the introduction of
screening and diagnostic methods, the number of cervical cancer
deaths in the developed world has declined dramatically, due mainly
to the increased use of the Pap test. However, the Pap test has a
wide variation in sensitivity, which is the ability to detect the
disease, and specificity, which is the ability to exclude false
positives. A study by Duke University for the U.S. Agency for
Health Care Policy and Research published in 1999 showed Pap test
performance ranging from a 22%-95% sensitivity and 78%-10%
specificity, although new technologies improving the sensitivity
and specificity of the Pap test have recently been introduced and
are finding acceptance in the marketplace. About 50 million Pap
tests are given annually in the United States, at an average price
of approximately $380 per test when combined with a pelvic per the
standard of care.
After
a Pap test returns a positive result for cervical cancer, accepted
protocol calls for a visual examination of the cervix using a
colposcope, usually followed by a biopsy, or tissue sampling, at
one or more locations on the cervix. This method looks for visual
changes attributable to cancer. There are about two million
colposcope examinations annually in the United States and Europe.
According to industry reports by MD Save and Costhelper Health,
leading online medical service providers, the average cost of a
colposcopy examination with biopsy in the United States is
currently $943.
Given
this landscape, we believe that there is a material need and market
opportunity for LuViva as a triage device in the developed world
where LuViva represents a more cost-effective method of verifying a
positive Pap test than the alternatives.
The LuViva Advanced Cervical Scan
LuViva
is designed to identify cervical cancers and precancers painlessly,
non-invasively and at the point of care by scanning the cervix with
light, then analyzing the light reflected from the cervix. The
information presented by the light would be used to indicate the
likelihood of cervical cancer or precancers. Our product, in
addition to detecting the structural changes attributed to cervical
cancer, is also designed to detect the biochemical changes that
precede the development of visual lesions. In this way, cervical
cancer may be detected earlier in its development, which should
increase the chances of effective treatment. In addition to the
device itself, operation of LuViva requires employment of our
single-use, disposable calibration and alignment cervical
guide.
To
date, thousands of women in multiple international clinical
settings have been tested with LuViva. As a result, more than 25
papers and presentations have been published regarding LuViva in a
clinical setting, including at the International Federation of
Gynecology and Obstetrics Congress in London in 2015 and at the
Indonesian National Obstetrics and Gynecology (POGI) Meeting in
Solo in 2016.
Internationally,
we contract with country-specific or regional distributors. We
believe that the international market will be significantly larger
than the U.S. market due to the international demand for cervical
cancer screening. We have executed formal distribution agreements
covering 54 countries and still have active contracts in place for
countries that cover roughly half of the world’s population,
including China and Southeast Asia (including Indonesia), Eastern
Europe and Russia as well as the Middle East (including Turkey). In
2020, we intend to focus on other large markets such as those in
the European Union, India, and certain Latin American countries,
such as Mexico.
39
We
have previously obtained regulatory approval to sell LuViva in
Europe under our Edition 3 CE Mark. Additionally, LuViva has also
obtained marketing approval from Health Canada, COFEPRIS in Mexico,
Ministry of Health in Kenya and the Singapore Health Sciences
Authority. In addition, in 2018, we were approved for sales and
marketing in India. We currently are seeking regulatory approval to
market LuViva in the United States but have not yet received
approval from the U.S. Food and Drug Administration (FDA). As of
December 31, 2019, we have sold 140 LuViva devices and
approximately 76,780 single-use-disposable cervical guides to
international distributors.
We
believe our non-invasive cervical cancer detection technology can
be applied to the early detection of other cancers as
well. From 2008 to early 2013, we worked with Konica Minolta
to explore the feasibility of adapting our microporation and
biophotonic cancer detection technology to other areas of medicine
and to determine potential markets for these products in
anticipation of a development agreement. In February 2013, we
replaced our existing agreements with Konica Minolta with a new
agreement, pursuant to which, subject to the payment of a nominal
license fee due upon FDA approval, Konica Minolta has granted us a
five-year, world-wide, non-transferable and non-exclusive right and
license to manufacture and to develop a non-invasive esophageal
cancer detection product from Konica Minolta and based on our
biophotonic technology platform. The license permits us to use
certain related intellectual property of Konica Minolta. In return
for the license, we have agreed to pay Konica Minolta a royalty for
each licensed product we sell. We continue to seek new
collaborative partners to further develop our biophotonic
technology.
Manufacturing, Sales Marketing and Distribution
We
manufacture LuViva at our Norcross, Georgia facility. Most of the
components of LuViva are custom made for us by third-party
manufacturers. We adhere to ISO 13485:2003 quality standards in our
manufacturing processes. Our single-use cervical guides are
manufactured by a vendor that specializes in injection molding of
plastic medical products. On January 22, 2017, we entered into a
license agreement with SMI pursuant to which we granted SMI an
exclusive global license to manufacture the LuViva device and
related disposables (subject to a carve-out for manufacture in
Turkey). On December 18, 2018, we entered into a co-development
agreement with NTI, whereby NTI will perform final assembly of the
LuViva device for its contracted distribution countries in Eastern
Europe and Russia at its ISO 13485 facility in Hungary. This
additional carve out has been agreed to by SMI.
We
rely on distributors to sell our products. Distributors can be
country exclusive or cover multiple countries in a region. We
manage these distributors, provide them marketing materials and
train them to demonstrate and operate LuViva. We seek distributors
that have experience in gynecology and in introducing new
technology into their assigned territories. Currently, we rely on
SMI in distributing our products in the People's Republic of China,
Macau, Hong Kong and Taiwan; we rely on NTI in distributing our
products in Eastern Europe and Russia.
We
have only limited experience in the production planning, quality
system management, facility development, and production scaling
that will be needed to bring production to increased sustained
commercial levels. We will likely need to develop additional
expertise in order to successfully manufacture, market, and
distribute any future products.
Research, Development and Engineering
We
have been engaged primarily in the research, development and
testing of our LuViva non-invasive cervical cancer detection
product and our core biophotonic technology. Since 2013, we have
incurred approximately $7.8 million in research and development
expenses, net of about $927,000 reimbursed through collaborative
arrangements and government grants. Research and development costs
were approximately $0.1 and $0.2 million in 2019 and 2018,
respectively.
Since
2013, we have focused our research and development and our
engineering resources almost exclusively on development of our
biophotonic technology, with only limited support of other programs
funded through government contracts or third-party funding. Because
our research and clinical development programs for other cancers
are at a very early stage, substantial additional research and
development and clinical trials will be necessary before we can
produce commercial prototypes of other cancer detection
products.
Several
of the components used in LuViva currently are available from only
one supplier, and substitutes for these components could not be
obtained easily or would require substantial modifications to our
products.
Patents
We
have pursued a course of developing and acquiring patents and
patent rights and licensing technology. Our success depends in
large part on our ability to establish and maintain the proprietary
nature of our technology through the patent process and to license
from other’s patents and patent applications necessary to
develop our products. As of December 31, 2019, we have 16 granted
U.S. patents relating to our biophotonic cancer detection
technology that were developed in-house and are owned by the
Company. Currently we do not own third party patents nor do we make
any outside payments for patents.
40
As
of September 3, 2020, patents 6,400,875, 6,577,391, and 6,870,620
had expired.
Patent
No.
Title
Ctry
Grant
Date
Expiration
Date
6,400,875
Method
for Protecting A Fiber Optic Probe And The Resulting Fiber Optic
Probe
US
06/04/2002
11/01/2019
6,577,391
Apparatus And
Method For Determining Tissue Characteristics
US
06/10/2003
03/24/2020
6,590,651
Apparatus and
Method for Determining Tissue Characteristics
US
07/08/2003
11/16/2020
6,792,982
Vacuum
Source For Harvesting Substances
US
09/21/2004
07/23/2023
6,870,620
Apparatus And
Method For Determining Tissue Characteristics
US
03/22/2005
03/24/2020
6,975,889
Multi-Modal Optical
Cancer Diagnostic System
US
12/13/2005
03/09/2021
7,006,220
Apparatus and
Method for Determining Tissue Characteristics
US
02/28/2006
11/16/2020
7,174,927
Vacuum
Source For Harvesting Substances
US
02/13/2007
09/03/2024
7,301,629
Apparatus and
Method for Determining Tissue Characteristics
US
11/27/2007
07/03/2023
7,335,166
System
And Methods For Fluid Extractions And Monitoring
US
02/26/2008
05/22/2023
8,644,912
Method
and Apparatus For Determining Tissue Characteristics
US
02/04/2014
11/16/2020
8,781,560
Method
and Apparatus For Rapid Detection and Diagnosis of Tissue
Abnormalities
US
07/15/2014
07/14/2031
9,561,003
Method
and Apparatus For Rapid Detection and Diagnosis of Tissue
Abnormalities
US
02/07/2017
07/14/2031
D714453
Mobile
Cart and Hand Held Unit for Diagnostics of Measurement
US
09/30/2014
09/30/2028
D724199
Medical
Diagnostic Stand Off Tube
US
03/10/2015
03/10/2029
D746475
Mobile
Cart and Hand Held Unit for Diagnostics or Measurement
US
12/29/2015
12/29/2029
In
addition to the patents listed above, the Company owns four
additional corresponding foreign patents and has applied for two
additional US patents, although there is no assurance that these
patents will be granted. The Company’s strategy is to
continue improving its products and filing new patents to protect
those improvements.
In
the United States, additional years of patent protection may be
added (on a case by case basis) beyond the standard patent
terms under the 1984 Drug Price Competition and Patent Term
Restoration Act, also known as the Hatch-Waxman Act. The
Hatch-Waxman act includes Section 156, which provides for the
extension of the term of a granted patent (PTE) under certain
circumstances. The intent behind Section 156 is to extend patent
life to compensate patent holders for patent term lost while
developing their product and awaiting FDA approval. The
Company’s patents qualify under Section 156 because LuViva
has not yet been commercialized in the United States and it is
being regulated by FDA as a Class III Medical Device.
Competition
The
medical device industry in general and the markets for cervical
cancer detection in particular, are intensely competitive. If
successful in our product development, we will compete with other
providers of cervical cancer detection and prevention
products.
Current
cervical cancer screening and diagnostic tests, primarily the Pap
test, HPV test, and colposcopy, are well established and pervasive.
Improvements and new technologies for cervical cancer detection and
prevention, such as Thin-Prep from Hologic and HPV testing from
Qiagen, have led to other new competitors. In addition, there are
other companies attempting to develop products using forms of
biophotonic technologies in cervical cancer detection, such as
Spectrascience, which has a very limited U.S. FDA approval to
market its device for detection of cervical cancers, but has not
yet entered the market. The approval limits use of the
Spectrascience device only after a colposcopy, as an adjunct. In
addition to the Spectrascience device, there are other technologies
that are seeking to enter the market as adjuncts to colposcopy,
including devices from Dysis and Zedco. While these technologies
are not direct competitors to LuViva, modifications to them or
other new technologies will require us to develop devices that are
more accurate, easier to use or less costly to administer so that
our products have a competitive advantage.
In
April 2014, the U.S. FDA approved the use of the Roche cobas HPV
test as a primary screener for cervical cancer. Using a sample of
cervical cells, the cobas HPV test detects DNA from 14 high-risk
HPV types. The test specifically identifies HPV 16 and HPV 18,
while concurrently detecting 12 other types of high-risk HPVs. This
could make HPV testing a competitor to the Pap test. However, due
to its lower specificity, we believe that screening with HPV will
increase the number of false positive results if widely
adopted.
41
In
June 2006, the U.S. FDA approved the HPV vaccine Gardasil from drug
maker Merck. Gardasil is a prophylactic HPV vaccine, meaning that
it is designed to prevent the initial establishment of HPV
infections. For maximum efficacy, it is recommended that girls
receive the vaccine prior to becoming sexually active. Since
Gardasil will not block infection with all of the HPV types that
can cause cervical cancer, the vaccine should not be considered a
substitute for routine Pap tests. On October 16, 2009,
GlaxoSmithKline PLC was granted approval in the United States for a
similar preventive HPV vaccine, known as Cervarix. Due to the
limited availability and lack of 100% protection against all
potentially cancer-causing strains of HPV, we believe that the
vaccines will have a limited impact on the cervical cancer
screening and diagnostic market for many years.
Government Regulation
The
medical devices that we manufacture are subject to regulation by
numerous regulatory bodies, including the CFDA, the U.S. FDA, and
comparable international regulatory agencies. These agencies
require manufacturers of medical devices to comply with applicable
laws and regulations governing the development, testing,
manufacturing, labeling, marketing and distribution of medical
devices. Devices are generally subject to varying levels of
regulatory control, the most comprehensive of which requires that a
clinical evaluation program be conducted before a device receives
approval for commercial distribution.
In
the European Union, medical devices are required to comply with the
Medical Devices Directive and obtain CE Mark certification in order
to market medical devices. The CE Mark certification, granted
following approval from an independent “Notified Body,”
is an international symbol of adherence to quality assurance
standards and compliance with applicable European Medical Devices
Directives. From 2017 through 2019, we were unable to pay the
annual registration fees to maintain our ISO 13485:2003
certification and our CE Mark. Once our financing is completed, we
will make the required payments and reobtain both certifications.
In addition, our December 21, 2018 agreement with Newmars,
described above, will allow final assembly at their ISO 13485:2016
accredited facility. Once all inspections have been passed for
LuViva, this will allow an alternative path for obtaining the CE
Mark.
China
has a regulatory regime similar to that of the European Union, but
due to interaction with the U.S. regulatory regime, the CFDA also
shares some similarities with its U.S. counterpart. Devices are
classified by the CFDA’s Center for Medical Device Evaluation
(CMDE) into three categories based on medical risk, with the level
of regulatory oversight determined by degree of risk and
invasiveness. CMDE’s device classifications and definitions
are as follows:
●
Class I device: The safety and effectiveness of the device can be
ensured through routine administration.
●
Class II device: Further control is required to ensure the safety
and effectiveness of the device.
●
Class III device: The device is implanted into the human body; used
for life support or sustenance; or poses potential risk to the
human body, and thus must be strictly controlled in respect to
safety and effectiveness.
Based
on the above definitions and several discussions with regulatory
consultants and potential partners, we believe that LuViva is most
likely to be classified as a Class II device, however, this is not
certain and the CFDA may determine that LuViva requires a Class III
registration. Class III registrations are granted by the national
CFDA office while Class I and II registrations occur at the
provincial level. Typically, registration granted at the provincial
level allows a medical device to be marketed in all of
China’s provinces.
While
Class I devices usually do not require clinical trial data from
Chinese patients and Class III devices almost always do, Class II
medical devices sometimes do and sometimes do not require Chinese
clinical trials, and this determination may depend on the claim for
the device and quality of clinical trials conducted outside of
China. If clinical trials conducted in China are required, they
usually are less burdensome for Class II devices than Class III
devices.
CFDA
labs also conduct electrical, mechanical and electromagnetic
emission safety testing for medical devices similar to those
required for the CE Mark. As is the case with the U.S. FDA,
manufacturers in China undergo periodic inspections and must comply
with international quality standards such as ISO 13485 for medical
devices. As part of our agreement with SMI, SMI will underwrite the
cost of securing approval of LuViva with the CFDA.
In
the United States, permission to distribute a new device generally
can be met in one of two ways. The first process requires that a
pre-market notification (510(k) Submission) be made to the U.S. FDA
to demonstrate that the device is as safe and effective as, or
substantially equivalent to, a legally marketed device that is not
subject to premarket approval (PMA). A legally marketed device is a
device that (1) was legally marketed prior to May 28, 1976, (2) has
been reclassified from Class III to Class II or I, or (3) has been
found to be substantially equivalent to another legally marketed
device following a 510(k) Submission. The legally marketed device
to which equivalence is drawn is known as the
“predicate” device. Applicants must submit descriptive
data and, when necessary, performance data to establish that the
device is substantially equivalent to a predicate device. In some
instances, data from human clinical studies must also be submitted
in support of a 510(k) Submission. If so, these data must be
collected in a manner that conforms with specific requirements in
accordance with federal regulations. The U.S. FDA must issue an
order finding substantial equivalence before commercial
distribution can occur. Changes to existing devices covered by a
510(k) Submission which do not significantly affect safety or
effectiveness can generally be made by us without additional 510(k)
Submissions.
42
The
second process requires that an application for premarket approval
(PMA) be made to the U.S. FDA to demonstrate that the device is
safe and effective for its intended use as manufactured. This
approval process applies to most Class III devices, including
LuViva. In this case, two steps of U.S. FDA approval are generally
required before marketing in the United States can begin. First,
investigational device exemption (IDE) regulations must be complied
with in connection with any human clinical investigation of the
device in the United States. Second, the U.S. FDA must review the
PMA application, which contains, among other things, clinical
information acquired under the IDE. The U.S. FDA will approve the
PMA application if it finds that there is a reasonable assurance
that the device is safe and effective for its intended
purpose.
We
completed enrollment in our U.S. FDA pivotal trial of LuViva in
2008 and, after the U.S. FDA requested two-years of follow-up data
for patients enrolled in the study, the U.S. FDA accepted our
completed PMA application on November 18, 2010, effective September23, 2010, for substantive review. On March 7, 2011, we announced
that the U.S. FDA had inspected two clinical trial sites and
audited our clinical trial data base systems as part of its review
process and raised no formal compliance issues. On January 20,2012, we announced our intent to seek an independent panel review
of our PMA application after receiving a
“not-approvable” letter from the U.S. FDA. On November14, 2012 we filed an amended PMA with the U.S. FDA. On September 6,2013, we received a letter from the U.S. FDA with additional
questions and met with the U.S. FDA on May 8, 2014 to discuss our
response. On July 25, 2014, we announced that we had responded to
the U.S. FDA’s most recent questions.
We
received a “not-approvable” letter from the U.S. FDA on
May 15, 2015. We had a follow up meeting with the U.S. FDA to
discuss a path forward on November 30, 2015, at which we agreed to
submit a detailed clinical protocol for U.S. FDA review so that
additional studies can be completed. We held a follow up
teleconference with FDA on January 28, 2020 and filed a
pre-submission document to the Agency on February 17, 2020 that
summarized the clinical protocol to be submitted for FDA review.
These studies may not be completed in 2020, although we intend to
pursue FDA approval and start studies in 2020 once funds are
available. We remain committed to obtaining U.S. FDA approval, but
at the same time we are focused on international sales growth,
where we believe the commercial opportunities are larger and the
clinical need is more significant.
The
process of obtaining clearance to market products is costly and
time-consuming in virtually all of the major markets in which we
sell, or expect to sell, our products and may delay the marketing
and sale of our products. Countries around the world have recently
adopted more stringent regulatory requirements, which are expected
to add to the delays and uncertainties associated with new product
releases, as well as the clinical and regulatory costs of
supporting those releases. No assurance can be given that our
products will be approved on a timely basis in any particular
jurisdiction, if at all. In addition, regulations regarding the
development, manufacture and sale of medical devices are subject to
future change. We cannot predict what impact, if any, those changes
might have on our business. Failure to comply with regulatory
requirements could have a material adverse effect on our business,
financial condition and results of operations.
Noncompliance
with applicable requirements can result in import detentions,
fines, civil penalties, injunctions, suspensions or losses of
regulatory approvals or clearances, recall or seizure of products,
operating restrictions, denial of export applications, governmental
prohibitions on entering into supply contracts, and criminal
prosecution. Failure to obtain regulatory approvals or the
restriction, suspension or revocation of regulatory approvals or
clearances, as well as any other failure to comply with regulatory
requirements, would have a material adverse effect on our business,
financial condition and results of operations.
Regulatory
approvals and clearances, if granted, may include significant
labeling limitations and limitations on the indicated uses for
which the product may be marketed. In addition, to obtain
regulatory approvals and clearances, the U.S. FDA and some foreign
regulatory authorities impose numerous other requirements with
which medical device manufacturers must comply. U.S. FDA
enforcement policy strictly prohibits the marketing of approved
medical devices for unapproved uses. Any products we manufacture or
distribute under U.S. FDA clearances or approvals are subject to
pervasive and continuing regulation by the U.S. FDA. The U.S. FDA
also requires us to provide it with information on death and
serious injuries alleged to have been associated with the use of
our products, as well as any malfunctions that would likely cause
or contribute to death or serious injury.
The
U.S. FDA requires us to register as a medical device manufacturer
and list our products. We are also subject to inspections by the
U.S. FDA and state agencies acting under contract with the U.S. FDA
to confirm compliance with good manufacturing practice. These
regulations require that we manufacture our products and maintain
documents in a prescribed manner with respect to manufacturing,
testing, quality assurance and quality control activities. The U.S.
FDA also has promulgated final regulatory changes to these
regulations that require, among other things, design controls and
maintenance of service records. These changes will increase the
cost of complying with good manufacturing practice
requirements.
Distributors
of medical devices may also be required to comply with other
foreign regulatory agencies, and we or our distributors currently
have marketing approval for LuViva from Health Canada, COFEPRIS in
Mexico, the Ministry of Health in Kenya, and the Singapore Health
Sciences Authority. The time required to obtain these foreign
approvals to market our products may be longer or shorter than that
required in China or the United States, and requirements for those
approvals may differ from those required by the CFDA or the U.S.
FDA.
43
We
are also subject to a variety of other controls that affect our
business. Labeling and promotional activities are subject to
scrutiny by the U.S. FDA and, in some instances, by the U.S.
Federal Trade Commission. The U.S. FDA actively enforces
regulations prohibiting marketing of products for unapproved users.
We are also subject, as are our products, to a variety of state and
local laws and regulations in those states and localities where our
products are or will be marketed. Any applicable state or local
regulations may hinder our ability to market our products in those
regions. Manufacturers are also subject to numerous federal, state
and local laws relating to matters such as safe working conditions,
manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous
substances. We may be required to incur significant costs to comply
with these laws and regulations now or in the future. These laws or
regulations may have a material adverse effect on our ability to do
business.
Although
our marketing and distribution partners around the world assist in
the regulatory approval process, ultimately, we are be responsible
for obtaining and maintaining regulatory approvals for our
products. The inability or failure to comply with the varying
regulations or the imposition of new regulations would materially
adversely affect our business, financial condition and results of
operations.
Employees and Consultants
As
of December 31, 2019, we had five regular employees and three
consultants to provide services to us on a full- or part-time
basis. Of the eight people employed or engaged by us, two are
engaged in engineering, manufacturing and development, two are
engaged in sales and marketing activities, one is engaged in
clinical testing and regulatory affairs, and three are engaged in
administration and accounting. No employees are covered by
collective bargaining agreements, and we believe we maintain good
relations with our employees.
Our
ability to operate successfully and manage our potential future
growth depends in significant part upon the continued service of
key scientific, technical, managerial and finance personnel, and
our ability to attract and retain additional highly qualified
personnel in these fields. Two of these key employees have an
employment contract with us; none are covered by key person or
similar insurance. In addition, if we are able to successfully
develop and commercialize our products, we likely will need to hire
additional scientific, technical, marketing, managerial and finance
personnel. We face intense competition for qualified personnel in
these areas, many of whom are often subject to competing employment
offers. The loss of key personnel or our inability to hire and
retain additional qualified personnel in the future could have a
material adverse effect on our business, financial condition and
results of operations.
Corporate History
We
are a Delaware corporation, originally incorporated in 1992 under
the name “SpectRx, Inc.,” and, on February 22, 2008,
changed our name to Guided Therapeutics, Inc. At the same time, we
renamed our wholly owned subsidiary, InterScan Inc., which
originally had been incorporated as “Guided Therapeutics,
Inc.”
Our
principal executive and operations facility is located at 5835
Peachtree Corners East, Suite B, Norcross, Georgia30092, and our
telephone number is (770) 242-8723.
Set
forth below is information regarding our current directors and
executive officers.
Name
Age
Position
Gene S.
Cartwright, Ph.D.
66
Chief
Executive Officer, President, Acting Chief Financial Officer and
Director
Mark
Faupel, Ph.D.
64
Chief
Operating Officer and Director
Richard
L. Fowler
63
Senior
Vice President of Engineering
John E.
Imhoff, M.D.
70
Director
Michael
C. James
61
Chairman and
Director
Except
as set forth below, all of the executive officers have been
associated with us in their present or other capacities for more
than the past five years. Officers are elected annually by the
board of directors and serve at the discretion of the board. There
are no family relationships among any of our executive officers and
directors. There are no family relationships between any of our
directors or executive officers.
Gene S. Cartwright,
Ph.D. joined us in January 2014
as the President, Chief Executive Officer and Acting Chief
Financial Officer. He was elected as a director on January 11,2014. Prior to joining us, he worked for Omnyx, LLC, a Joint
Venture between GE Healthcare and the University of Pittsburgh
Medical Center, where, as CEO for over four years he founded and
managed the successful development of products for the field of
Digital Pathology. Prior to his work with Omnyx, LLC, he was
President of Molecular Diagnostics for GE Healthcare. Prior to GE,
Dr. Cartwright was Divisional Vice President/General Manager for
Abbott Diagnostics’ Molecular Diagnostics business. In his
24-year career at Abbott, he also served as Divisional Vice
President for U.S. Marketing for five years. He received a Master
of Management degree from Northwestern’s Kellogg School of
Management and also holds a Ph.D. in chemistry from Stanford
University and an AB from Dartmouth College. Dr. Cartwright brings
over 30 years of experience working in the IVD diagnostics
industry. He has great experience in the diagnostics market both in
the development and introduction of new diagnostics technologies,
as well as extensive successful commercial experience with global
businesses. With his background and experience, Dr. Cartwright, as
President and Chief Executive Officer, as well as Acting Chief
Financial Officer, works with and advises the board as to how we
can successfully market and build LuViva international
sales.
Mark Faupel, Ph.D.,
rejoined us as Chief Operating Officer
and director on December 8, 2016. He previously served on our board
of directors through 2013 and has more than 30 years of experience
in developing non-invasive alternatives to surgical biopsies and
blood tests, especially in the area of cancer screening and
diagnostics. Dr. Faupel was one of our co-founders and also served
as our Chief Executive Officer from May 2007 through 2013. Prior
thereto was our Chief Technical Officer from April 2001 to May
2007. Dr. Faupel has served as a National Institutes of Health
reviewer, is the inventor on 26 U.S. patents and has authored
numerous scientific publications and presentations, appearing in
such peer-reviewed journals as The Lancet. Dr. Faupel earned his
Ph.D. in neuroanatomy and physiology from the University of
Georgia.
Rick Fowler,
Senior Vice President of Engineering
is an accomplished Executive with significant experience in the
management of businesses that sell, market, produce and develop
sophisticated medical devices and instrumentation. Mr.
Fowler’s 25 plus years of experience includes assembling and
managing teams, leading businesses and negotiating contracts,
conducting litigation, and developing ISO, CE, FDA QSR, GMP and GCP
compliant processes and products. He is adept at providing product
life cycle management through effective process definition and
communication - from requirements gathering, R&D feasibility,
product development, product launch, production startup and
support. Mr. Fowler combines outstanding analytical,
out-of-the-box, and strategic thinking with strong leadership,
technical, and communication skills and he excels in dynamic,
demanding environments while remaining pragmatic and focused. He is
able to deliver high risk projects on time and under budget as well
as enhance operational effectiveness through outstanding
cross-functional team leadership (R&D, marketing, product
development, operations, quality assurance, sales, service, and
finance). In addition, Mr. Fowler is well versed in global medical
device regulatory and product compliance requirements. Mr. Fowler
became a consultant in 2020, but retained his
title.
John E. Imhoff, M.D.
has served as a member of our Board of
Directors since April 2006. Dr. Imhoff is an ophthalmic surgeon who
specializes in cataract and refractive surgery. He is one of our
principal stockholders and invests in many other private and public
companies. He has a B.S. in Industrial Engineering from Oklahoma
State University, an M.D. from the University of Oklahoma and
completed his ophthalmic residency at the Dean A. McGee Eye
Institute. He has worked as an ophthalmic surgeon and owner of
Southeast Eye Center since 1983. Dr. Imhoff has experience in
clinical trials and in other technical aspects of a medical device
company. His background in industrial engineering is especially
helpful to us, especially as Dr. Imhoff can combine this knowledge
with clinical applications. His experience in the investment
community is invaluable to a public company often undertaking
capital raising efforts.
45
Michael C. James
has served as a member of our Board of
Directors since March 2007 and as Chairman of the Board since
October 2013. Mr. James is also the Managing Partner of Kuekenhof
Capital Management, LLC, a private investment management company,
Chief Executive Officer and the Chief Financial Officer of
Inergetics, Inc., a nutraceutical supplements company and also the
Chief Financial Officer of Terra Tech Corporation, which is a
hydroponic and agricultural company. He also holds the position of
Managing Director of Kuekenhof Equity Fund, L.P. and Kuekenhof
Partners, L.P. Mr. James currently sits on the Board of Directors
of Inergetics; Inc. Mr. James was Chief Executive Officer of
Nestor, Inc. from January 2009 to September 2009 and served on
their Board of Directors from July 2006 to June 2009. He was
employed by Moore Capital Management, Inc., a private investment
management company from 1995 to 1999 and held position of Partner.
He was employed by Buffalo Partners, L.P., a private investment
management company from 1991 to 1994 and held the position of Chief
Financial and Administrative Officer. He began his career in 1980
as a staff accountant with Eisner LLP. Mr. James received a B.S.
degree in Accounting from Farleigh Dickinson University in 1980.
Mr. James has experience both in the areas of company finance and
accounting, which is invaluable to us during financial audits and
offerings. Mr. James has extensive experience in the management of
both small and large companies and his entrepreneurial background
is relevant as we develop as a company.
Involvement in Certain Legal Proceedings
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 September 3, 2020, there was no accrual recorded for any
potential losses related to pending litigation.
Board Committees and Director Independence
Director Independence
Of
our current directors, we have determined that Michael C. James and
John Imhoff are “independent” as defined by applicable
rules and regulations.
Board Committees
Our
board of directors has established three standing committees
— Audit and Compensation Committees. All standing committees
operate under a charter that has been approved by our board of
directors.
Audit Committee
Our
board of directors has an Audit Committee, composed of Michael
James and John Imhoff, Messrs. Michael James and John Imhoff are
independent directors as defined in accordance with section Rule
10A-3 of the Exchange Act and the rules of the NASDAQ Stock Market.
Mr. James serves as chairman of the committee. Our board of
directors has determined that Mr. James is an “audit
committee financial expert” as defined in
Item 407(d)(5)(ii) of Regulation S-K.
Our
Audit Committee oversees our corporate accounting, financial
reporting practices and the audits of financial statements. For
this purpose, the Audit Committee has a charter (which is reviewed
annually) and performs several functions.
The
Audit Committee:
●
appoints,
retains, and terminates the independent auditors (subject, if
applicable, to shareholder ratification);
●
meets
with the independent auditors and financial management of the
corporation to review the scope of the proposed audit for the
current year and the audit procedures to be utilized, and at the
conclusion thereof reviews such audit, including any comments or
recommendations of the independent auditors;
●
reviews
with the independent auditors, the company’s internal auditor
(if any), and financial and accounting personnel, the adequacy and
effectiveness of the accounting and financial controls of the
corporation, and elicits any recommendations for the improvement of
such internal control procedures or particular areas where new or
more detailed controls or procedures are desirable. Particular
emphasis should be given to the adequacy of such internal controls
to expose any payments, transactions, or procedures that might be
deemed illegal or otherwise improper. Further, the committee
periodically should review company policy statements to determine
their adherence to the code of conduct;
46
●
reviews
the financial statements contained in the annual report to
shareholders with management and the independent auditors to
determine that the independent auditors are satisfied with the
disclosure and content of the financial statements to be presented
to the shareholders;
●
provides
sufficient opportunity for the independent auditors to meet with
the members of the audit committee without members of management
present. Among the items to be discussed in these meetings are the
independent auditors’ evaluation of the corporation’s
financial, accounting and auditing personnel, and the cooperation
that the independent auditors received during the course of the
audit;
●
reviews accounting and financial human resources and succession
planning within the company;
●
submits the minutes of all meetings of the audit committee to, or
discusses the matters discussed at each committee meeting with, the
board of directors.
●
establishes procedures for the receipt, retention and treatment of
complaints received by the issuer regarding accounting, internal
accounting controls, or auditing matters, and the confidential,
anonymous submission by employees of the issuer of concerns
regarding questionable accounting or auditing matters;
●
insures that the independent auditors of the company provide
adequate evidence of their independence, including requiring a
formal written statement regarding all relationship services
provided to the company, which may impact
independence.
Compensation Committee
Our
board of directors also has a Compensation Committee, which reviews
or recommends the compensation arrangements for our management and
employees and also assists the board of directors in reviewing and
approving matters such as company benefit and insurance plans,
including monitoring the performance thereof. The Compensation
Committee is composed of 2 members: John Imhoff and Michael James.
Mr. Imhoff serves as chairman of this committee. Messrs.
Imhoff and James are independent in accordance with rules of the
NASDAQ Stock Market.
Our
Committee has overall responsibilities for approving and evaluating
officer compensation plans, policies and programs of the Company.
For this purpose, the Compensation Committee has a charter (which
is reviewed annually) and performs several functions. The
Compensation Committee:
●
retains
and terminates any compensation consultant to be used to assist in
the evaluation of director, CEO or senior executive compensation
and shall have sole authority to approve the consultant’s
fees and other retention terms;
●
reviews
and approves corporate goals and objectives relevant to
compensation, evaluate performance in light of those goals and
objectives, and determine and approve compensation levels based on
this evaluation;
●
makes
recommendations to the Board with respect to compensation,
incentive compensation and equity-based plans. To the extent
directed or authorized by the Board, the Compensation Committee
shall adopt or administer such plans on behalf of the Board and the
Company.
●
produces
the compensation committee report on executive compensation
required to be included in the Company’s proxy statement for
its annual meeting of stockholders.
●
forms
and delegates authority to subcommittees, when
appropriate.
●
makes
regular reports to the Board.
●
reviews
and reassesses the adequacy of the Compensation Committee
Charter.
●
reviews
and evaluates its own performance
Nominating Committee
Our
board of directors has a Nominating Committee composed of John
Imhoff and Michael James. John Imhoff serves as the chairman of the
committee. The Nominating Committee is charged with proposing
potential director nominees to the board of directors for
consideration. The Nominating Committee has a charter which is
reviewed annually. John Imhoff and Michael James are independent
directors in accordance with the rules of the NASDAQ Stock Market.
The Nominating Committee will consider director nominees
recommended by security holders.
47
Code of Ethics
We
have adopted a code of ethics that applies to all of our directors,
officers and employees. To obtain a copy without charge, contact
our Corporate Secretary, Guided Therapeutics, Inc., 5835 Peachtree
Corners East, Suite B, Norcross, Georgia30092. If we amend our
code of ethics, other than a technical, administrative or
non-substantive amendment, or we grant any waiver, including any
implicit waiver, from a provision of the code that applies to our
principal executive officer, principal financial officer, principal
accounting officer or controller, we will disclose the nature of
the amendment or waiver on our website, www.guidedinc.com, under
the “Investor Relations” tab under the tab “About
Us.” Also, we may elect to disclose the amendment or waiver
in a report on Form 8-K filed with the SEC.
Executive Compensation
Summary Compensation Table
The
following table lists specified compensation we paid or accrued
during each of the fiscal years ended December 31, 2019 and 2018 to
the Chief Executive Officer and our two other most highly
compensated executive officers, collectively referred to as the
“named executive officers,” in 2019:
2019 and 2018 Summary Compensation Table
Name and
Principal Position
Year
Salary
($)
Bonus
($)
Option
Awards
($)(1)
Total
($)
Gene S. Cartwright,
Ph.D.
2019
-
-
-
-
President, CEO, Acting CFO and
Director (2)
2018
-
-
-
-
Mark Faupel,
Ph.D.
2019
-
-
-
-
COO and
Director(3)(2)
2018
-
-
-
-
Richard Fowler,
2019
-
-
-
-
Senior Vice President of
Engineering(2)
2018
62,019
-
-
62,019
(1)
All amounts reported as accrued. Dr. Cartwright, Dr. Faupel, and
Mr. Fowler have elected not to get paid a salary, due to our cash
position.
(2)
On December 8, 2016, the board of directors appointed Dr. Faupel as
our new COO and director. For 2019 and 2018, Dr. Cartwright did not
receive salary compensation. As previously disclosed, on July 20,2018, the Company entered into an exchange agreement and promissory
note with Dr. Cartwright. The agreements were entered into in order
to extinguish and restructure current amounts owed to Dr.
Cartwright. In the exchange agreement Dr. Cartwright, agreed to
exchange outstanding amounts due to him for loans, interest, bonus,
salary and vacation pay in the amount of $1,621,499 for $319,204
promissory note. Pursuant to the exchange agreement the note will
bear interest at 6%. In addition, Dr. Cartwright will receive 125
stock options, with 31 vesting immediately and the remaining
vesting monthly over three years. 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 schedule below summarizes the
detail of outstanding amounts:
For
Dr. Cartwright:
Salary
$337
Bonus
675
Vacation
-
Interest on
compensation
59
Loans to
Company
528
Interest on
loans
22
Total
outstanding
$1,621
Amount
forgiven
1,302
Promissory
note issued in exchange
319
For
2019 and 2018, Dr. Faupel did not receive salary compensation. He
received no bonus in the years ended December 31, 2019 and 2018. As
previously disclosed, on July 24, 2018, the Company entered into an
exchange agreement and promissory note with Dr. Faupel. The
agreements were entered into in order to extinguish and restructure
current amounts owed to Dr. Faupel. In the exchange agreement Dr.
Faupel, agreed to exchange outstanding amounts due to him for
loans, interest, bonus, salary and vacation pay in the amount of
$660,895 for $207,111 promissory note. Pursuant to the exchange
agreement the note will bear interest at 6%. In addition, Dr.
Faupel will receive 94 stock options, with 31 vesting immediately
and the remaining vesting monthly over three years. Dr. Faupel will
also receive 560 options at $200.00 shall owe Dr. Faupel $113,000.
As a result of the exchange agreement, the Company recorded a gain
for extinguishment of debt of $199,079 and a capital contribution
of $234,990. As of December 31, 2019, Dr. Faupel’s total
undiscounted cash flow amount due was approximately $256,825
including interest. The schedule below summarizes the detail of
outstanding amounts:
48
For
Dr. Faupel:
Salary
$134
Bonus
20
Vacation
95
Interest on
compensation
67
Loans to
Company
196
Interest on
loans
149
Total
outstanding
$661
Amount
forgiven
454
Promissory
note issued in exchange
207
For
2019 and 2018, Mr. Fowler accrued base salary of nil and $62,019.
On March 2016, Mr. Fowler began working half-time and agreed to
reduce his base salary compensation to $107,500 from $215,000 in
2015. For both years he received the usual and customary company
benefits. He received no bonus in the years ended December 31, 2019
and 2018. In 2015, he received options to purchase 2 shares of
common stock, which vest over 48 months. As of December 31, 2019,
Mr. Fowler’s total deferred salary plus interest was
approximately $521,389.
Our
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 our board of directors, but incentive stock options were
granted at an exercise price equal to the fair market value of our
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 our 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.
49
2018 Stock Option Plan
Overview Our
stockholders approved and adopted the Guided Therapeutics, Inc.
2018 Stock Option Plan (the “Plan”) and the material
terms thereunder at the annual meeting of our stockholders in 2018.
A total of 2,500,000 shares of common stock are reserved for
issuance under the Plan.
Administration
Our Board or a committee of at least
two people as our Board may appoint (the “Committee”)
administer the Plan. The Committee has the authority to determine
the terms and conditions of any agreements evidencing any awards
granted under the Plan and to adopt, alter and repeal rules,
guidelines and practices relating to the Plan. The Committee has
full discretion to administer and interpret the Plan and to adopt
such rules, regulations and procedures as it deems necessary or
advisable and to determine, among other things, the time or times
at which the awards may be exercised and whether and under what
circumstances an award may be exercised.
Eligibility
Employees, directors, officers,
advisors or consultants of our company or our affiliates are
eligible to participate in the Plan. The Committee has the sole and
complete authority to determine who will be granted an award under
the Plan, however, it may delegate such authority to one or more
officers of the Company under the circumstances set forth in the
Plan.
Number of
Shares Authorized The Plan
provides for an aggregate of 2,500,000 shares of common stock to be
available for awards. If an award is forfeited or if any option
terminates, expires or lapses without being exercised, the shares
of our common stock subject to such award will again be made
available for future grant. Shares that are used to pay the
exercise price of an option or that are withheld to satisfy the
plan participant’s tax withholding obligation will not be
available for re-grant under the Plan. If there is any change in
our corporate capitalization, the Committee in its sole discretion
may make substitutions or adjustments to the number of shares
reserved for issuance under the Plan, the number of shares covered
by awards then outstanding under the Plan, the limitations on
awards under the Plan, the exercise price of outstanding options
and such other equitable substitution or adjustments as it may
determine appropriate.
Term The
Plan has a term of ten years and no further awards may be granted
under the Plan after that date.
Awards
Available for Grant The
Committee may grant awards of Non-Qualified Stock Options,
Incentive (qualified) Stock Options, Stock Appreciation Rights,
Restricted Stock, Restricted Stock Units, Stock Bonus Awards or any
combination of the foregoing; provided, that the Committee may not
grant to any one person in any one calendar year Awards (i) for
more than 500,000 Common Shares in the aggregate or (ii) payable in
cash in an amount to exceed $25,000 in the
aggregate.
50
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
Our
board recognizes that related person transactions present a
heightened risk of conflicts of interest. The audit committee has
the authority to review and approve all related party transactions
involving our directors or executive officers.
Under
the policy, when management becomes aware of a related person
transaction, management reports the transaction to the audit
committee and requests approval or ratification of the transaction.
Generally, the audit committee will approve only related party
transactions that are on terms comparable to those that could be
obtained in arm’s length dealings with an unrelated third
person. The audit committee will report to the full board all
related person transactions presented to it. Based on the
definition of independence of the NASDAQ Stock Market, the board
has determined that Mr. James and Dr. Imhoff are independent
directors.
John
E. Imhoff is one of our directors. In June 2015, Dr. Imhoff agreed
to exchange certain of his warrants, originally issued in December
2014 and exercisable for 1 share of our common stock, for two new
warrants that, unlike the original warrant, do not contain any
price or share reset provisions. Each new warrant is exercisable
for the same number of shares of our common stock as the original
warrant, at any time until December 2, 2020. The exercise price of
the first new warrant is $57,600 per share and the second new
warrant is $70,400 per share but, aside from the exercise price,
the new warrants are identical in terms to each other. As
additional consideration, we issued Dr. Imhoff an additional 1
share of common stock. Dr. Imhoff participated on terms equal to
those of other holders of the December 2014 warrants. As a result
of these transactions, Dr. Imhoff’s beneficial ownership of
our common stock increased from approximately 11.7% immediately
prior to the exchange, to approximately 11.8% immediately
afterward.
In
September 2015, Dr. Imhoff participated in our Series C preferred
stock issuance by exchanging all of his shares of Series B
preferred stock and investing $300,000 in cash, for a total of
1,067 shares of Series C preferred stock and warrants to purchase
211 shares of common stock. Dr. Imhoff participated on terms equal
to those of other Series C investors. As a result of these
transactions, Dr. Imhoff’s beneficial ownership of our common
stock increased from approximately 14% immediately prior to his
first acquisition of shares of Series C preferred stock, to 25%
immediately afterward.
On
March 11, 2016, Dr. Imhoff received 1 share of common stock as a
dividend on his Series B preferred stock (previously accrued but
unpaid), in accordance with the terms of the Series B preferred
stock.
In
April 2016, Dr. Imhoff exchanged his shares of Series C preferred
stock for a total of 2,400.75 shares of Series C1 preferred stock
and 16 shares of common stock. Dr. Imhoff participated on terms
equal to those of other Series C1 investors. As a result of this
transaction, Dr. Imhoff’s beneficial ownership of our common
stock increased from approximately 25% immediately prior to the
transaction, to 77% immediately afterward.
In
June 2016, Dr. Imhoff agreed to exchange certain of his warrants,
exercisable for 6 shares of our common stock and subject to certain
anti-dilution provisions, in exchange for new warrants, exercisable
for 11 shares of our common stock, but without those anti-dilution
provisions. Dr. Imhoff will be required to surrender his old
warrants upon consummation of our next financing resulting in net
cash proceeds to us 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 our common stock is not listed on
a national securities exchange, and will expire five years from the
date of issuance.
On
September 6, 2016, we entered into a royalty agreement with Dr.
Imhoff and another party. Pursuant to the royalty agreement, in
exchange for a payment of $50,000 by Dr. Imhoff and the other
party, we granted them a royalty on future sales of our single-use
cervical guides. The royalty rate was initially $0.10 per
disposable, until October 2, 2016, at which point the royalty rate
increased to $0.20 per disposable. Any royalty payments will be
split evenly between Dr. Imhoff and the other party.
Lynne
Imhoff (no relation) currently beneficially owns in excess of 10%
of our outstanding common stock. In September 2015, Ms. Imhoff
participated in our Series C preferred stock issuance by exchanging
all of her shares of Series B preferred stock and investing
$125,000 in cash, for a total of 300 shares of Series C preferred
stock and warrants to purchase 1 shares of common stock. Ms. Imhoff
participated on terms equal to those of other Series C investors.
As a result of these transactions, Ms. Imhoff’s beneficial
ownership of our common stock increased from approximately 2%
immediately prior to her first acquisition of shares of Series C
preferred stock, to 4% immediately afterward.
In
April 2016, Ms. Imhoff exchanged her shares of Series C preferred
stock for a total of 675 shares of Series C1 preferred stock and 5
shares of common stock. Ms. Imhoff participated on terms equal to
those of other Series C1 investors. As a result of this
transaction, Ms. Imhoff’s beneficial ownership of our common
stock increased from approximately 4% immediately prior to the
transaction, to 45% immediately afterward.
James Clavijo is one of our
consultants. On
June 23, 2020, we entered into an exchange agreement with Mr.
Clavijo. Based on this agreement we exchanged outstanding payables,
in the amount of $135,213 of debt outstanding for: $10,213 in cash;
500,000 restricted common stock shares; and 250,000 warrants issued
to purchase common stock shares at a strike price of
$0.50.
The
following table lists information regarding the beneficial
ownership of our equity securities as of September 3, 2020 by (1)
each person whom we know to beneficially own more than 5% of the
outstanding shares of our common stock, (2) each director, (3) each
officer named in the summary compensation table below, and (4) all
directors and executive officers as a group. Unless otherwise
indicated, the address of each officer and director is 5835
Peachtree Corners East, Suite B, Norcross, Georgia30092.
Common Stock
(2)
Series E
Preferred Stock (3)
Series
D Preferred Stock (4)
Series C1
Preferred Stock (5)
Series C2
Preferred Stock (6)
Name and Address
of Beneficial Owner (1)
Number of
Shares
Percentag
Number of
Shares
Percentage
Number of
Shares
Percentage
Number of
Shares
Percentage
Number of
Shares
Percentage
John E. Imhoff
(7)
10,957,813
50.47%
300
39.22%
-
-
2,400.75
73.59%
Lynne Imhoff
(8)
1,350,000
9.35%
-
-
675
64.33%
-
-
Michael C. James/Kuekenhof Equity
Fund, LLP (9)
30,264
*
-
-
-
-
-
-
Gene Cartwright
(10)
857,171
6.19%
50
6.54%
-
-
-
-
Richard L. Fowler
(11)
-
*
-
-
-
-
-
-
Mark L. Faupel
(12)
1,345,950
9.37%
38
4.97%
-
-
299.25
9.17%
Richard Blumberg
(13)
2,335,260
16.37%
-
-
-
-
-
-
Rosalind Master Fund
(14)
3,285,859
20.74%
250
15.38%
250
32.68%
-
-
-
-
K2 Medical / Shandong
(15)
3,810,540
25.40%
-
-
-
-
-
-
Auctus (16)
9,275,000
42.41%
6.46%
-
-
-
-
-
-
Flynn D. Case Living Trust
(17)
1,792,909
12.81%
-
-
-
-
-
-
FCMI (18)
2,000,000
500
30.76%
All directors and executive
officers as a group (4 persons) (19)
13,191,197
55.54%
388
52.57%
-
-
2,700.75
82.75%
(*)
Less
than 1%
(1)
Except
as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all
shares of common stock.
(2)
Percentage ownership is based on 13,096,066 shares of common stock
outstanding as of September 3, 2020. Beneficial ownership is
determined in accordance with the rules of the SEC, based on
factors that include voting and investment power with respect to
shares. Shares of common stock subject to convertible securities
convertible or exercisable within 60 days after the record date,
are deemed outstanding for purposes of computing the percentage
ownership of the person holding those securities but are not deemed
outstanding for purposes of computing the percentage ownership of
any other person. Note that certain of our outstanding securities,
including certain warrants and the shares of Series C1 preferred
stock held by the persons listed in this table, have anti-dilution
“ratchet” or “price-protection” provisions
that, when triggered, will increase the number of shares of common
stock underlying such securities. Subject to customary exceptions,
these provisions are triggered anytime we issue shares of common
stock to third parties at a price lower than the then-current
conversion price or exercise price of the subject securities. As a
result, the beneficial ownership reported in this table is only as
of the date presented, and the beneficial ownership amounts of the
persons in this table may increase on a future date, even though
such persons have not actually acquired any additional shares of
common stock. The number of shares of Common Stock excludes those
underlying the Warrants, Preferred Stocks and Convertible Notes,
the conversion/exercise of which may not be effected to the extent
such conversion/exercise would result in the holder’s
aggregate beneficial ownership, together with that of all the
holder’s affiliates, to exceed 4.99% of the Company’s
issued and outstanding shares of Common Stock.
(3)
As of September 3, 2020, there were 1,635.50 shares of Series E
preferred stock shares that will be issued, and each such share was
convertible into approximately 4,000 shares of common
stock.
52
(4)
As of September 3, 2020, there were 763 shares of Series D
preferred stock shares that will be issued, and each such share was
convertible into approximately 3,000 shares of common
stock.
(5)
As of September 3, 2020, there were 1,049.25 shares of Series C1
preferred stock outstanding, and each such share was convertible
into approximately 2,000 shares of common stock. Three shareholders
elected to convert 3,263.00 of their Series C1 preferred stock for
Series C2 preferred stock.
(6)
As of September 3, 2020, there were 3,262.25 shares of Series C2
preferred stock outstanding, and each such share was convertible
into approximately 2,000 shares of common stock.
(7)
Shares of common stock consist of 2,342,285 shares of common stock
directly held, 2,899,255 shares issuable upon exercise of warrants,
14,773 shares subject to options, 900,000 shares issuable upon
conversion of 300 shares of Series D preferred stock shares and
4,801,500 shares issuable upon conversion of 2,400.75 shares of
Series C2 preferred stock. Dr. Imhoff is on the board of
directors.
(8)
Shares of common stock consist of 1,350,000 shares issuable upon
conversion of 675.00 shares of Series C1 preferred
stock.
(9)
Shares of commons stock consist of 7,745 shares of common stock
directly held and 14,773 shares issuable upon exercise of warrants.
Mr. James is on the board of directors.
(10)
Shares of commons stock consist of 107,171 shares of common stock
directly held, 200,000 shares issuable upon exercise of warrants,
150 ,000 shares issuable upon
conversion of 50 shares of Series D preferred stock shares
and 400,000 shares subject
to options. Dr. Cartwright is
the CEO and on the board of directors.
(11)
Mr. Fowler is named in the summary compensation table
.
(12)
Shares of common stock consist of 81,450 shares of common stock
directly held, 152,000 shares issuable upon exercise of warrants,
400,000 shares subject to options, 114,000 shares issuable upon conversion of 38 shares
of Series D preferred stock shares and 598,500 shares issuable upon
conversion of 299.25 shares of Series C2 preferred stock. Dr.
Faupel is the COO and on the board of
directors.
(13)
Shares of commons stock consists of 1,167,630 shares of common
stock directly held, and 1,167,630 shares issuable upon exercise of
warrants.
(14)
Shares of commons stock consists of 535,859 shares of common stock
directly held, and 1,000,000 shares issuable upon exercise of
warrants , 1,000,000 shares
issuable upon conversion of 250.00 shares of Series E preferred
stock and 750,000 shares issuable upon conversion of 250 shares of
Series D preferred stock.
(15)
Shares of commons stock consists of 1,905,270 shares of common
stock directly held, and 1,905,270 shares issuable upon exercise of
warrants.
(16)
Shares of commons stock consists of 500,000 of common stock
directly held and 8,775,000 shares issuable upon exercise of
warrants.
(17)
Shares of commons stock consists of 896,453 shares of common stock
directly held, and 896,456 shares issuable upon exercise of
warrants.
(18)
Shares of commons stock consists of 2,000,000 shares issuable upon conversion of 500
shares of Series E preferred stock.
(19)
Shares of commons stock consists of 2,538,652 shares of common
stock directly held, 3,259,000 shares issuable upon exercise of
warrants, 829,545 shares subject to options, 1,164
,000 shares issuable upon conversion
of 388 shares of Series D preferred stock shares
and
5,400,000 shares issuable upon conversion of 2,700.75 shares of
Series C2 preferred stock.
Our
Certificate of Incorporation authorizes the issuance of up to
3,000,000,000 shares of common stock, par value $0.001 per
share, and 5,000,000 shares of preferred stock, par value
$0.001 per share. As of the date of this prospectus, we had
13,096,066 shares of common stock issued and outstanding, 286
shares of Series C preferred stock, 1,049.25 shares of Series C1
preferred stock, 3,262.25 shares of Series C2 preferred stock
issued and outstanding, ; 763 shares of Series D preferred stock
and 1,635.50 shares of Series E preferred stock.
Common Stock
Holders
of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have
cumulative voting rights. An election of directors by our
stockholders is determined by a plurality of the votes cast by the
stockholders entitled to vote on the election. Other matters are
decided by the affirmative vote of our stockholders having a
majority in voting power of the votes cast by the stockholders
present or represented and voting on such matter. Holders of common
stock are entitled to receive proportionately any dividends as may
be declared by our board of directors, subject to any preferential
dividend rights of outstanding preferred stock.
In
the event of our liquidation or dissolution, the holders of common
stock are entitled to receive proportionately all assets available
for distribution to stockholders after the payment of all debts and
other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of common stock are
subject to and may be adversely affected by the rights of the
holders of shares of any series of preferred stock that we may
designate and issue in the future.
Preferred Stock
Our
Certificate of Incorporation authorizes the issuance of
5,000,000 shares of blank check preferred stock with such
designation, rights and preferences as may be determined from time
to time by our board of directors. As of the date of this
prospectus, there are 1,635.50 shares of Series E preferred stock,
738 shares of Series D preferred stock, 286 shares of Series C
preferred stock, 1,049.25 shares of Series C1 preferred stock and
3,262.25 shares of Series C2 preferred stock outstanding.
Accordingly, our board of directors is empowered, without
stockholder approval, to issue preferred stock with dividend,
liquidation, redemption, voting or other rights which could
adversely affect the voting power or other rights of the holders of
common stock. We may issue some or all of the preferred stock to
effect a business transaction. In addition, the preferred stock
could be utilized as a method of discouraging, delaying or
preventing a change in control of us.
Series C Convertible Preferred Stock
Pursuant
to the Series C certificate of designations, shares of Series C
preferred stock are convertible into common stock by their holder
at any time and may be mandatorily convertible upon the achievement
of specified average trading prices for our 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 our common stock 15 trading days after any reverse
stock split of our common stock, and 5 trading days after any
conversions of our 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,
our common stock. In addition, upon conversion of the Series C
preferred stock prior to the Dividend End Date, we 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. The Series C preferred stock generally has no
voting rights except as required by Delaware law. Upon our
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 our common stock.
Series C1 Convertible Preferred Stock
The
Series C1 preferred stock has terms that are substantially the same
as the Series C preferred stock, except that the Series C1
preferred stock does not pay dividends (unless and to the extent
declared on the common stock) or at-the-market “make-whole
payments” and, while it has the same anti-dilution
protections afforded the Series C preferred stock, it does not
automatically reset in connection with a reverse stock split or
conversion of our outstanding convertible debt.
54
Series C2 Convertible Preferred Stock
The
terms of the Series C2 Preferred Stock are substantially the same
as the Series C1 Preferred Stock, except that (i) shares of Series
C1 preferred stock may not be convertible into the Company’s
common stock by their holder for a period of 180 days following the
date of the filing of the Certificate of Designation (the
“Lock-Up Period”); (ii) the Series C2 preferred stock
has the right to vote as a single class with the Company’s
common stock on an as-converted basis, notwithstanding the Lock-Up
Period; and (iii) the Series C2 preferred stock will automatically
convert into that number of securities sold in the next Qualified
Financing (as defined in the Exchange Agreement) determined by
dividing the stated value ($1,000 per share) of such share of
Series C2 preferred stock by the purchase price of the securities
sold in the Qualified Financing.
Series D Convertible Preferred Stock
As of
the date of this prospectus, 6,000 shares have been designated as
Series E Convertible Preferred Stock (“Series D Preferred
Stock”), of which 763 shares are issued and outstanding. The
following is a summary of the rights, privileges and preferences of
the Series D Preferred Stock, which such summary is qualified in
its entirety by the Series D Certificate of
Designation.
Each
share of Series D Preferred Stock has a par value of $0.001 per
share and a stated value equal to $750, subject to increase set
forth in its Certificate of Designation (the "Stated
Value").
Each
holder of Series D Preferred Stock is entitled to receive
cumulative dividends of 10% per annum, payable quarterly in cash
or, following the listing of the Company’s common stock on
certain Canadian trading markets and at the option of the Company,
shares of Common Stock.
Upon
any liquidation, dissolution or winding-up of the Company, the
holders shall be entitled to receive an amount equal to the Stated
Value, plus any accrued and unpaid dividends thereon and any other
fees or liquidated damages then due and owing before any
distribution or payment shall be made to the holders of common
stock and any other securities junior to Series D Preferred
Stock.
Each
share of Series D Preferred Stock is convertible, at any time for a
period of 5 years after issuance, into that number of shares of
Common Stock. The conversion price for the Series D Preferred Stock
is $0.25, subject to adjustment set forth in the Series D
Certificate of Designation (the “Series D Conversion
Price”). The conversion of Series D Preferred Stock is
subject to a 4.99% beneficial ownership limitation, which may be
increased to 9.99% at the election of the holder of the Series D
Preferred Stock. If the average of the VWAPs (as defined under the
Series D Certificate of Designation) for any consecutive 5 trading
day period (“Series D Measurement Period”) exceeds 200%
of the then Series D Conversion Price and the average daily trading
volume of the Common Stock on the primary trading market exceeds a
number of shares per trading day during the Series D Measurement
Period (subject to adjustments), the Company may redeem the then
outstanding Series D Preferred Stock, for cash in an amount equal
to aggregate Stated Value then outstanding plus accrued but unpaid
dividends.
Except
for certain matters affecting the rights of Series D Preferred
Stock or as otherwise required by law, the holders of Series D
Preferred Stock do not have voting rights.
Series E Convertible Preferred Stock
As of
the date of this prospectus, 6,000 shares have been designated as
Series E Convertible Preferred Stock (“Series E Preferred
Stock”), of which 1,635.5 shares are issued and outstanding.
The following is a summary of the rights, privileges and
preferences of the Series E Preferred Stock, which such summary is
qualified in its entirety by the Series E Certificate of
Designation.
Each
share of Series E Preferred Stock has a par value of $0.001 per
share and a stated value equal to $1,000, subject to increase set
forth in its Certificate of Designation (the "Stated
Value").
Each
holder of Series E Preferred Stock is entitled to receive
cumulative dividends of 8% per annum, payable annually in cash or,
following the listing of the Company’s common stock on
certain Canadian trading markets and at the option of the Company,
shares of Common Stock.
Upon
any liquidation, dissolution or winding-up of the Company, the
holders shall be entitled to receive an amount equal to the Stated
Value, plus any accrued and unpaid dividends thereon and any other
fees or liquidated damages then due and owing before any
distribution or payment shall be made to the holders of common
stock and any other securities junior to Series D Preferred
Stock.
55
Each
share of Series E Preferred Stock is convertible, at any time for a
period of 5 years after issuance, into that number of shares of
Common Stock. The conversion price for the Series E Preferred Stock
is $0.25, subject to adjustment set forth in the Series E
Certificate of Designation (the “Series E Conversion
Price”). The conversion of Series E Preferred Stock is
subject to a 4.99% beneficial ownership limitation, which may be
increased to 9.99% at the election of the holder of the Series E
Preferred Stock. If the average of the VWAPs (as defined under the
Series E Certificate of Designation) for any consecutive 5 trading
day period (“Series E Measurement Period”) exceeds 200%
of the then Series E Conversion Price and the average daily trading
volume of the Common Stock on the primary trading market exceeds a
number of shares per trading day during the Series E Measurement
Period (subject to adjustments), the Company may redeem the then
outstanding Series E Preferred Stock, for cash in an amount equal
to aggregate Stated Value then outstanding plus accrued but unpaid
dividends.
Except
for certain matters affecting the rights of Series E Preferred
Stock or as otherwise required by law, the holders of Series E
Preferred Stock do not have voting rights.
Warrants
As
of the date of this prospectus, warrants to purchase 66,615,856
shares of our common stock are issued and outstanding. Below is a
summary of the warrants we have issued relating to securities we
are registering in this prospectus.
Warrants issued in Series D Financing
We
issued warrants to purchase an aggregate of 1,526,000 shares of our
common stock (the “Series D Warrants”) with a strike
price of $0.25 and a term of five years. Such warrants are
exercisable on the date of issuance and may be exercised cashlessly
if there is no effective registration statement covering the Common
Stock issuable upon exercise of such warrants. These Series D
Warrants contain a 4.99% beneficial ownership blocker which may be
increased to 9.99% at the holder’s election.
We
also issued Series D Warrants to purchase an aggregate of 1,576,000
shares of our common stock with a strike price of $0.75 and a term
of five years. Such warrants are exercisable on the date of
issuance and may be exercised cashlessly if there is no effective
registration statement covering the Common Stock issuable upon
exercise of theses Series D Warrants. These Series D Warrants
contain a 4.99% beneficial ownership blocker which may be increased
to 9.99% at the holder’s election.
Auctus Warrants
On
December 17, 2019, we entered into a securities purchase agreement
and convertible note with Auctus. In connection with the closing of
the first tranche of the Auctus Note, we issued a five-year common
stock purchase warrant (the “Auctus Warrant”) to
Auctus. Such warrant entitles its holder to purchase 7,500,000
shares of the Common Stock at an exercise price of $0.20, subject
to certain adjustments as provided therein. If, during the period
from the issuance date of the Auctus Warrant to December 21, 2021
(or December 17,2024 if an Event of Default occurs under the Auctus
Note), we sell any Common Stock or securities entitling any person
to acquire shares of Common Stock at an effective price per share
(the “Base Share Price”) less than the then exercise
price of such warrant, then the exercise price of the warrant shall
be reduced at the option of the holder and only reduced to equal
the Base Share Price, and the number of Warrant Shares issuable
thereunder shall be increased proportionately. The Auctus Warrant
may be exercised cashlessly if there is no effective registration
statement covering the Common Stock issuable upon exercise of the
Auctus Warrant. The Auctus Warrant contains a 4.99% beneficial
ownership blocker.
Warrants Issued Pursuant to the Exchange Agreements
On
December 30, 2019, we entered into exchange agreements with K2
Medical LLC, Mr. Blumberg, Mr. Imhoff, Mr. Case, Mr. Grimm, Mr.
Mamula, Mr. Gould and Mr. James. Pursuant to these agreements, we
issued 4,713,603 warrants to purchase common stock shares at a
strike price of $0.20.
On
December 30, 2019, we entered into exchange agreements with K2
Medical LLC, Mr. Imhoff, FGP Protective Opportunity Master Fund
SPC, Ms. Rosenstock, Mr. James and Mr. Blumberg. Pursuant to these
agreements, we issued 1,109,817 warrants to purchase common stock
shares at a strike price of $0.25.
On
December 30, 2019, we entered into exchange agreements with K2
Medical LLC, Mr. Imhoff, FGP Protective Opportunity Master Fund
SPC, Ms. Rosenstock, Mr. James and Mr. Blumberg. Pursuant to these
agreements we issued 1,109,817 warrants to purchase common stock
shares at a strike price of $0.75.
The
warrants issued pursuant to the December 2019 exchange agreements
are exercisable on the date of issuance for five years. Such
warrants may be exercised cashlessly if there is no effective
registration statement covering the Common Stock issuable upon
exercise of these warrants. These warrants contain a 4.99%
beneficial ownership blocker which may be increased to 9.99% at the
holder’s election.
56
On
June 23, 2020, we entered into an exchange agreement with Mr.
Clavijo. Pursuant to this agreement we issued 250,000 warrants to
purchase common stock shares at a strike price of
$0.50.
Delaware Anti-Takeover Law and Provisions of Certificate of
Incorporation and By-Laws
Delaware Anti-Takeover Law
We
are subject to Section 203 of the Delaware General Corporation
Law. Section 203 generally prohibits a public Delaware
corporation from engaging in a “business combination”
with an “interested stockholder” for a period of three
years after the date of the transaction in which the person became
an interested stockholder, unless:
●
prior
to the date of the transaction, the board of directors of the
corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an
interested stockholder;
●
upon
consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding
specified shares; or
●
at or
subsequent to the date of the transaction, the business combination
is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested
stockholder.
Section 203
defines a “business combination” to
include:
●
any
merger or consolidation involving the corporation and the
interested stockholder;
●
any
sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the assets of the corporation to or
with the interested stockholder;
●
subject
to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
●
subject
to exceptions, any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of
any class or series of the corporation beneficially owned by the
interested stockholder; or
●
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided
by or through the corporation.
In
general, Section 203 defines an “interested
stockholder” as any person that is:
●
the
owner of 15% or more of the outstanding voting stock of the
corporation;
●
an
affiliate or associate of the corporation who was the owner of 15%
or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date;
or
●
the
affiliates and associates of the above.
Under
specific circumstances, Section 203 makes it more difficult
for an “interested stockholder” to effect various
business combinations with a corporation for a three-year period,
although the stockholders may, by adopting an amendment to the
corporation’s Certificate of Incorporation or bylaws, elect
not to be governed by this section, effective 12 months after
adoption.
Our
Certificate of Incorporation and amended and restated bylaws do not
exclude us from the restrictions of Section 203. We anticipate
that the provisions of Section 203 might encourage companies
interested in acquiring us to negotiate in advance with our board
of directors since the stockholder approval requirement would be
avoided if a majority of the directors then in office approve
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder.
Certificate
of Incorporation and Amended and Restated
Bylaws
On
March 23, 2012, our board of directors approved and adopted our
amended and restated bylaws. Provisions of our second amended and
restated bylaws and our Certificate of Incorporation may delay or
discourage transactions involving an actual or potential change of
control or change in our management, including transactions in
which stockholders might otherwise receive a premium for their
shares, or transactions that our stockholders might otherwise deem
to be in their best interests. Therefore, these provisions could
adversely affect the price of our common stock. Among other things,
our Certificate of Incorporation and amended and restated
bylaws:
●
permit
our board of directors to issue up to 5,000,000 shares of preferred
stock, with any rights, preferences and privileges as they may
designate;
●
provide
that vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of
the stockholders having the right to vote as a single class may be
filled by a majority of the directors then in office, although less
than a quorum, or by a sole remaining director;
●
provide
that stockholders seeking to present proposals before a meeting of
stockholders or to nominate candidates for election as directors at
a meeting of stockholders must provide advance notice in writing,
and also specify requirements as to the form and content of a
stockholder’s notice;
●
do not
provide for cumulative voting rights, thereby allowing the holders
of a majority of the shares of common stock entitled to vote in any
election of directors to elect all of the directors standing for
election.
The
shares of common stock being offered by the selling stockholders
listed below (or their successors and assigns) were issued as
follows:
●
1,526,000
shares of common stock issued, 2,289,000 shares of common stock
issuable upon conversion of Series D Preferred Stock sold,
1,526,000 shares of common stock issuable upon exercise of certain
warrants at a strike price of
$0.25 , 1,526,000 shares of common stock issuable upon
exercise of certain warrants at a
strike price of $0.75 in the Series D Preferred Offering
during December 2019;
●
6,542,000
shares of common stock issuable upon conversion of Series E
Preferred Stock sold;
●
7,457,013
shares of common stock issued, 4,713,603 shares of common stock
issuable upon exercise of certain warrants issued at a strike price of $0.20 , 1,121,705
shares of common stock issuable upon exercise of the warrants
issued at a strike price of
$0.25, 1,121,705 shares of common stock issuable upon
exercise of the warrants issued at a
strike price of $0.75 and 250,000 shares of common stock
issuable upon exercise of the warrants issued at a strike price of
$0.50 pursuant to the Exchange Agreements;
●
4,666,667
shares of common stock issuable upon conversion and 7,500,000
shares of common stock issuable upon exercise of the warrants
issued at a strike price of $0.20 in
connection with the Auctus Note.
Summary of Offerings
Series D Financing
During
December 2019 and January 2020, we received equity investments in
the amount of $738,000. These investors received a total of
1,476,000 common stock shares and 1,476,000 warrants to purchase
common stock shares at a strike price of $0.25, 1,476,000
warrants.
We
agreed use commercially reasonable efforts to have its Common Stock
listed on the TSX Venture Exchange. Commencing on the date of
listing of the Common Stock on TSX Venture Exchange, each Series D
Investor has the right, upon 5 days’ notice to us, to
exchange its Series D Preferred into certain 12% Senior Secured
Debentures (the “Debentures”) on the basis of $1 Stated
Value of Series D Preferred for $1 principal amount of the
Debentures. The Debentures shall bear interest at 10% per annum,
payable quarterly in cash or, at our option, in shares of Common
Stock at the average of the 20 VWAPs (as defined in the Debentures)
immediately prior to the payment date.
Each
share of Series D Preferred is convertible, at any time for a
period of 5 years after issuance, into that number of shares of
Common Stock, determined by dividing the Stated Value by $0.25,
subject to certain adjustments set forth in the Series D
Certificate of Designation (the “Series D Conversion
Price”). The conversion of Series D Preferred is subject to a
4.99% beneficial ownership limitation, which may be increased to
9.99% at the election of the holder of the Series D Preferred. If
the average of the VWAPs (as defined in the Series D Certificate of
Designation) for any consecutive 5 trading day period
(“Series D Measurement Period”) exceeds 200% of the
then Series D Conversion Price and the average daily trading volume
of the Common Stock on the primary trading market exceeds a number
of shares per trading day during the Series D Measurement Period
(subject to adjustments), the Company may redeem the then
outstanding Series D Preferred, for cash in an amount equal to
aggregate Stated Value then outstanding plus accrued but unpaid
dividends .
The
Series D Warrants may be exercised cashlessly if there is no
effective registration statement covering the Common Stock issuable
upon exercise of the Series D Warrants. The Series D Warrants
contain a 4.99% beneficial ownership blocker which may be increased
to 9.99% at the holder’s election.
On
December 30, 2019, we also entered into a Security Agreement with
the Series D Investors (the “Series D Security
Agreement”) pursuant to which all obligations under the
Debentures and the Series D Certificate of Designation are secured
by all of our assets and personal properties.
On
December 30, 2019, we also entered into a Registration Rights
Agreement (the “Series D Registration Rights Agreement
“) with the Series D Investors pursuant to which we agreed to
file with the SEC, a registration statement on a Form S-3 (or on
other appropriate form if a Form S-3 is not available) covering the
Common Stock issuable upon conversion of the Debentures or exercise
of the Series D Warrants within 90 days of the date of the
Registration Rights Agreement and cause such registration statement
to be declared effective within 120 days of the date of the
Registration Rights Agreement. All reasonable expenses related to
such registration shall be borne by us.
58
Series E Financing
In
June and July 2020, we received equity investments in the amount of
$1,635,500. These investors received a total of 1,635.50 Series E
preferred stock.
Each
share of Series E Preferred is convertible, at any time for a
period of 5 years after issuance, into that number of shares of
Common Stock, determined by dividing the Stated Value by $0.25,
subject to certain adjustments set forth in the Series E
Certificate of Designation (the “Series E Conversion
Price”). The conversion of Series E Preferred is subject to a
4.99% beneficial ownership limitation, which may be increased to
9.99% at the election of the holder of the Series E Preferred. If
the average of the VWAPs (as defined in the Series E Certificate of
Designation) for any consecutive 5 trading day period
(“Series E Measurement Period”) exceeds 200% of the
then Series E Conversion Price and the average daily trading volume
of the Common Stock on the primary trading market exceeds a number
of shares per trading day during the Series E Measurement Period
(subject to adjustments), the Company may redeem the then
outstanding Series E Preferred, for cash in an amount equal to
aggregate Stated Value then outstanding plus accrued but unpaid
dividends .
Auctus Note
On
December 17, 2019, we 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% and 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 addition, Auctus will receive 7,500,000 five-year
common stock purchase warrants, at an exercise price of $0.20, on
the first tranche of $700,000. From the $700,000, received
$570,000, $65,000 went to attorney’s fees and Auctus Fund
Management, and $65,000 was paid for the partial payment of an
$89,250 promissory note that was issued on July 3, 2018 to Auctus.
At a future date, the second tranche of $400,000 will be received
when we register 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 December31, 2019, $700,000 remained outstanding and accrued interest of
$2,722.
In
the event (i) the we make a public announcement of certain merger
or consolidation or sale of substantially all of its assets or (ii)
any person (including our company) publicly announces a tender
offer to purchase 50% or more of the outstanding Common Stock, then
the Conversion Price shall equal the lower of (x) the Conversion
Price which would have been applicable before the date of such
announcement and (y) the Conversion Price that would otherwise be
in effect until the transaction is consummated or
abandoned.
We
shall include on each registration statement it files with the SEC
all the shares of Common Stock issuable upon conversion of the
Auctus Note and exercise of the Auctus Warrant (the “Auctus
Registrable Securities”). We will be subject to liquidated
damages of 25% of the outstanding principal balance of the Auctus
Note, but not less than $15,000, if it fails to comply with the
registration requirement.
Six
months following the date of the Auctus Note, Auctus shall have the
right to redeem all or a portion of the Auctus Note, up to the
maximum monthly redemption amount as set forth in the Auctus Note.
Payments for such redemption maybe made either in cash or shares or
a combination of both.
The
Auctus Warrant entitles its holder to purchase 7,500,000 shares of
the Common Stock at the Auctus Exercise Price, subject to certain
adjustments as provided in the Auctus Warrant. If we at any time
while the Auctus Warrant is outstanding, sells any Common Stock or
securities entitling any person to acquire shares of Common Stock
at an effective price per share less than the then Auctus Exercise
Price, then the Auctus Exercise Price shall be reduced at the
option of the holder and only reduced to equal the Base Share
Price, and the number of Warrant Shares issuable hereunder shall be
increased proportionately. The Auctus Warrant may be exercised
cashlessly if there is no effective registration statement covering
the Common Stock issuable upon exercise of the Auctus Warrant. The
Auctus Warrant contains a 4.99% beneficial ownership
blocker.
Pursuant
to the Auctus Security Agreement dated December 17, 2019, all our
obligations under the Auctus Note are secured by our assets and
personal properties, subordinate only to our obligations to GPB
Debt Holdings II LLC and senior to all other
obligations.
59
The Exchange Agreements
On
December 17, 2019, we also entered into a Registration Rights
Agreement (the “Auctus Registration Rights Agreement”)
with Actus pursuant to which, we agreed to file with the SEC a
registration statement covering the maximum number of the Auctus
Registrable Securities within 90 days of the date of the
Registration Rights Agreement and use its reasonable best efforts
to amend or file a new Registration Statement to cover all the
Registrable Securities as soon as practicable. All reasonable
expenses related to such registration shall be borne by
us.
On
December 30, 2019, we entered into an exchange agreement with K2
Medical. Based on this agreement we will exchange $790,544 of debt
outstanding for: 1,905,270 common stock shares; 496,602 warrants to
purchase common stock shares at a strike price of $0.20; 704,334
warrants to purchase common stock shares at a strike price of
$0.25; and 704,334 warrants to purchase common stock shares at a
strike price of $0.75.
On
December 30, 2019, we entered into an exchange agreement with Mr.
Blumberg. Based on this agreement we 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, we entered into an exchange agreement with Mr.
Case. Based on this agreement we will exchange $179,291 of debt
outstanding for: 896,455 common stock shares; and 896,456 warrants
to purchase common stock shares at a strike price of
$0.20.
On
December 30, 2019, we entered into an exchange agreement with Mr.
Grimm. Based on this agreement we 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, we entered into an exchange agreement with Mr.
Gould. Based on this agreement we 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, we entered into an exchange agreement with Mr.
Mamula. Based on this agreement we 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, we entered into an exchange agreement with Mr.
Imhoff. Based on this agreement we 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, we entered into an exchange agreement with Ms.
Rosenstock. Based on this agreement we 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.
On
June 23, 2020, we entered into an exchange agreement with Mr.
Clavijo. Based on this agreement we exchanged outstanding payables,
in the amount of $135,213 of debt outstanding for: $10,213 in cash;
500,000 restricted common stock shares; and 250,000 warrants issued
to purchase common stock shares at a strike price of
$0.50.
Selling Stockholder Table
The table below lists the selling stockholders and
other information regarding the beneficial ownership of the shares
of common stock by each of the selling stockholders. The table
below sets forth information as of the date of this prospectus, to
our knowledge, about the beneficial ownership of our common stock
by the selling stockholders both before and immediately after this
offering. Because
the selling stockholders may sell, transfer or otherwise dispose of
all, some or none of their shares of common stock, we cannot
determine the number of such shares that will be sold, transferred
or otherwise disposed of by the selling stockholders, or the amount
or percentage of shares of our common stock that will be held by
the selling stockholders upon termination of any particular
offering. See “Plan of Distribution.” For purposes of
the table below, we assume that the selling stockholders will sell
all of their shares of common stock.
60
Name of Selling Stockholder
C:
Number of Shares
of Common Stock Owned Prior to Offering
Maximum Number
of Shares of Common Stock Offered byt his Prospectus
Number of Shares
of Common Stock Owned After Offering
Percentage of
Common Stock Owned After Offering Assuming All Shares are
Sold (1)
Rosalind Master Fund L.P.
(2)
3,250,000
3,250,000
-
-
John Imhoff
(3)(4)(5)
10,900,010
6,098,510
4,801,500
36.66%
Jane Pire (6)
27,000
27,000
-
-
Timothy Pire
(7)
216,000
216,000
-
-
Gene Cartwright
(8)(9)
450,000
450,000
-
-
Mark Faupel
(10)(11)
940,500
342,000
598,500
4.57%
Dolores Maloof
(12)(13)
1,574,500
450,000
1,124,500
8.59%
Alberto Martin
(14)
45,000
45,000
-
-
Adrian Sakamoto
(15)
90,000
90,000
-
-
Vay Tham (16)
225,000
225,000
-
-
Erin Jones (17)
72,000
72,000
-
-
K2 Medical LLC
(18)(19)
3,810,270
3,762,989
47,281
*
Flynn Case (20)
896,456
896,456
-
-
Frederick W. Grimm
(21)
510,916
510,916
-
-
Bryan T. Mamula
(22)
195,770
195,770
-
-
John Gould (23)
1,112,272
1,112,272
-
-
FGP Protective Opportunity
Master
Fund SP (24)
582,176
582,176
-
-
Linda Rosenstock
(25)
200,000
200,000
-
-
Michael James
(26)(27)
15,501
15,491
10
*
Richard Blumberg
(28)(29)
2,328,000
2,335,260
7,260
*
Auctus Fund LLC
(30)(31)
12,840,929
12,586,667
254,262
1.94%
Gary S. Kaplan
(32)
100,000
100,000
-
-
Field Pro Fund Class
P
Enhanced Pension Plus Fund
(33)
2,000,000
2,000,000
-
-
Simply Put Financial Services Inc.
(34)
40,000
40,000
-
-
Steven J. Hammer
(35)
30,000
30,000
-
-
GHS Investment LLC
(36)
200,000
200,000
-
-
James Clavijo
(37)
790,000
790,000
-
-
Lorena R. Guerra
(38)
20,000
20,000
-
-
Alan Gruijc
(39)
200,000
200,000
-
-
Saus Peur Exploration Services Inc.
(40)
20,000
20,000
-
-
Webster Mrak and Blumberg Pension
Plan (41)
932,000
932,000
-
-
John Comerford
(42)
20,000
20,000
-
-
Natalia M. Castillo
(43)
20,000
20,000
-
-
Frederick G. Craft
(44)
320,000
320,000
-
-
Juan F. M. Castillo
(45)
60,000
60,000
-
-
Samantha Neff
(46)
40,000
40,000
-
-
Peyman Rezaire
(47)
1,000,000
1,000,000
-
-
*
less
than 1%
(1)
Based
upon 13,096,066 shares of common stock outstanding as of September3, 2020.
61
(2)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Rosalind Master Fund
L.P. consists of (i) 500,000 shares of common stock, (ii) 750,000
shares of common stock issuable upon conversion of Series D
Preferred Stock, (iii) 500,000 shares of common stock issuable upon
exercise of certain warrants at a
strike price of $0.25 , (iv) 500,000 shares of common stock
issuable upon exercise of certain warrants at a strike price of $0.75 in connection with the
Series D Offering and (v) 1,000,000 shares of common stock issuable
upon conversion of Series E preferred stock. Rosalind Master
Fund L.P. holds the registrable shares through Investor Company ITF
Rosalind Master Fund L.P.
(3)
The
number of shares of common stock owned by John Imhoff prior to this
offering consists of 2,299,255 shares
of common stock directly held, 2,899,255 shares issuable upon
exercise of warrants issued pursuant to the Exchange Agreements,
900,000 shares issuable upon conversion of 300 shares of Series D
preferred stock and 4,801,500 shares issuable upon conversion of
2,400.75 shares of Series C2 preferred stock. Dr. Imhoff is a
director of the Company.
(4)
The
number of shares of common stock to be offered pursuant to this
prospectus by Dr. Imhoff consists of the following securities
issued or issuable in connection with the Series D Offering: (i)
600,000 shares of common stock, (ii) 900,000 shares of common stock
issuable upon conversion of Series D Preferred Stock, (iii) 600,000
shares of common stock issuable upon exercise of certain warrants
at a strike price of $0.25 ,
and (iv) 600,000 shares of common stock issuable upon exercise of
certain warrants at a strike price of
$0.75.
(5)
The
number of shares of common stock to be offered pursuant to this
prospectus by Dr. Imhoff also consists of the following securities
issued or issuable pursuant to the Exchange Agreements: (i)
1,699,255 shares of common stock, (ii) 1,497,367 shares of common
stock issuable upon exercise of certain warrants issued
at a strike price of $0.20 ,
(iii) 100,944 shares of common stock issuable upon exercise of the
warrants issued at a strike price of
$0.25, and (iv) 100,944 shares of common stock issuable upon
exercise of the warrants issued at a
strike price of $0.75.
(6)
The
number of shares of common stock owned prior to this offering and
offered pursuant to this prospectus by Jane Pire consists of the
following securities issued or issuable in connection with the
Series D Offering: (i) 6,000 shares of common stock, (ii) 9,000
shares of common stock issuable upon conversion of Series D
Preferred Stock, (iii) 6,000 shares of common stock issuable upon
exercise of certain warrants at a
strike price of $0.25 , and (iv) 6,000 shares of common
stock issuable upon exercise of certain warrants at a strike price of $0.75.
(7)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Timothy Pire consists
of the following securities issued or issuable in connection with
the Series D Offering: (i) 48,000 shares of common stock, (ii)
72,000 shares of common stock issuable upon conversion of Series D
Preferred Stock, (iii) 48,000 shares of common stock issuable upon
exercise of certain warrants at a
strike price of $0.25 , and (iv) 48,000 shares of common
stock issuable upon exercise of certain warrants at a strike price of $0.75.
(8)
The
number of shares of common stock owned by Gene Cartwright prior to
this offering consists of 100,000
shares of common stock directly held, 200,000 shares issuable upon
exercise of warrants, 150,000 shares issuable upon conversion of 50
shares of Series D preferred stock shares. Ms. Cartwright is the
Chief Executive Officer, Acting Chief Financial Officer and a
director of the Company.
(9)
The
number of shares of common stock to be offered pursuant to this
prospectus by Gene Cartwright consists of the following securities
issued or issuable in connection with the Series D Offering: (i)
100,000 shares of common stock, (ii) 150,000 shares of common stock
issuable upon conversion of Series D Preferred Stock, (iii) 100,000
shares of common stock issuable upon exercise of certain warrants
at a strike price of $0.25 ,
and (iv) 100,000 shares of common stock issuable upon exercise of
certain warrants at a strike price of
$0.75..
(10)
The number of shares of common stock owned by Mark Faupel prior to
this offering consists of 76,000 shares of common stock directly held,
152,000 shares issuable upon exercise of warrants, 114,000 shares
issuable upon conversion of 38 shares of Series D preferred stock
and 598,500 shares issuable upon conversion of 299.25 shares of
Series C2 preferred stock. Dr. Faupel is the Chief Operating
Officer and a director of the Company.
(11)
The
number of shares of common stock to be offered pursuant to this
prospectus by Mark Faupel consists of the following securities
issued or issuable in connection with the Series D Offering: (i)
76,000 shares of common stock, (ii) 144,000 shares of common stock
issuable upon conversion of Series D Preferred Stock, (iii) 76,000
shares of common stock issuable upon exercise of certain warrants
at a strike price of $0.25 ,
and (iv) 76,000 shares of common stock issuable upon exercise of
certain warrants at a strike price of
$0.75.
(12)
The number of shares of common stock owned by Dolores Maloof prior
to this offering consists of 100,000 shares of common stock, 150,000 shares of
common stock issuable upon conversion of Series D Preferred Stock,
200,000 shares of common stock issuable upon exercise of warrants,
and 1,124,500 shares issuable upon conversion of 562.25 shares of
Series C2 preferred stock.
(13)
The
number of shares of common stock to be offered pursuant to this
prospectus by Dolores Maloof consists of the following securities
issued or issuable in connection with the Series D Offering: (i)
100,000 shares of common stock, (ii) 150,000 shares of common stock
issuable upon conversion of Series D Preferred Stock, (iii) 100,000
shares of common stock issuable upon exercise of certain warrants
at a strike price of $0.25 ,
and (iv) 100,000 shares of common stock issuable upon exercise of
certain warrants at a strike price of
$0.75.
(14)
The
number of shares of common stock offered pursuant to this
prospectus by Alberto Martin consists of the following securities
issued or issuable in connection with the Series D Offering: (i)
10,000 shares of common stock, (ii) 15,000 shares of common stock
issuable upon conversion of Series D Preferred Stock, (iii) 10,000
shares of common stock issuable upon exercise of certain warrants
at a strike price of $0.25 ,
and (iv) 10,000 shares of common stock issuable upon exercise of
certain warrants at a strike price of
$0.75.
62
(15)
The
number of shares of common stock offered pursuant to this
prospectus by Adrian Sakamoto consists of the following securities
issued or issuable in connection with the Series D Offering: (i)
20,000 shares of common stock, (ii) 30,000 shares of common stock
issuable upon conversion of Series D Preferred Stock, (iii) 20,000
shares of common stock issuable upon exercise of certain warrants
at a strike price of $0.25 ,
and (iv) 20,000 shares of common stock issuable upon exercise of
certain warrants at a strike price of
$0.75.
(16)
The
number of shares of common stock offered pursuant to this
prospectus by Vay Tham consists of the following securities issued
or issuable in connection with the Series D Offering: (i) 50,000
shares of common stock, (ii) 75,000 shares of common stock issuable
upon conversion of Series D Preferred Stock, (iii) 50,000 shares of
common stock issuable upon exercise of certain warrants
at a strike price of $0.25 ,
and (iv) 50,000 shares of common stock issuable upon exercise of
certain warrants at a strike price of
$0.75.
(17)
The
number of shares of common stock offered pursuant to this
prospectus by Erin Jones consists of the following securities
issued or issuable in connection with the Series D Offering: (i)
76,000 shares of common stock, (ii) 144,000 shares of common stock
issuable upon conversion of Series D Preferred Stock, (iii) 76,000
shares of common stock issuable upon exercise of certain warrants
at a strike price of $0.25 ,
and (iv) 76,000 shares of common stock issuable upon exercise of
certain warrants at a strike price of
$0.75.
(18)
The number of shares of common stock owned by K2 Medical LLC prior
to this offering consists of 1,905,270 shares of common stock and 1,905,000
shares issuable upon exercise of warrants. Richard Blumberg, a
former director of the Company, serves as the managing member of K2
Medical LLC.
(19)
The
number of shares of common stock offered pursuant to this
prospectus by K2 Medical LLC consists of the following securities
issued or issuable pursuant to the Exchange Agreements (i)
1,881,495 shares of common stock issued, (ii) 496,602 shares of
common stock issuable upon exercise of certain warrants issued
at a strike price of $0.20 ,
(iii) 692,446 shares of common stock issuable upon exercise of the
warrants issued at a strike price of
$0.25, and (iv) 692,446 shares of common stock issuable upon
exercise of the warrants issued at a
strike price of $0.75.
(20)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Flynn Case consists of
the following securities issue or issuable pursuant to the Exchange
Agreements: (i) 896,456 shares of common stock issued, and (ii)
896,456 shares of common stock issuable upon exercise of certain
warrants issued at a strike price of
$0.20 .
(21)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Frederick W. Grimm
consists of the following securities issue or issuable pursuant to
the Exchange Agreements: (i) 255,548 shares of common stock issued,
and (ii) 255,548 shares of common stock issuable upon exercise of
certain warrants issued at a strike
price of $0.20 .
(22)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Bryan T. Mamula
consists of the following securities: (i) 77,885 shares of common
stock issued pursuant to the Exchange Agreements, (ii) 77,885
shares of common stock issuable upon exercise of certain warrants
issued at a strike price of
$0.20 pursuant to the Exchange Agreements, and (iii) 40,000
shares of common stock issuable upon
conversion of Series E preferred stock.
(23)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by John Gould consists of
the following securities issue or issuable pursuant to the Exchange
Agreements: (i) 556,136 shares of common stock issued, and (ii)
556,136 shares of common stock issuable upon exercise of certain
warrants issued at a strike price of
$0.20 .
(24)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by FGP Protective
Opportunity Master Fund SP consists of (i) 291,088 shares of common
stock issued, (ii) 145,544 shares of common stock issuable upon
exercise of certain warrants issued at
a strike price of $0.25, and (iii) 145,544 shares of common
stock issuable upon exercise of certain warrants issued
at a strike price of $0.75
pursuant to the Exchange Agreements. Gregory Pepin, directly or
indirectly alone or with others, has the power to vote or dispose
the securities held by FGP Protective Opportunity Master Fund
SP.
(25)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Linda Rosenstock
consists of the following securities issue or issuable pursuant to
the Exchange Agreements: (i) 100,000 shares of common stock issued,
(ii) 50,000 shares of common stock issuable upon exercise of
certain warrants issued at a strike
price of $0.25, and (iii) 50,000 shares of common stock
issuable upon exercise of certain warrants issued at a strike price of $0.75.
(26)
The
number of shares of common stock owned by Michael James prior to
this offering consists of 7,756 shares
of common stock, 7,745 shares issuable upon exercise of warrants
issuable upon exercise of options. Mr. James is a director of the
Company.
(27)
The
number of shares of common stock offered pursuant to this
prospectus by Michael James consists of the following securities
issue or issuable pursuant to the Exchange Agreements: (i) 7,746
shares of common stock issued, (ii) 5,291 shares of common stock
issuable upon exercise of certain warrants issued at a strike price of $0.20 , (iii) 1,227
shares of common stock issuable upon exercise of the warrants
issued at a strike price of $0.25, and
(iv) 1,227 shares of common stock issuable upon exercise of
the warrants issued at a strike price
of $0.75.
(28)
The
number of shares of common stock owned by Richard Blumberg prior to
this offering consists of 1,168,000 shares of common stock and
1,160,000 shares issuable upon exercise of warrants. Richard
Blumberg was a former director of the Company.
(29)
The
number of shares of common stock to be offered pursuant to this
prospectus by Richard Blumberg consists of the following securities
issue or issuable pursuant to the Exchange Agreements: (i)
1,167,630 shares of common stock issued, (ii) 928,318 shares of
common stock issuable upon exercise of certain warrants issued
at a strike price of $0.20 ,
(iii) 119,656 shares of common stock issuable upon exercise of the
warrants issued at a strike price of
$0.25, and (iv) 119,656 shares of common stock issuable upon
exercise of the warrants issued at a
strike price of $0.75.
63
(30)
The number of shares of common stock owned by Auctus Fund LLC prior
to this offering consists of
(i) 4,262 shares issuable upon
exercise of warrants in connection with the securities purchase
agreement dated March 20, 2018, (ii) 250,000 shares issuable upon
exercise of warrants in connection with the securities purchase
agreement dated March 31, 2020, (iii) 4,666,667 shares of common
stock issuable upon conversion, (iv) 7,500,000 shares of common
stock issuable upon exercise of the warrants issued
in connection
with the issuance of the
Auctus Note, and (v) 420,000 shares of common stock issuable
upon conversion of Series E preferred stock. Al Sollami and Lou Posner, directly or
indirectly alone or with others, has the power to vote or dispose
the securities held by Auctus Fund LLC.
(31)
The number of shares of common stock to be offered pursuant to this
prospectus by Auctus Fund LLC consists of (i) 4,666,667 shares of common stock issuable
upon conversion of the Auctus Note, (ii) 7,500,000 shares of common
stock issuable upon exercise of the warrants issued
in connection
with the issuance of the
Auctus Note, and (iii) 420,000 shares of common stock issuable
upon conversion of Series E preferred stock.
(32)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Gary Kaplan consists
of 100,000 shares of common stock
issuable upon conversion of Series E preferred
stock.
(33)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Field Pro Fund Class P
and Enhanced Pension Plus Fund consists of 2,000,000 shares of common stock issuable upon conversion of
Series E preferred stock. Fieldhouse Capital management Inc.
or John Kason directly or indirectly alone or with others, has the
power to vote or dispose the securities held by Field Pro Fund
Class P and Enhanced Pension Plus Fund.
(34)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Simply Put Financial
Services Inc. consists of 40,000 shares of common stock issuable upon conversion of
Series E preferred stock. John Kason directly or indirectly
alone or with others, has the power to vote or dispose the
securities held by Simply Put Financial Services Inc.
(35)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Steven Hammer consists
of 30,000shares of common stock
issuable upon conversion of Series E preferred
stock.
(36)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by GHS Investment LLC
consists of 200,000 shares of common
stock issuable upon conversion of Series E preferred stock. Mark
Grober directly or indirectly alone or with others, has the
power to vote or dispose the securities held by GHS Investment
LLC.
(37)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by James Clavijo consists
of (i) 500,000 shares of common stock issued pursuant to the
Exchange Agreements, (ii) 250,000 shares of common stock issuable
upon the exercise of of warrants issued at a strike price of $0.50
pursuant to the Exchange Agreements, and (iii) 40,000 shares of common stock issuable upon conversion of
Series E preferred stock.
(38)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Lorena R. Guerra
consists of 20,000 shares of common
stock issuable upon conversion of Series E preferred
stock.
(39)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Alan Gruijc consists
of 200,000 shares of common stock
issuable upon conversion of Series E preferred
stock.
(40)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Saus Peur Exploration
Services Inc. consists of 20,000 shares of common stock issuable upon conversion of
Series E preferred stock. Tyrell Sutherland directly or
indirectly alone or with others, has the power to vote or dispose
the securities held by Saus Peur Exploration Services
Inc.
(41)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Webster Mrak Blumberg
and Pension Plan consists of 932,000 shares of common stock issuable upon conversion of
Series E preferred stock. Richard Blumberg directly or
indirectly alone or with others, has the power to vote or dispose
the securities held by WMB Pension Plan.
(42)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by John Comerford
consists of 20,000 shares of common
stock issuable upon conversion of Series E preferred
stock.
(43)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Natalia Castillo
consists of 20,000 shares of common
stock issuable upon conversion of Series E preferred
stock.
(44)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Fred Craft consists of
320,000 shares of common stock
issuable upon conversion of Series E preferred
stock.
(45)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Juan Castillo consists
of 60,000 shares of common stock
issuable upon conversion of Series E preferred
stock.
(46)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Samantha Neff consists
of 40,000 shares of common stock
issuable upon conversion of Series E preferred
stock.
(47)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Peyman Rezaie consists
of 1,000,000 shares of common stock
issuable upon conversion of Series E preferred
stock.
(48)
The
number of shares of common stock owned prior to this offering and
to be offered pursuant to this prospectus by Bernard Goffe consists
of 40,000 shares of common stock
issuable upon conversion of Series E preferred
stock.
We
are registering the shares of common stock to permit the resale of
these shares of common stock by the holders thereof (and such
holders’ successors and assigns) from time to time after the
date of this prospectus. We will not receive any of the proceeds
from the sale by the selling stockholders of the shares of common
stock. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.
The
selling stockholders may sell all or a portion of the shares of
common stock beneficially owned by them and offered hereby from
time to time directly or through one or more underwriters,
broker-dealers or agents. If the shares of common stock are sold
through underwriters or broker-dealers, the selling stockholders
will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of common stock may be sold
in one or more transactions at fixed prices, at prevailing market
prices at the time of the sale, at varying prices determined at the
time of sale, or at negotiated prices. These sales may be effected
in transactions, which may involve crosses or block
transactions,
●
on any
national securities exchange or quotation service on which the
securities may be listed or quoted at the time of
sale;
●
in the
over-the-counter market;
●
in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
●
through
the writing of options, whether such options are listed on an
options exchange or otherwise;
●
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
●
block
trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
●
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its account;
●
an
exchange distribution in accordance with the rules of the
applicable exchange;
●
privately
negotiated transactions;
●
short
sales;
●
sales
pursuant to Rule 144;
●
broker-dealers
may agree with the selling securityholders to sell a specified
number of such shares at a stipulated price per share;
●
a
combination of any such methods of sale; and
●
any
other method permitted pursuant to applicable law.
If
the selling stockholders effect such transactions by selling shares
of common stock to or through underwriters, broker-dealers or
agents, such underwriters, broker-dealers or agents may receive
commissions in the form of discounts, concessions or commissions
from the selling stockholders or commissions from purchasers of the
shares of common stock for whom they may act as agent or to whom
they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, broker-dealers or agents
may be in excess of those customary in the types of transactions
involved). In connection with sales of the shares of common stock
or otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers, which may in turn engage in short
sales of the shares of common stock in the course of hedging in
positions they assume. The selling stockholders may also sell
shares of common stock short and deliver shares of common stock
covered by this prospectus to close out short positions and to
return borrowed shares in connection with such short sales. The
selling stockholders may also loan or pledge shares of common stock
to broker-dealers that in turn may sell such shares.
The
selling stockholders may pledge or grant a security interest in
some or all of the warrants or shares of common stock owned by them
and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the
shares of common stock from time to time pursuant to this
prospectus or any amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act, amending, if
necessary, the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders
under this prospectus. The selling stockholders also may transfer
and donate the shares of common stock in other circumstances in
which case the transferees, donees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
65
The
selling stockholders and any broker-dealer participating in the
distribution of the shares of common stock may be deemed to be
“underwriters” within the meaning of the Securities
Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a
particular offering of the shares of common stock is made, a
prospectus supplement, if required, will be distributed which will
set forth the aggregate amount of shares of common stock being
offered and the terms of the offering, including the name or names
of any broker-dealers or agents, any discounts, commissions and
other terms constituting compensation from the selling stockholders
and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.
Under
the securities laws of some states, the shares of common stock may
be sold in such states only through registered or licensed brokers
or dealers. In addition, in some states the shares of common stock
may not be sold unless such shares have been registered or
qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
There
can be no assurance that any selling stockholder will sell any or
all of the shares of common stock registered pursuant to the
registration statement, of which this prospectus forms a
part.
The
selling stockholders and any other person participating in such
distribution will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including,
without limitation, Regulation M of the Exchange Act, which may
limit the timing of purchases and sales of any of the shares of
common stock by the selling stockholders and any other
participating person. Regulation M may also restrict the ability of
any person engaged in the distribution of the shares of common
stock to engage in market-making activities with respect to the
shares of common stock. All of the foregoing may affect the
marketability of the shares of common stock and the ability of any
person or entity to engage in market-making activities with respect
to the shares of common stock.
We will pay all expenses of the registration of
the shares of common stock pursuant to the registration rights
agreement, estimated to be approximately $114,610.72
in total, including, without
limitation, SEC filing fees and expenses of compliance with state
securities or “blue sky” laws; provided, however, that
a selling stockholder will pay all underwriting discounts and
selling commissions, if any. We will indemnify the selling
stockholders against liabilities, including some liabilities under
the Securities Act, in accordance with applicable registration
rights agreements, or the selling stockholders will be entitled to
contribution. We may be indemnified by the selling stockholders
against civil liabilities, including liabilities under the
Securities Act, that may arise from any written information
furnished to us by the selling stockholder specifically for use in
this prospectus, in accordance with the related registration rights
agreement, or we may be entitled to
contribution.
Once
sold under the registration statement, of which this prospectus
forms a part, the shares of common stock will be freely tradable in
the hands of persons other than our affiliates.
Certain
legal matters with respect to the shares of common stock offered
hereby will be passed upon by Ellenoff Grossman & Schole
LLP, New York, New York.
The
financial statements of our company appearing in this prospectus
have been included herein in relianceupon the report (which report
includes an explanatory paragraph relating to our ability to
continue as a going concern) of UHY LLP, an independent registered
public accounting firm, appearing elsewhere herein, and upon the
authority of UHY LLP as experts in accounting and
auditing.
We
have filed a registration statement on Form S-1 with the SEC with
respect to our common stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the
registration statement. You should refer to the registration
statement and its exhibits for additional information. Whenever we
make references in this prospectus to any of our contracts,
agreements or other documents, the references are not necessarily
complete and you should refer to the exhibits attached to the
registration statement for the copies of the actual contract,
agreement or other document.
Our
fiscal year ends on December 31. We are a reporting company
and file annual, quarterly, and current reports, and other
information with the SEC. Our SEC filings are available to the
public on the SEC’s Internet site at http://www.sec.gov. We
maintain a website at www.guidedinc.com. Information contained in
or accessible through our website is not and should not be
considered a part of this prospectus and you should not rely on
that information in deciding whether to invest in our common
stock.
Unaudited
Consolidated Statements of Operations for the three and six months
ended June 30, 2020 and 2019
F-36
Unaudited
Consolidated Statements of Stockholder’s Deficit for the
three and six months ended June 30, 2020 and 2019
F-37
Unaudited
Consolidated Statements of Cash Flows for the six months ended June30, 2020 and 2019
F-38
Notes
to the Unaudited Consolidated Financial Statements
F-39
68
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Guided
Therapeutics, Inc.
Opinion
on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Guided
Therapeutics, Inc. and Subsidiary. (the “Company”) as
of December 31, 2019 and 2018, and the related consolidated
statements of operations, stockholders’ deficit, and cash
flows for the years then ended, and the related notes
(collectively, the “consolidated financial
statements”). In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31,2019 and 2018, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Substantial Doubt
about the Company’s Ability to Continue as a Going
Concern
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the
Company has recurring losses from operations, limited cash flow,
and an accumulated deficit. These conditions raise substantial
doubt about the Company’s ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not
include any adjustment that might result from the outcome of this
uncertainty. Our opinion is not modified with respect to that
matter.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risk of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
We have
served as the Company’s auditor since 2007.
Accounts
receivable, net of allowance for doubtful accounts of $114 and $157
at December 31, 2019 and 2018, respectively
13
13
Inventory,
net of reserves of $831 and $767 at December 31, 2019 and 2018,
respectively
48
114
Other
current assets
70
69
Total
current assets
1,030
196
NONCURRENT
ASSETS:
Property
and equipment, net
-
21
Lease
asset-right, net of amortization
132
-
Other
assets
18
19
Total
noncurrent assets
150
40
TOTAL
ASSETS
1,180
236
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
CURRENT
LIABILITIES:
Notes
payable in default, related parties
349
334
Notes
payable in default
427
366
Short-term
notes payable
380
225
Short-term
notes payable, related parties
646
674
Convertible
notes in default
2,915
2,778
Short-term
convertible notes payable
73
-
Short-term
convertible notes payable, related parties
513
380
Accounts
payable
2,897
3,013
Accounts
payable, related parties
136
-
Accrued
liabilities
3,235
3,156
Subscription
receivable
635
-
Current
portion of lease liability
103
-
Deferred
revenue
101
66
Total
current liabilities
12,410
10,992
LONG-TERM
LIABILITIES:
Warrants,
at fair value
5,092
4,728
Lease
liability
29
-
Long-term
convertible notes payable, net
15
-
Long-term
debt-related parties
569
340
Total
long-term liabilities
5,705
5,068
TOTAL
LIABILITIES
18,115
16,060
COMMITMENTS & CONTINGENCIES (Note 8)
F-2
STOCKHOLDERS’
DEFICIT:
Series
C convertible preferred stock, $.001 par value; 9.0 shares
authorized, 0.3 shares issued and outstanding as of December 31,2019 and 2018, respectively. (Liquidation preference of $286 at
December 31, 2019 and 2018, respectively).
105
105
Series
C1 convertible preferred stock, $.001 par value; 20.3 shares
authorized, 1.0 shares issued and outstanding as of December 31,2019 and 2018, respectively. (Liquidation preference of $1,049 at
December 31, 2019 and 2018).
170
170
Series
C2 convertible preferred stock, $.001 par value; 5,000 shares
authorized, 3.3 shares issued and outstanding as of December 31,2019 and 2018, respectively. (Liquidation preference of $3,263 at
December 31, 2019 and 2018).
531
531
Common
stock, $.001 par value; 3,000,000 shares authorized, 3,319 and
2,669 shares issued and outstanding as of December 31, 2019 and
2018, respectively
3,394
2,877
Additional
paid-in capital
118,552
118,259
Treasury
stock, at cost
(132)
(132)
Accumulated
deficit
(139,555)
(137,634)
TOTAL
STOCKHOLDERS’ DEFICIT
(16,935)
(15,824)
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
1,180
236
The
accompanying notes are an integral part of these consolidated
statements.
F-3
GUIDED
THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS (in thousands)
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.
F-7
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 December15, 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.
F-8
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):
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):
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):
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.
F-10
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.
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.
F-11
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 December31, 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.
F-12
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:
F-13
FAIR
VALUE MEASUREMENTS (In Thousands)
The
following is summary of items that the Company measures at fair
value on a recurring basis:
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.
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.
F-15
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 June29, 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.
F-16
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 May23, 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.
F-17
Warrants
The
following table summarizes transactions involving the
Company’s outstanding warrants to purchase common stock for
the year ended December 31, 2019:
* However, please refer to Footnote 10 - CONVERTIBLE DEBT IN
DEFAULT in the paragraph: Debt Restructuring for more
information regarding our warrants.
F-18
(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)
(18)
Issued
pursuant to a strategic license agreement. Issued as part of a
February 2017 private placement.
(19)
Issued
as part of a May 2017 private placement.
(20)
Issued
to investors for a loan in November 2017.
(21)
Issued
to investors for a loan in December 2017.
(22)
Issued
to investors for a loan in January 2018.
(23)
Issued
to investors for a loan in March 2018.
(24)
Issued
to investors for a loan in March 2018.
(25)
Issued
to investors for a loan in April 2018.
(26)
Issued
to investors for a loan in May 2018.
(27)
Issued
to investors for a loan in May 2018.
(28)
Issued
to investors for a loan in June 2018
(29)
Issued
to investors for a loan in August 2018
(30)
Issued
to investors for a loan in September 2018
(31)
Issued
to investors for a loan in October 2018
(32)
Issued
to investors for a loan in November 2018
(33)
Issued
to investors for a loan in December 2018
(34)
Issued
to investors for a loan in December 2018
(35)
Issued
to investors for a loan in December 2018
(36)
Issued
to investors for a loan in December 2018
(37)
Issued
to investors for a loan in January 2019
(38)
Issued
to investors for a loan in January 2019
(39)
Issued
to investors for a loan in January 2019
(40)
Issued
to investors for a loan in February 2019
(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).
F-19
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.
F-20
Components of
deferred taxes are as follow at December 31 (in
thousands):
2019
2018
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:
2019
2018
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:
2019
2018
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.
F-21
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, PeachtreeCorners, Georgia30092. 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):
On June5, 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.
F-22
On July24, 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 July1, 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:
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.
F-24
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:
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 June5, 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.
F-25
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 May15, 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 May15, 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.
F-26
The
following table summarizes the Convertible notes payable:
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 August31, 2016. The balance of this note was reduced by a transfer of
$306,863 as part of a debt restructuring that occurred on December7, 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.
F-27
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.
F-28
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 December31, 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:
On July24, 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 December31, 2018.
The
table below summarizes the detail of the exchange
agreement:
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.
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.
F-31
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.
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.
F-32
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.
F-33
GUIDED
THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS (unaudited, in thousands)
Series D
convertible preferred stock, $.001 par value; 6.0 shares
authorized, 0.8 and nil shares issued and outstanding as of June30, 2020 and December 31, 2019, respectively. (Liquidation
preference of $554 and nil at June 30, 2020 and December 31,2019).
276
-
Series E
convertible preferred stock, $.001 par value; 5.0 shares
authorized, 0.9 and nil shares issued and outstanding as of June30, 2020 and December 31, 2019, respectively. (Liquidation
preference of $853 and nil at June 30, 2020 and December 31,2019).
853
-
Common stock, $.001
par value; 3,000,000 shares authorized, 12,765 and 3,319 shares
issued and outstanding as of June 30, 2020 and December 31, 2019,
respectively
3,403
3,394
Additional
paid-in capital
121,975
118,552
Treasury
stock, at cost
(132)
(132)
Accumulated
deficit
(143,604)
(139,555)
TOTAL
STOCKHOLDERS’ DEFICIT
(16,423)
(16,935)
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
942
1,180
The
accompanying notes are an integral part of these consolidated
statements.
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
Bad
debt expense
13
-
Depreciation
-
21
Amortization
of debt issuance costs and discounts
194
46
Amortization
of beneficial conversion feature
53
54
Share-based
compensation
-
8
Change
in fair value of warrants
2,551
1,679
Loss
from extinguishment of debt
316
-
Changes
in operating assets and liabilities:
Accounts
receivable
-
(3)
Inventory
(3)
66
Other
current assets
29
67
Other
non-current asset
18
-
Accounts
payable
19
29
Deferred
revenue
-
33
Accrued
liabilities
(108)
504
Total
adjustments
3,082
2,558
Net
cash used in operating activities
(938)
(374)
CASH
FLOWS FROM INVESTING ACTIVITIES:
Additions
to property and equipment
(1)
-
Net
cash used in investing activities
(1)
-
CASH
FLOWS FROM FINANCING ACTIVITIES:
Proceeds
from debt financing, net of discounts and debt issuance
costs
519
474
Proceeds
from issuance of Series E Preferred Stock
853
-
Payments
made on notes payable
(697)
(100)
Proceeds
from the issuance of common stock, net of costs
128
-
Net
cash provided by financing activities
803
374
NET
CHANGE IN CASH AND CASH EQUIVALENTS
(136)
-
CASH
AND CASH EQUIVALENTS, beginning of year
899
-
CASH
AND CASH EQUIVALENTS, end of period
$763
$-
SUPPLEMENTAL
SCHEDULE OF:
Cash paid
for:
Interest
$209
$-
NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance
of common stock as debt repayment
$2,529
$33
Dividends
on preferred stock
$29
$-
Subscription
receivable
$635
$-
Warrants
exchanged for fixed price warrants
$67
$-
The
accompanying notes are an integral part of these consolidated
financial statements.
F-39
GUIDED
THERAPEUTICS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
ORGANIZATION,
BACKGROUND, AND BASIS OF PRESENTATION
Guided
Therapeutics, Inc. (formerly SpectRx, Inc.), together with its
wholly owned subsidiary, InterScan, Inc. (formerly Guided
Therapeutics, Inc.), collectively referred to herein as the
“Company”, is a medical
technology company focused on developing innovative medical devices
that have the potential to improve healthcare. The Company’s
primary focus is the continued commercialization of its LuViva
non-invasive cervical cancer detection device and extension of its
cancer detection technology into other cancers, including
esophageal. The Company’s technology, including products in
research and development, primarily relates to biophotonics
technology for the non-invasive detection of
cancers.
Basis
of Presentation
All
information and footnote disclosures included in the consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United
States.
The
accompanying unaudited consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements.
Therefore, these financial statements should be read in conjunction
with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 filed with the Securities and Exchange Commission
(“SEC”) pursuant to Section 13 or 15(d) under the
Securities Exchange Act of 1934. In the opinion of management, all
adjustments (consisting of normal recurring accruals and other
items) considered necessary for a fair presentation have been
included.
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 3,319,469 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 June 30, 2020 and December 31,2019.
The
Company’s prospects must be considered in light of the
substantial risks, expenses and difficulties encountered by
entrants into the medical device industry. This industry is
characterized by an increasing number of participants, intense
competition and a high failure rate. The Company has experienced
net losses since its inception and, as of June 30, 2020, it had an
accumulated deficit of approximately $143.6 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.
F-40
At June30, 2020, the Company had a negative working capital of
approximately $7.8 million, accumulated deficit of $143.6 million,
and net loss of $4.0 million for the six months then ended (the net
loss was in part the result of a $2.5 million change in fair value
of warrants that was recorded in the period). Stockholders’
deficit totaled approximately $16.4 million at June 30, 2020,
primarily due to recurring net losses from operations, deemed
dividends on warrants and preferred stock, offset by proceeds from
the exercise of options and warrants and proceeds from sales of
stock.
The
Company has taken steps to improve its going concern opinion,
including:
●
During the end of
2019 and beginning of 2020, the Company was able to raise $4.0
million in equity and debt investments;
●
The Company has
executed several exchange agreements that converted to
approximately $2.3 million of debt for equity, as well as eliminate
some existing debt;
●
Subsequent to June30, 2020, the Company uplisted to the Over the Counter (OTC)
bulletin board;
If
sufficient capital cannot be raised during 2020, 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 28.3 million
shares of its common stock outstanding at June 30, 2020, with
exercise prices ranging between $0.04 and $1.82 per share.
Exercises of in the money warrants would generate a total of
approximately $5.0 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.
2. SIGNIFICANT
ACCOUNTING POLICIES
Use
of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Significant areas where estimates are used include the
allowance for doubtful accounts, inventory valuation and input
variables for Black-Scholes, Monte Carlo simulations and binomial
calculations. The Company uses the Monte Carlo simulations and
binomial calculations in the calculation of the fair value of the
warrant liabilities and the valuation of embedded conversion
options and freestanding warrants.
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
Recently Adopted Accounting Pronouncements
In June
2016, the FASB issued ASU 2016-13, Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 requires that expected credit losses
relating to financial assets are measured on an amortized cost
basis and available-for-sale debt securities be recorded through an
allowance for credit losses. ASU 2016-13 limits the amount of
credit losses to be recognized for available-for-sale debt
securities to the amount by which carrying value exceeds fair value
and also requires the reversal of previously recognized credit
losses if fair value increases. The Company adopted the standard on
January 1, 2020. The adoption of ASU 2016-13 did not have a
material impact on the Company.
F-41
In
August 2018, the FASB issued Accounting Standards Update No.
2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair
Value Measurement, or ASU 2018-13. The amendments in ASU 2018-13
eliminate, add, and modify certain disclosure requirements for fair
value measurements. The amendments are effective for the
Company’s interim and annual reporting periods beginning
after December 15, 2019, with early adoption permitted for either
the entire ASU or only the provisions that eliminate or modify
requirements. The amendments with respect to changes in unrealized
gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value
measurements, and the narrative description of measurement
uncertainty are to be applied prospectively. All other amendments
are to be applied retrospectively to all periods presented. The
adoption of ASU 2016-13 did not have a material impact on the
Company.
A
variety of proposed or otherwise potential accounting standards are
currently under consideration by standard-setting organizations and
certain regulatory agencies. Because of the tentative and
preliminary nature of such proposed standards, management has not
yet determined the effect, if any, that the implementation of such
proposed standards would have on the Company’s consolidated
financial statements.
Cash
Equivalents
The
Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be a cash
equivalent.
Accounts
Receivable
The
Company performs periodic credit evaluations of its
distributors’ financial conditions and generally does not
require collateral. The Company reviews all outstanding accounts
receivable for collectability on a quarterly basis. An allowance
for doubtful accounts is recorded for any amounts deemed
uncollectable. Uncollectibility, is determined based on the
determination that a distributor will not be able to make payment
and the time frame has exceeded one year. The Company does not
accrue interest 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 June 30, 2020 and December 31, 2019, our inventories
were as follows (in thousands):
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.
F-42
Property
and Equipment
Property and
equipment are recorded at cost. Depreciation is computed using the
straight-line method over estimated useful lives of three to seven
years. Leasehold improvements are amortized at the shorter of the
useful life of the asset or the remaining lease term. Depreciation
and amortization expense are included in general and administrative
expense on the statement of operations. Expenditures for repairs
and maintenance are expensed as incurred. Property and equipment
are summarized as follows at June 30, 2020 and December 31, 2019
(in thousands):
Debt
issuance costs are capitalized and amortized over the term of the
associated debt. Debt issuance costs are presented in the balance
sheet as a direct deduction from the carrying amount of the debt
liability consistent with the debt discount.
Patent
Costs (Principally Legal Fees)
Costs
incurred in filing, prosecuting, and maintaining patents are
recurring, and expensed as incurred. Maintaining patents are
expensed as incurred as the Company has not yet received U.S. FDA
approval and recovery of these costs is uncertain. Such costs
aggregated approximately $4,000 and $10,000 for the six months
ended June 30, 2020 and 2019,
respectively.
Leases
With the implementation of ASU 2016-02,
“Leases (Topic 842)”, the Company recorded a
lease-right-of-use asset 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 June 30, 2020, the
balance of the lease-right-of-use
asset and lease liability was approximately
$86,000.
The
cumulative effect of initially applying the new guidance had an
immaterial impact on the opening balance of retained earnings. The
Company elected the practical expedients permitted under the
transition guidance within the new standards, which allowed the
Company to carry forward the historical lease
classification.
Accrued Liabilities
Accrued
liabilities are summarized as follows (in thousands):
Cash
received from investors for common stock shares that has not
completed processing is recorded as a liability to subscription
receivables. As of June 30, 2020, the Company had not issued 50,000
common stock shares to an investor. As of June 30, 2020, the
outstanding subscription receivable was $5,820. 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.
During
the six months ended June 30, 2020, the Company did not have any
revenues. Accounts receivable, that netted to nil, and were
reserved against, were from more than one distributor and
represents 100% of the balance as of June 30, 2020. During the six
months ended June 30, 2019, revenues were from two distributors and
for extended warranties. Revenues from these distributors totaled
$19,000 for the period ended June 30, 2019. Accounts receivable,
not reserved against, were from one distributor and represents 100%
of the balance for the period ended June 30, 2019.
Deferred revenue
The
Company defers payments received as revenue until earned based on
the related contracts and applying ASC 606 as required. As of June30, 2020, and December 31, 2019, the Company had $101,000 in
deferred revenue.
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 entered into an agreed upon payment plan with the IRS
for delinquent payroll taxes and also with the Georgia Department
of State. 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 cumulative net operating losses, but it has not
filed its Federal tax returns, therefore this number may not be
accurate. Once the returns are filed, the net operating losses will
be eligible to be carried forward for tax purposes at federal and
applicable states level. A full valuation allowance has been
recorded related the deferred tax assets generated from the net
operating losses.
The
current corporate tax rates in the U.S. is 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 June 30,2020 and December 31, 2019, 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.
F-45
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 six months ended June 30, 2020 and 2019, share-based
compensation for options attributable to employees, non-employees,
officers and Board members were approximately nil and $8,000,
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 June 30, 2020, and 2019the Company did not have any
unrecognized compensation costs related to granted stock options
that will 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, ASC 820, Fair Value
Measurements and Disclosures, establishes the authoritative
definition of fair value, sets out a framework for measuring fair
value, and outlines the required disclosures regarding fair value
measurements. Fair value is the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at
the measurement date. The Company uses a three-tier fair value
hierarchy based upon observable and non-observable inputs as
follow:
●
Level 1 –
Quoted market prices in active markets for identical assets and
liabilities;
●
Level 2 –
Inputs, other than level 1 inputs, either directly or indirectly
observable; and
●
Level 3 –
Unobservable inputs developed using internal estimates and
assumptions (there is little or no market date) which reflect those
that market participants would use.
The
Company records its derivative activities at fair value, which
consisted of warrants as of June 30, 2020. The fair value of the
warrants was estimated using the Binomial Simulation model. Gains
and losses from changes to derivatives are included in change in
fair value of warrants 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 June 30, 2020 and December 31,2019:
FAIR
VALUE MEASUREMENTS (In Thousands)
The
following is summary of items that the Company measures at fair
value on a recurring basis:
As of
June 30, 2020, the fair value of warrants was approximately $7.6 million. A net
change of approximately $2.6 million has been recorded to
the accompanying statement of operations for the six months ended
June 30, 2020.
4.
STOCKHOLDERS’ DEFICIT
Common
Stock
The
Company has authorized 3,000,000,000 shares of common stock with
$0.001 par value, of which 12,764,629 were issued and outstanding
as of June 30, 2020. As of December 31, 2019, there were
3,000,000,000 authorized shares of common stock, of which 3,319,469
were issued and outstanding.
For the
six months ended June 30, 2020, the Company issued 9,445,160 shares
of common stock as listed below:
Exchange of Debt
for common stock shares and warrants
During
June 2020, the Company received equity investments in the amount of
$853,000. These investors received a total of 853 Series E
preferred stock (if the Investor elects to convert their Series E
preferred stock, each Series E preferred stock shares converts into
4,000 shares of the Company’s common stock
shares).
During
January and April 2020, the Company received equity investments in
the amount of $128,000. These investors received a total of 256,000
common stock shares and 256,000 warrants issued to purchase common
stock shares at a strike price of $0.25, 256,000 warrants to
purchase common stock shares at a strike price of $0.75 and 128
Series D preferred stock (if the Investor elects to convert their
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 $38,000 was from related
parties.
F-47
During
December 2019, the Company received equity investments in the
amount of $635,000. The $635,000 of investments were recorded as a
subscription liability in December 2019. The common stock shares
were issued in January 2020. These investors received 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
issued 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.
Debt
Exchanges
On
January 8, 2020, the Company exchanged $2,064,366 in debt for
several equity instruments (noted below) that were determined to
have a total fair value of $2,065,548, resulting in a loss on
extinguishment of debt of $1,183 which is recorded in other income
(expense) on the accompanying consolidated statements of
operations. The Company also issued 6,957,013 warrants to purchase
common stock shares; with exercise prices of $0.25, $0.75 and
$0.20. In addition, one of the investors forgave approximately
$29,000 of debt, which was recorded as a gain for extinguishment of
debt.
On June3, 2020, the Company exchanged $328,422 in debt from Auctus,
(summarized in footnote 10:
Convertible Notes), for 500,000 common stock shares and
700,000 warrants to purchase common stock shares. The fair value of
the common stock shares was $250,000 (based on a $0.50 fair value
for the Company’s stock) and of the warrants to purchase
common stock shares was $196,818 (based on a $0.281 black scholes
fair valuation). This resulted in a net loss on extinguishment of
debt of $118,396 ($446,818 fair value less the $328,422 of
exchanged debt).
On June30, 2020, the Company exchanged $125,000 in debt (during June 2020,
$125,000 in payables had been converted into short-term debt) from
Mr. James Clavijo, for 500,000 common stock shares and 250,000
warrants to purchase common stock shares. The fair value of the
common stock shares was $250,000 (based on a $0.50 fair value for
the Company’s stock) and of the warrants to purchase common
stock shares was $99,963 (based on a $0.40 black scholes fair
valuation). This resulted in a net loss on extinguishment of debt
of $224,963 ($349,963 fair value less the $125,000 of exchanged
debt). After the exchange transaction a balance was due Mr. Clavijo
of $10,213 which was paid.
The
following table summarizes the debt exchanges:
Total Debt and
Accrued Interest
Total
Debt
Total Accrued
Interest
Common Stock
Shares
Warrants
(Exercise $0.25)
Warrants
(Exercise $0.75)
Warrants
(Exercise $0.20)
Warrants
(Exercise $0.15)
Warrants
(Exercise $0.50)
Aquarius
$145,544
107,500
38,044
291,088
145,544
145,544
-
-
-
K2
Medical (Shenghuo)3
803,653
771,927
31,726
1,905,270
704,334
704,334
496,602
-
-
Mr.
Blumberg
305,320
292,290
13,030
1,167,630
119,656
119,656
928,318
-
-
Mr.
Case
179,291
150,000
29,291
896,456
-
-
896,456
-
-
Mr.
Grimm
51,050
50,000
1,050
255,548
-
-
255,548
-
-
Mr.
Gould
111,227
100,000
11,227
556,136
-
-
556,136
-
-
Mr.
Mamula
15,577
15,000
577
77,885
-
-
77,885
-
-
Dr.
Imhoff2
400,417
363,480
36,937
1,699,255
100,944
100,944
1,497,367
-
-
Ms.
Rosenstock1
50,000
50,000
-
100,000
50,000
50,000
-
-
-
Mr. James2
2,286
2,000
286
7,745
1,227
1,227
5,291
-
-
Auctus
328,422
249,119
79,303
500,000
-
-
-
700,000
-
Mr.
Clavijo
125,000
125,000
-
500,000
-
-
-
-
500,000
$2,517,787
$2,276,316
$241,471
7,957,013
1,121,705
1,121,705
4,713,603
700,000
500,000
1 Ms. Rosenstock also
forgave $28,986 in debt to the Company.
2 Mr. Imhoff and Mr.
James are members of the board of directors and therefore related
parties.
3 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.
F-48
Preferred
Stock
Overview
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 June 30, 2020 and December 31, 2019,
respectively and 20,250 shares of preferred stock as Series C1
Preferred Stock, of which 1,050 shares were issued and outstanding
at June 30, 2020 and December 31, 2019. In addition, some
holders separately agreed to exchange
each share of the Series C1 Preferred Stock held for one (1) share
of the Company’s newly created Series C2 Preferred Stock. In
total, for 3,262.25 shares of Series C1 Preferred Stock to be
surrendered, the Company issued 3,262.25 shares of Series C2
Preferred Stock. At June 30, 2020, 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.
Series C Convertible Preferred Stock
Pursuant to the
Series C certificate of designations, shares of Series C preferred
stock are convertible into common stock by their holder at any time
and may be mandatorily convertible upon the achievement of
specified average trading prices for the Company’s common
stock. At June 30, 2020 and 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 June30, 2020, the exercise price per share was $512,000.
On May23, 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.
F-49
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 June30, 2020, 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 381,098 shares of
the Company’s common stock.
On
August 31, 2018, 3,262.25 shares of Series C1 Preferred Stock were
surrendered, and the Company issued 3,262.25 shares of Series C2
Preferred Stock.
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 June 30, 2020, 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.
Series D Convertible Preferred Stock
On January 8, 2020, the Company entered
into a Security Agreement with the Series D Investors (the
“Series D Security Agreement”) pursuant to which all
obligations under the Series D Certificate of Designation are
secured by all of the Company’s assets and personal
properties, with certain accredited investors, including
the Chief Executive Officer, Chief
Operating Officer and a director of the Company. In total, for
$763,000 the Company issued 763 shares of Series D Preferred Stock,
1,526,000 common stock shares, 1,526,000 common stock warrants,
exercisable at $0.25, and 1,526,000 common stock warrants,
exercisable $0.75. Each Series D Preferred Stock is convertible
into 3,000 common stock shares. The Series D Preferred Stock
will have cumulative dividends at the rate per share of 10% per
annum. The stated value and
liquidation preference on the Series D Preferred Stock is
$554.
F-50
Each
share of Series D Preferred is convertible, at any time for a
period of 5 years after issuance, into that number of shares of
Common Stock, determined by dividing the Stated Value by $0.25,
subject to certain adjustments set forth in the Series D
Certificate of Designation (the “Series D Conversion
Price”). The conversion of Series D Preferred is subject to a
4.99% beneficial ownership limitation, which may be increased to
9.99% at the election of the holder of the Series D Preferred. If
the average of the VWAPs (as defined in the Series D Certificate of
Designation) for any consecutive 5 trading day period
(“Measurement Period”) exceeds 200% of the then Series
D Conversion Price and the average daily trading volume of the
Common Stock on the primary trading market exceeds 1,000 shares per
trading day during the Measurement Period (subject to adjustments),
the Company may redeem the then outstanding Series D Preferred, for
cash in an amount equal to aggregate Stated Value then outstanding
plus accrued but unpaid dividends .
The
Series D Warrants may be exercised cashlessly if there is no
effective registration statement covering the Common Stock issuable
upon exercise of the Series D Warrants. The Series D Warrants
contain a 4.99% beneficial ownership blocker which may be increased
to 9.99% at the holder’s election.
On
January 8, 2020, the Company also entered into a Registration
Rights Agreement (the “Series D Registration Rights Agreement
“) with the Series D Investors pursuant to which the Company
agreed to file with the SEC, a registration statement on a Form S-3
(or on other appropriate form if a Form S-3 is not available)
covering the Common Stock issuable upon conversion of the Series D
Warrants within 90 days of the date of the Registration Rights
Agreement and cause such registration statement to be declared
effective within 120 days of the date of the Registration Rights
Agreement. All reasonable expenses related to such registration
shall be borne by the Company.
Series E Convertible Preferred Stock
During June 2020, the Company entered into
a Security Agreement with the Series E Investors (the “Series
E Security Agreement”) pursuant to which all obligations
under the Series E Certificate of Designation are secured by all of
the Company’s assets and personal properties, with certain
accredited investors. In total, for
$853,000 the Company issued 853 shares of Series E Preferred Stock.
Each Series E Preferred Stock is convertible into 4,000 common
stock shares. The Series E Preferred Stock will have
cumulative dividends at the rate per share of 6% per annum.
The stated value and liquidation
preference on the Series E Preferred Stock is
$853.
Each
share of Series E Preferred is convertible, at any time for a
period of 5 years after issuance, into that number of shares of
Common Stock, determined by dividing the Stated Value by $0.25,
subject to certain adjustments set forth in the Series E
Certificate of Designation (the “Series E Conversion
Price”). The conversion of Series E Preferred is subject to a
4.99% beneficial ownership limitation, which may be increased to
9.99% at the election of the holder of the Series E Preferred. If
the average of the VWAPs (as defined in the Series E Certificate of
Designation) for any consecutive 5 trading day period
(“Measurement Period”) exceeds 200% of the then Series
E Conversion Price and the average daily trading volume of the
Common Stock on the primary trading market exceeds 1,000 shares per
trading day during the Measurement Period (subject to adjustments),
the Company may redeem the then outstanding Series E Preferred, for
cash in an amount equal to aggregate Stated Value then outstanding
plus accrued but unpaid dividends .
F-51
Warrants
The
following table summarizes transactions involving the
Company’s outstanding warrants to purchase common stock for
the six months ended June 30, 2020:
* However, please refer to Footnote 10 - CONVERTIBLE DEBT in the
paragraph: Debt Restructuring for more information regarding our
warrants.
(1)
Issued
to investors for a loan in March 2018.
(2)
Exchanged
in January 2020 from amount issued as part of a February 2016
private placement with senior secured debt
holder
(3)
Issued
to a placement agent in conjunction with a February 2016 private
placement with senior secured debt holder
(4)
Issued
to investors for a loan in April 2019
(5)
Issued
to investors for a loan in July 2019
(6)
Issued
to investors for a loan in September 2019
(7)
Issued
to investors for a loan in December 2019
(8)
Issued
to investors for a loan in January 2020
(9)
Issued
to investors as part of Series D Preferred Stock Capital raise in
December 2020
(10)
Issued
to investors as part of Series D Preferred Stock Capital raise in
December 2020
(11)
(12)
(13)
(14)
(15)
(16)
Issued
to investors as part of Series D Preferred Stock Capital raise in
December 2020 Issued to a
consultant for services in April 2020 Issued to an
investor as part of Series D Preferred Stock Capital raise in April
2020 Issued to an
investor as part of Series D Preferred Stock Capital raise in April
2020 Issued to an
investor for a loan in May 2020 Issued to an
investor in exchange of debt in June 2020
F-52
Footnote (2) - On
January 16, 2020, the Company entered into an exchange agreement
with GPB. This exchange agreement canceled the existing outstanding
warrants, which were subject to anti-dilution and ratchet
provisions, to purchase 35,937,500 shares of common stock at an
exercise price of $0.04 per share and resulted in the issuance of
new warrants to purchase 7,185,000 share of common stock at a price
of $0.20 per share. The new warrants have fixed exercise prices of
$0.20; subject to the Company meeting the agreed upon terms of the
exchange agreement.
Warrant
to purchase 70 shares of common stock were not recorded as their
exercise price after considering reverse stock splits, were greater
than $60,000 and deemed to be immaterial for
disclosure
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 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 at least $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 at least $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.
5.
STOCK OPTIONS
The
Company’s 1995 Stock Plan (the “Plan”) has
expired pursuant to its terms, so zero shares remained available
for issuance at June 30, 2020 and December 31, 2019. 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. As of June 30, 2020, and December 31, 2019, there were no
stock options outstanding and exercisable.
On July14, 2020, the Company granted 1,800,000 stock options to employees
and consultants. The new Stock Plan (the “Plan”) allows
for the issuance of incentive stock options, nonqualified stock
options, and stock purchase rights. The exercise price of options
was determined by the Company’s board of directors, but
incentive stock options were granted at an exercise price equal to
the fair market value of the Company’s common stock as of the
grant date. Options historically granted have generally become
exercisable over four years and expire ten years from the date of
grant.
6.
LITIGATION AND CLAIMS
From
time to time, the Company may be involved in various legal
proceedings and claims arising in the ordinary course of business.
Management believes that the dispositions of these matters,
individually or in the aggregate, are not expected to have a
material adverse effect on the Company’s financial condition.
However, depending on the amount and timing of such disposition, an
unfavorable resolution of some or all of these matters could
materially affect the future results of operations or cash flows in
a particular year.
As of
June 30, 2020, and December 31, 2019, there was no accrual recorded
for any potential losses related to pending
litigation.
F-53
7.
COMMITMENTS AND CONTINGENCIES
Operating
Leases
In
December 2009, the Company moved its offices, which comprise its
administrative, research and development, marketing and production
facilities to 5835 Peachtree Corners East, Suite B, PeachtreeCorners, Georgia30092. 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 June 30, 2018; $8,022 each month for the period
beginning April 1, 2018 and ending June 30, 2019; $8,268 each month
for the period beginning April 1, 2019 and ending June 30, 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 June 30, 2020 under
non-cancellable operating leases for office space and equipment are
as follows (in thousands):
On June5, 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).
On July24, 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
to purchase cervical guides then it will do so at a cost including
labor, plus ten percent markup. The Company will provide 200
cervical guides at no cost for the clinical trials. Fourth, the
Company and SMI will make best efforts to sell devices after CFDA
approval. With an initial estimate of year one sales of 200 LuViva
devices; year two sales of 500 LuViva devices; year three sales of
1,000 LuViva devices; and year four sales of 1,250 LuViva devices.
Fifth, SMI shall pay for entire costs of securing approval of
LuViva with the Chinese FDA. Sixth, SMI shall arrange, at its sole
cost, for a manufacturer in China to build tooling to support
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 device chip. If within 18 months of the
license’s effective date, SMI fails to achieve
commercialization of LuViva in China, SMI shall no longer have any
rights to manufacture, distribute or sell LuViva. Commercialization
is defined as: filing an application with the Chinese FDA for the
approval of LuViva; any assembly or manufacture of the devices or
disposables that begins in China; and purchase of at least 10
devices and disposables for clinical evaluations and regulatory use
and or sales in the jurisdictions. On March 5, 2020the Company had
recorded an accrued liability for SMI of $692,335, which was
reclassified to additional paid in capital and 12,147 common stock
shares.
F-54
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).
Contingencies
Based
on the current outbreak of the Coronavirus SARS-CoV-2, the pathogen
responsible for COVID-19, which has already had an impact on
financial markets, there could be additional repercussions to the
Company’s operating business, including but not limited to,
the sourcing of materials for product candidates, manufacture of
supplies for preclinical and/or clinical studies, delays in
clinical operations, which may include the availability or the
continued availability of patients for trials due to such things as
quarantines, conduct of patient monitoring and clinical trial data
retrieval at investigational study sites.
The
future impact of the outbreak is highly uncertain and cannot be
predicted, and the Company cannot provide any assurance that the
outbreak will not have a material adverse impact on the
Company’s operations or future results or filings with
regulatory health authorities. The extent of the impact to the
Company, if any, will depend on future developments, including
actions taken to contain the coronavirus.
8.
NOTES PAYABLE
Notes
Payable in Default
At June30, 2020 and December 31, 2019, the Company maintained notes
payable to both related and non-related parties totaling
approximately $309,000 and $776,000, 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 as
20%. The Company is
accruing interest at the default rate of 18.0% on two of the loans.
As described in Note 4:
STOCKHOLDERS’ DEFICIT certain notes payable in default
outstanding had been exchanged for equity and cash as described in
the note.
As
described previously, the Company entered into an exchange
agreement with Dr. Imhoff. Based on this agreement the Company
exchanged $199,417 of short-term debt outstanding.
As
described previously, the Company entered into an exchange
agreement with Ms. Rosenstock. Based on this agreement the Company
exchanged $50,000 of short-term debt outstanding and forgave
$28,986.
On
February 8, 2019, a note payable in default to Aquarius 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 balance on the note was $107,500 and accrued interest
was $38,044 for a total of $145,544 outstanding. As of June 30,2020, the Company had entered into an exchange agreement with
Aquarius. Based on this agreement the Company exchanged $145,544 of
debt outstanding for: 291,088 common stock shares; 145,544 warrants
issued to purchase common stock shares at a strike price of $0.25;
and 145,544 warrants issued to purchase common stock shares at a
strike price of $0.75.
On July1, 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 issued 315,000 warrants at an exercise price of
$0.25 per warrant and exercisable within 3 years from issuance (the
“Initial Warrants”). As of June 30, 2020, the loan had
been paid off. As of December 31, 2019, $57,946 remained
outstanding, which included a fee of $4,951 and interest of
$4,606.
F-55
As
described previously, the Company entered into an exchange
agreement with Mr. Blumberg. Based on this agreement the Company
exchanged $70,320 of short-term debt outstanding.
As
described previously, the Company entered into an exchange
agreement with Mr. James. Based on this agreement the Company
exchanged $2,286 of short-term debt outstanding.
The
following table summarizes the Notes payable in default, including related
parties:
The
notes payable to related parties was $2,000 of the $309,000 balance
at June 30, 2020 and $349,000 of the $776,000 balance at December31, 2019.
Short
Term Notes Payable
As
described previously, the Company entered into an exchange
agreement with Dr. Imhoff. Based on this agreement the Company
exchanged $167,000 of short-term debt outstanding.
The
Company issued promissory notes to Mr. Cartwright and Mr. Faupel,
in the amounts of approximately $48,000 and $5,000, respectively.
The notes were initially issued with 0% interest, however interest
increased to 6.0% interest 90 days after the Company received
$1,000,000 in financing proceeds.
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). As of June 30, 2020, the Company had
exchanged $179,291 of debt outstanding for: 896,456 common stock
shares; and 896,455 warrants issued to purchase common stock shares
at a strike price of $0.20. As of December 31, 2019, the Company
had not repaid the note and original issue discount of $157,500
($7,500 is recorded in accrued expenses).
As
described previously, the Company entered into an exchange
agreement with Mr. Mamula. Based on this agreement the Company
exchanged $15,577 of short-term debt outstanding.
On
September 19, 2018, and February 15, 2019, the Company issued
promissory notes to Mr. Gould for $50,000 each in aggregate
principal amount of a 6% promissory note for an aggregate purchase
price of $52,500 each (representing a $2,500 original issue
discount). As of June 30, 2020, the Company had entered into an
exchange agreement with Mr. Gould. Based on this agreement the
Company exchanged $111,227 of debt outstanding for: 556,136 common
stock shares; and 556,136 warrants issued to purchase common stock
shares at a strike price of $0.20. 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) and therefore the
accrued interest rate increased to 12%.
F-56
As
described previously, the Company entered into an exchange
agreement with K2 Medical. Based on this agreement the Company
exchanged $203,000 of short-term debt outstanding.
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. As of June 30, 2020, the balance of $68,121 had been paid
in full.
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 June 30, 2020, a balance of $813
remained. The balance due on insurance policies totaled $57,483 at
December 31, 2019.
As
described previously, the Company entered into an exchange
agreement with Mr. Blumberg. Based on this agreement the Company
exchanged $223,000 of short-term debt outstanding.
As
described previously, the Company entered into an exchange
agreement with Mr. Grimm. Based on this agreement the Company
exchanged $51,050 of short-term debt outstanding.
At June30, 2020 and December 31, 2019, the Company maintained short term
notes payable to both related and non-related parties totaling
$54,000 and $1,026,000, respectively. These notes are short term,
straight-line amortizing notes. The notes carry annual interest
rates between 5% and 19%.
On June30, 2020, the Company exchanged $125,000 in debt (during June 2020,
$125,000 in payables had been converted into short-term debt) from
Mr. James Clavijo, for 500,000 common stock shares and 250,000
warrants to purchase common stock shares. The fair value of the
common stock shares was $250,000 (based on a $0.50 fair value for
the Company’s stock) and of the warrants to purchase common
stock shares was $99,963 (based on a $0.40 black scholes fair
valuation). This resulted in a net loss on extinguishment of debt
of $224,963 ($349,963 fair value less the $125,000 of exchanged
debt). After the exchange transaction a balance was due Mr. Clavijo
of $10,213 which was paid.
The
following table summarizes the Short-term notes payable, including related
parties:
Short-term
notes payable, including related parties
$54
$1,026
The
short-term notes payable past due to related parties was $53,000 of
the $54,000 balance at June 30, 2020 and $646,000 of the $1,026,000
balance at December 31, 2019.
F-57
Troubled Debt Restructuring
The
debt extinguished for Notes Payable which closed on January 8,2020, the Company exchanged $2,064,366 in debt for common stock
shares and warrants as described above that were determined to have
a total fair value of $2,065,548, resulting in a loss on
extinguishment of debt of $1,183 which is recorded in other income
(expense) on the accompanying consolidated statements of
operations. In addition, one of the investors forgave approximately
$29,000 of debt, which was recorded as a gain for extinguishment of
debt. Also, during June 2020, the Company exchanged $125,000 in
debt for common stock shares and warrants as described. This debt
extinguished met the criteria for troubled debt. The basic criteria
are that the borrower is troubled, ie., they are having financial
difficulties, and a concession is granted by the creditor. Due to
the Company being in default on several of its loans the debt is
considered troubled debt. The troubled debt restructuring for Notes
Payable, had an immaterial effect on the Company’s basic or
diluted earnings per share calculation for June 30, 2020 and
2019.
9.
SHORT-TERM CONVERTIBLE DEBT
Related
Party Convertible Note Payable – Short-Term
On June5, 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 June 30, 2020, the note had been exchanged for common stock
shares and warrants. This was part of the exchange made on January8, 2020, for $790,544 of debt outstanding for: 1,905,270 common
stock shares issued on March 23, 2020; 496,602 warrants issued to
purchase common stock shares at a strike price of $0.20; 692,446
warrants issued to purchase common stock shares at a strike price
of $0.25; and 692,446 warrants issued to purchase common stock
shares at a strike price of $0.75. As of December 31, 2019, the
Company had a note due of $512,719.
Troubled Debt Restructuring
The
debt extinguished for Related Party Convertible Note Payable
– Short-Term, which closed on January 8, 2020, the Company
exchanged in part $512,719 in debt for several common stock shares
and warrants as described above. This debt extinguished met the
criteria for troubled debt. The basic criteria are that the
borrower is troubled, i.e., they are having financial difficulties,
and a concession is granted by the creditor. Due to the Company
being in default on several of its loans the debt is considered
troubled debt. See Note 8: Notes Payable, for total gain or loss
recorded in the period. The troubled debt restructuring for Notes
Payable, had an immaterial effect on the Company’s basic or
diluted earnings per share calculation for June 30, 2020 and
2019.
Convertible
Note Payable – Short-Term
On
March 31, 2020, we 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, we 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, we received net proceeds of
$100,000. The note matures on January 26, 2021 and accrues interest
at a rate of 12% per year. We 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 our
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 last 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. As of June 30, 2020, the note
outstanding was $112,750, which consisted of unamortized balance of
$57,354 of a beneficial conversion feature, unamortized original
issue discount of $10,200, unamortized debt issuance costs of
$11,034 and interest of $3,345 included in accrued expenses on the
accompanying consolidated balance sheet.
F-58
On May15, 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%
is due and payable on May 15, 2020. 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 receives 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.
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 14, 2020, the outstanding note
was paid off.
On May15, 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 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 receives a notice of conversion. The notes may be
prepaid in accordance with the terms set forth in the notes. The
notes also contain certain representations, warranties, covenants
and events of default including if the Company are delinquent in
our periodic report filings with the SEC and increases in the
amount of the principal and interest rates under the notes in the
event of such defaults. In the event of default, at Adar’s
option and in its sole discretion, Adar may consider the notes
immediately due and payable. 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. On May 22, 2020, the
outstanding note was paid off.
The
following table summarizes the Convertible notes payable:
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. At December 31, 2019,
the common stock purchase warrant exercise price had been adjusted
to $0.04 and the number of common stock shares exchangeable for was
35,937,500.
As
of June 30, 2020, and as a result of the January 15, 2020 exchange
agreement, the common stock purchase warrant exercise price had
been adjusted to $0.20 and the number of common stock shares
exchangeable for was 7,185,000. This exchange is subject to the
Company meeting repayment conditions. Those conditions involved in
part the repayment of $450,000, $100,000 and $950,000 for the
completion of each Auctus financing tranche. The Company has
executed Tranche 1 and 2 and has paid GPB $550,000. In addition,
the Company would need to begin repaying $50,000, in repayment of
$1,500,000, each month, beginning on September 15, 2020 (if the
Company is not in default it may request an additional four-month
forbearance on that repayment).
The
convertible note required 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. In an event of default the note will accrue interest at a
rate of 22%. 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 June 30, 2020 and
December 31, 2019, had not done so. The note is secured by a lien
on substantially all of the Company’s assets.
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 June 30, 2020, and December 31, 2019, GPB had
earned approximately $32,000 and $31,000 in royalties that are
unpaid, respectively.
As
of June 30, 2020, the balance due on the convertible debt was
$1,828,062, consisting of principal of $1,479,093 and a prepayment
penalty of $347,026 and compared to December 31, 2019, where the
balance due on the convertible debt was $2,177,030 consisting of
principal of $1,830,000 and a prepayment penalty of $347,030.
Interest accrued on the note total $1,148,709 and $1,175,925 at
June 30, 2020 and December 31, 2019, 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.
F-60
Troubled Debt Restructuring
The
debt restructured for Convertible Debt, which closed on January 15,2020, the Company restructured several re-payment plans as
described above and in addition cancelled warrants and issued new
warrants as part of the restructure. This debt restructure met the
criteria for troubled debt. The basic criteria are that the
borrower is troubled, i.e., they are having financial difficulties,
and a concession is granted by the creditor. Due to the Company
being in default on several of its loans the debt is considered
troubled debt. See Note 8: Notes Payable, for total gain or loss
recorded in the period. The troubled debt restructuring for
Convertible Debt, based on the reduction in warrants outstanding
would have an effect on the Company’s diluted earnings per
share calculation for June 30, 2020, but not on the basic earnings
per share calculation. The earnings per share value would have
adjusted from 0.041 to 0.029 for the three months ended March 31,2020. However, for the six months ended June 30, 2020 the basic and
diluted earnings per share would have remained the same as the
Company had a loss.
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 $145,000). 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 August31, 2016. The balance of this note was reduced by a transfer of
$306,863 as part of a debt restructuring that occurred on December7, 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 $91,596
and $148,223 at June 30, 2020 and December 31, 2019,
respectively.
Other
Convertible Debt in Default
GHS
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 June 30, 2020 and December 31, 2019, the balance due on this
note was $83,094, including a default penalty of $37,926 and
accrued interest of $19,956, and $83,094 including a default
penalty of $37,926 and accrued interest of $16,641, respectively.
GHS converted $12,700 of principal and accrued interest during the
year ended December 31, 2019.
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 its
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 June 30, 2020 and December 31, 2019, the balance due on
this note was $14,187, including a default penalty of $4,937.
Interest accrued on the note totals $4,420 and $3,972 at June 30,2020 and December 31, 2019, respectively, and is included in
accrued expenses on the accompanying consolidated balance
sheet.
F-61
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 June 30, 2020 and December 31,2019, the balance due on this note was $103,285, including a
default penalty of $35,285. Interest accrued on the note totals
$34,437 and $29,287 at June 30, 2020 and December 31, 2019,
respectively, and is included in accrued expenses on the
accompanying consolidated balance sheet.
Auctus
On May22, 2020, the Company entered into an exchange agreement with
Auctus. Based on this agreement the Company exchanged three
outstanding notes, in the amounts of $150,000, $89,250, and $65,000
for a total amount $328,422 of debt outstanding, as well as any
accrued interest and default penalty, for: $160,000 in cash
payments (payable in monthly payments of $20,000), converted a
portion of the notes pursuant to original terms of the notes into
500,000 restricted common stock shares (shares were issued on June3, 2020); and 700,000 warrants issued to purchase common stock
shares at a strike price of $0.15. The fair value of the common
stock shares was $250,000 (based on a $0.50 fair value for the
Company’s stock) and of the warrants to purchase common stock
shares was $196,818 (based on a $0.281 black scholes fair
valuation). As of June 30, 2020, a balance of $140,000 remained to
be paid for these exchanged loans.
Auctus notes exchanged in the May 22, 2020 transaction
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 June 30, 2020, the balance due on this note was
$140,000. On May 22, 2020, the default penalty and outstanding
interest was exchanged as described in the preceding paragraph. At
December 31, 2019, the balance due on this total was $192,267,
including a default penalty of $70,931, respectively. Interest
accrued on the note totals $45,629 at December 31, 2019,
respectively, and is included in accrued expenses on the
accompanying consolidated balance sheet. Auctus converted nil and
$14,236 of principal and accrued interested during the six months
and year ended June 30, 2020 and December 31, 2019, respectively.
At June 30, 2020, the balance due on this note was
$140,000.
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, the balance due on this
total was $90,641, including a default penalty of $56,852,
respectively. Interest accrued on the note totals $16,436 at
December 31, 2019, respectively, and is included in accrued
expenses on the accompanying consolidated balance sheet. At June30, 2020, the balance due on this note was nil.
F-62
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, respectively.
Interest accrued on the note totaled $142 at December 31, 2019 and
is included in accrued expenses on the accompanying consolidated
balance sheet. At June 30, 2020, the balance due on this note was
nil.
The
following table summarizes the Convertible notes (including debt in
default):
The
convertible notes payable in default was $432,000 of the $2,260,000
balance at June 30, 2020 and the total balance of $2,915,000 at
December 31, 2019.
Troubled Debt Restructuring
The
debt restructured for Convertible Debt in default from Auctus,
which closed on May 22, 2020, the Company restructured several
re-payment plans as described above and in addition cancelled
warrants and issued new warrants as part of the restructure. This
debt restructure met the criteria for troubled debt. The basic
criteria are that the borrower is troubled, i.e., they are having
financial difficulties, and a concession is granted by the
creditor. Due to the Company being in default on several of its
loans the debt is considered troubled debt. The troubled debt
restructuring for Convertible Debt in default from Auctus, had an
immaterial effect on the Company’s basic or diluted earnings
per share calculation for June 30, 2020 and 2019.
11.
LONG-TERM DEBT
Long-term
Debt – Related Parties
On July24, 2019, Dr. Faupel and Mr. Cartwright agreed to an addendum to
the debt restructuring 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 September4, 2021.
F-63
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. The resulting difference of
$20,000 was recorded to accrued interest. 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 December31, 2018. The resulting difference of $30,000 was recorded to
accrued interest and elimination of debt.
Troubled Debt Restructuring
The
debt extinguished for Mr. Cartwright and Mr. Faupel meet the
criteria for troubled debt. The basic criteria are that the
borrower is troubled, i.e., they are having financial difficulties,
and a concession is granted by the creditor. Due to the Company
being in default on several of its loans the debt is considered
troubled debt. The troubled debt restructuring for Long-term Debt
– Related Parties, had an immaterial effect on the
Company’s basic or diluted earnings per share calculation for
June 30, 2020 and 2019 as the gain was recorded in
2018.
The
table below summarizes the detail of the exchange
agreement:
Future
debt obligations at June 30, 2020 for Long-term Debt –
Related Parties are as follows (in thousands):
Year
Amount
2020
-
2021
-
2022
200
2023
200
2024
184
Totals
584
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 was received in December 2019 and matures
December 17, 2021 and accrues interest at a 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
proceeds of $635,000, after administrative and legal expenses
Company received $570,000). 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. On May 27, 2020,
the second tranche of $400,000 was received. 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
June 30, 2020, and December 31, 2019, $700,000 remained outstanding
and accrued interest of $38,111 and $2,722, respectively. Further,
as of June 30, 2020, and December 31, 2019, the Company had
unamortized debt issuance costs of $47,396 and $64,000,
respectively and an unamortized debt discount on warrants of
$463,020, and $622,000, respectively and providing a net balance of
$190,000 and $15,000, respectively.
On May27, 2020, the Company received the second tranche in the amount of
$400,000, from the December 17, 2019, securities purchase agreement
and convertible note with Auctus. The net amount paid to the
Company was $313,000 This second tranche is part of the convertible
note issued to Auctus for a total of $2.4 million of which $700,000
has already been provided by Auctus. The notes maturity date is
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. 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. In addition, as
part of this transaction the Company was required to pay a 2.0% fee
to a registered broker-dealer. As of June 30, 2020, $400,000
remained outstanding and accrued interest of $3,778. Further, as of
June 30, 2020, the Company had unamortized debt issuance costs of
$63,836, providing a net balance of $336,164.
F-65
In
addition, the Company determined that the conversion option needed
to be bifurcated from the debt arrangement and will be 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.
Future
debt obligations at June 30, 2020 for Long-term Convertible Notes
Payable, net are as follows (in thousands):
Year
Amount
2020
-
2021
1,100
2022
-
2023
-
2024
-
Totals
1,100
Long-term
debt
On May4, 2020, the Company received a loan from the Small Business
Administration (SBA) pursuant to the Paycheck Protection Program
(PPP) as part of the Coronavirus Aid, Relief, and Economic Security
Act (CARES Act) in the amount of $50,184. The loan bears interest
at a rate of 1.00%, and matures in 24 months, with the principal
and interest payments being deferred until the date of forgiveness
with interest accruing, then converting to monthly principal and
interest payments, at the interest rate provided herein, for the
remaining eighteen (18) months. Lender will apply each payment
first to pay interest accrued to the day Lender received the
payment, then to bring principal current, and will apply any
remaining balance to reduce principal. Payments must be made on the
same day as the date of this Note in the months they are due.
Lender shall adjust payments at least annually as needed to
amortize principal over the remaining term of the Note. Under the
provisions of the PPP, the loan amounts will be forgiven as long
as: the loan proceeds are used to cover payroll costs, and most
mortgage interest, rent, and utility costs over a 24 week period
after the loan is made; and employee and compensation levels are
maintained. In addition, payroll costs are capped at $100,000 on an
annualized basis for each employee. Not more than 40% of the
forgiven amount may be for non-payroll costs. As of June 30, 2020,
the outstanding balance was $50,226 including $41 in accrued
interest.
12.
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 and Series D convertible preferred stock, convertible
debt, convertible preferred dividends and warrants convertible into
common stock shares.
F-66
The
following table sets forth pertinent data relating to the
computation of basic and diluted net loss per share attributable to
common shareholders.
Basic weighted average number of shares outstanding
8,463
3,319
Net income loss per share (basic)
$(0.48)
$(0.87)
Diluted weighted average number of shares outstanding
8,463
3,319
Net income (loss) per share (diluted)
$(0.48)
$(0.87)
Dilutive equity instruments (number of equivalent
units):
Stock options
-
-
Preferred stock
-
-
Convertible debt
31,228
38,786
Warrants
5,341
30,235
Total Dilutive instruments
36,569
69,021
13.
SUBSEQUENT EVENTS
During
July 2020, the Company received equity investments in the amount of
$773,000. These investors will receive 773 Series E Preferred Stock
(each Series E Preferred Stock share converts into 4,000 shares of
the Company’s common stock shares). The Series E Preferred
Stock will have cumulative dividends at the rate per share of 6%
per annum. The stated value of the Series E Preferred Stock is
$1,000.
During
July and August 2020, GHS converted outstanding debt in the amount
of $50,454 for 175,000 common stock shares.
On July14, 2020, the Company granted stock options to employees and
consultants. The new Stock Plan (the “Plan”) allows for
the issuance of incentive stock options, nonqualified stock
options, and stock purchase rights. The exercise price of options
was determined by the Company’s board of directors, but
incentive stock options were granted at an exercise price equal to
the fair market value of the Company’s common stock as of the
grant date. Options historically granted have generally become
exercisable over four years and expire ten years from the date of
grant.
Stock
options granted have a 10-year life and expire 90 days after
employment of consulting engagement terminates. Vesting schedule
varies per grantee. Generally stock options granted vest as
follows: 25% vest immediately, and the remaining stock options vest
over 33 months, beginning three months after grant.
F-67
The
following lists the stock options granted:
Grant
Date
Expiration
Date
Vesting
Period
Number
of Stock Options Granted
Exercise
Price
Black
Scholes Valuation
Cartwright,
Gene
07/14/2020
07/12/2030
Immediate
400,000
$0.49
$0.483
Faupel,
Mark
07/14/2020
07/12/2030
Immediate
400,000
$0.49
$0.483
Imhoff,
John
07/14/2020
07/12/2030
36
months
50,000
$0.49
$0.483
James,
Michael
07/14/2020
07/12/2030
36
months
50,000
$0.49
$0.483
Clavijo,
James
07/14/2020
07/12/2030
36
months
300,000
$0.49
$0.483
Battle,
Lisa
07/14/2020
07/12/2030
36
months
178,000
$0.49
$0.483
Sufka,
Melissa
07/14/2020
07/12/2030
36
months
178,000
$0.49
$0.483
Waterstreet,
Alesandra
07/14/2020
07/12/2030
36
months
178,000
$0.49
$0.483
Sufka,
Melissa
07/14/2020
07/12/2030
18
months
66,000
$0.49
$0.483
1,800,000
During
August 2020, the Company issued 106,560 common stock shares for the
payment of Series D Preferred Stock dividends accrued.
F-68
You should rely only on the information contained in this document.
We have not authorized anyone to provide you with information that
is different. This document may only be used where it is legal to
sell these securities. The information in this document may only be
accurate on the date of this document.
Additional risks and uncertainties not presently known or that are
currently deemed immaterial may also impair our business
operations. The risks and uncertainties described in this document
and other risks and uncertainties which we may face in the future
will have a greater impact on those who purchase our common stock.
These purchasers will purchase our common stock at the market price
or at a privately negotiated price and will run the risk of losing
their entire investment.
39,001,753 SHARES OF
COMMON STOCK
PROSPECTUS
,
2020
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
The
following table sets forth the expenses in connection with this
registration statement. All of such expenses are estimates, other
than the filing fees payable to the SEC.
Description
Amount to bePaid
Filing Fee -
SEC
$1,610.72
Attorney’s
fees and expenses
$100,000.00
Accountant’s
fees and expenses
$11,000.00
Transfer
agent’s and registrar fees and expenses
$0.00
Printing and
engraving expenses
$2,000.00
Miscellaneous
expenses
0.00
Total
$114,610.72*
*
Estimated
ITEM
14. INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Section 145
of the Delaware General Corporation Law provides that a corporation
may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with any
threatened, pending or completed actions, suits or proceedings in
which such person is made a party by reason of such person being or
having been a director, officer, employee or agent of the
corporation. Section 145 of the Delaware General Corporation
Law also provides that expenses (including attorneys’ fees)
incurred by a director or officer in defending an action may be
paid by a corporation in advance of the final disposition of an
action if the director or officer undertakes to repay the advanced
amounts if it is determined such person is not entitled to be
indemnified by the corporation. The Delaware General Corporation
Law provides that Section 145 is not exclusive of other rights
to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors
or otherwise. Our amended and restated bylaws provide that, we
shall indemnify and hold harmless any person who was or is made or
is threatened to be made a party or is otherwise involved in any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason
of the fact that such person, or the person for whom he is the
legally representative, is or was a director or officer of ours,
against all liabilities, losses, expenses (including
attorney’s fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such proceeding.
Section 102(b)(7)
of the Delaware General Corporation Law permits a corporation to
provide in its Certificate of Incorporation that a director of the
corporation shall not be personally liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the
director’s duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock
repurchases, redemptions or other distributions, or (iv) for
any transaction from which the director derived an improper
personal benefit.
Our
Certificate of Incorporation provides that we shall, indemnify to
the fullest extent permitted by law any person made or threatened
to be made a party to an action or proceeding, whether criminal,
civil, administrative or investigative, by reason of the fact that
such person or his or her testator or intestate is or was a
director, officer or employee of ours, or any predecessor of us, or
serves or served at any other enterprise as a director, officer or
employee at the request of us or any predecessor to
us.
II-1
Our
amended and restated bylaws provide we shall, indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right
of the corporation to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee or agent
of us, or is or was serving at the request of us as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses
(including attorneys' fees) and amounts paid in settlement (if such
settlement is approved in advance by us, which approval shall not
be unreasonably withheld) actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit
if he acted in good faith and in manner he reasonably believed to
be in or not opposed to the best interests of us, except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable to us unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court
shall deem proper. Notwithstanding any other provision of this
Article VI, no person shall be indemnified hereunder for any
expenses or amounts paid in settlement with respect to any action
to recover short-swing profits under Section 16(b) of the
Securities Exchange Act of 1934, as amended.
Expenses
incurred by such a person in defending a civil or criminal action,
suit or proceeding by reason of the fact that such person he is or
was a director, officer, employee or agent of us, or is or was
serving at the request of us, or by or in the right of us to
procure a judgment in our favor by reason of the fact that he is a
director, officer, employee or agent of another corporation,
partnership, joint venture trust or other enterprise, shall be paid
by us in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such
person to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by us as authorized by
relevant sections of the Delaware General Corporation
Law.
The
indemnification rights provided in our amended and restated bylaws
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any by-law, agreement or vote of
stockholders or disinterested directors or otherwise, both as to
action in their official capacities and as to action in another
capacity while holding such office, continue as to such person who
has ceased to be a director or officer, and inure to the benefit of
the heirs, executors and administrators of such a
person.
If
the Delaware General Corporation Law is amended to expand further
the indemnification permitted to indemnitees, then we shall
indemnify such persons to the fullest extent permitted by the
Delaware General Corporation Law, as so amended.
Our
amended and restated bylaws shall be deemed to be a contract
between us and each person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that person is or was, or has
agreed to become, a director or officer of ours, or is or was
serving, or has agreed to serve, at our request, as a director,
officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise,
including any employee benefit plan, or by reason of any action
alleged to have been taken or omitted in such capacity, at any time
while this by-law is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or
any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of
facts.
The
indemnification provision of our amended and restated bylaws does
not affect directors’ responsibilities under any other laws,
such as the federal securities laws or state or federal
environmental laws.
We
may purchase and maintain insurance on behalf of any person who is
or was a director, officer or employee of ours, or is or was
serving at our request as a director, officer, employee or agent of
another company, partnership, joint venture, trust or other
enterprise against liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such,
whether or not we would have the power to indemnify him against
liability under the provisions of this section. We currently
maintain such insurance.
II-2
The
right of any person to be indemnified is subject to our right, in
lieu of such indemnity, to settle any such claim, action, suit or
proceeding at our expense of by the payment of the amount of such
settlement and the costs and expenses incurred in connection
therewith.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling our
company pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
In
the event that a claim for indemnification against such liabilities
(other than the payment of expenses incurred or paid by a director,
officer or controlling person in a successful defense of any
action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
registered herewith, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to the
court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of
such issue.
ITEM
15. RECENT
SALES OF UNREGISTERED SECURITIES
On
March 20, 2018, we entered into a securities purchase agreement
with Auctus Fund, LLC for the issuance and sale to Auctus of
$150,000 in aggregate principal amount of a 12% convertible
promissory note. On March 20, 2018, we issued the note to Auctus.
Pursuant to the purchase agreement, we also issued to Auctus a
warrant exercisable to purchase an aggregate of 4,262 shares of the
Company’s common stock. The warrant is exercisable at any
time, at an exercise price per share equal to $1.82 (110% of the
closing price of the common stock on the day prior to issuance),
subject to certain customary adjustments and price-protection
provisions contained in the warrant. The warrant has a five-year
term. The note matures nine months from the date of issuance and
accrues interest at a rate of 12% per year. We could have prepaid
the note, in whole or in part, for 115% of outstanding principal
and interest until 30 days from issuance, for 125% of outstanding
principal and interest at any time from 31 to 60 days from
issuance, and for 130% of outstanding principal and interest at any
time from 61 days from issuance to 180 days from issuance. After
nine months from the date of issuance, Auctus may convert the note,
at any time, in whole or in part, into shares of the our common
stock, at a conversion price equal to the lower of the price
offered in the our next public offering or a 40% discount to the
average of the two lowest trading prices of the common stock during
the 20 trading days prior to the conversion, subject to certain
customary adjustments and price-protection provisions contained in
the note. The note includes customary events of default provisions
and a default interest rate of 24% per year. Upon the occurrence of
an event of default, Auctus may require us to redeem the note (or
convert it into shares of common stock) at 150% of the outstanding
principal balance plus accrued and unpaid interest. As of December31, 2018, we had a net debt of $133,870 and accrued interest of
$635.
On
August 29, 2018, we issued a promissory note to an investor for
$150,000 in aggregate principal amount of a 6% promissory note for
an aggregate purchase price of $157,500 (representing a $7,500
original issue discount). Pursuant to the promissory note the
entire unpaid principal balance on the promissory note together
with all accrued and unpaid interest and loan origination fees, if
any, at the choice of the investor, shall be due and payable in
full from the funds received by us from a financing of at least
$2,000,000, or at the option of the investor, to be included in our
financing under the same terms as the new investors with the most
favorable terms making a cash investment. If we do 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 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, 2018,
we had not repaid the note and therefore the accrued interest rate
increased to 12%.
II-3
On
August 31, 2018, we entered into agreements with certain holders of
the our Series C1 preferred stock, par value $0.001 per share (the
“Series C1 Preferred Stock”), including John Imhoff,
the chairman of our board of directors, and Mark Faupel, the Chief
Operating Officer and a director of our 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 our newly created Series C2
preferred stock, par value $0.001 per share (the “Series C2
Preferred Stock”). In total, for 3,262 shares of Series C1
Preferred Stock to be surrendered, we issued 3,262 shares of Series
C2 Preferred Stock.
On
September 19, 2018, we issued a promissory note to an investor for
$50,000 in aggregate principal amount of a 6% promissory note for
an aggregate purchase price of $52,500 (representing a $2,500
original issue discount). Pursuant to the promissory note the
entire unpaid principal balance on the promissory note together
with all accrued and unpaid interest and loan origination fees, if
any, at the choice of the investor, shall be due and payable in
full from the funds received from a financing of at least
$2,000,000, or at the option of the investor, to be included in the
our financing under the same terms as the new investors with the
most favorable terms making a cash investment. If we do 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 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, 2018, we had not repaid the note and therefore the
accrued interest rate increased to 12%.
On
July 1, 2019, we entered into a loan agreement with Accilent
Capital Management Inc/Rev Royalty Income and Growth Trust
(“Accilent”), providing for the purchase by Rev of an
unsecured promissory note in the principal amount of $49,389 (CAD$
65,500). The note was fully funded on July 9, 2019 (net of a 8%
original issue discount and other expenses). The note bears an
interest rate of 16% and 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. We will issue warrants to purchase one common share 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 our financing
subject to adjustment and exercisable within 3 years from issuance
(the “Initial Warrants”). In the event that the common
shares of the Issuer were not listed on the TSX Venture Exchange
pursuant to the “Transaction” on or prior to September1, 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 $3,951 and accrued interest of
$4,606.
On
December 5, 2019, we entered into an exchange agreement with
Aquarius. Pursuant to this agreement, we 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
January 6, 2020, we entered into an exchange agreement with Jones
Day. We 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 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.
II-4
On
January 16, 2020, we 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 the 2016 warrants issued; 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 we are 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 we will pay an
additional $50,000 to pay down debt. If between $5,000,000 and
$6,000,000 is raised thru financings, we will pay an additional
$1,000,000 to pay down debt. If the financing is in excess of
$6,000,000 then we will pay the entire debt balance outstanding. In
the event of alternative financings, we 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 our assets, 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 our common stock shares
to less than 9.99% of the total number of our outstanding common
stock shares at any one point in time. All royalty payments owed to
GPB pursuant thereto shall remain our obligations to GPB and shall
remain in full force and effect. We shall have 8 months from the
execution date of this exchange agreement, subject to early
termination as forth below (in “forbearance
agreement”). We 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, we agree 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
March 31, 2020, we 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, we 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, we received net proceeds of
$100,000. The note matures on January 26, 2021 and accrues interest
at a rate of 12% per year. We 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 our 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.
On
June 23, 2020, we entered into an exchange agreement with Mr.
Clavijo. Based on this agreement we exchanged outstanding payables,
in the amount of $135,213 of debt outstanding for: $10,213 in cash;
500,000 restricted common stock shares; and 250,000 warrants issued
to purchase common stock shares at a strike price of
$0.50.
In
June and July 2020, we sold an aggregate of 1,635.50 shares of
Series E preferred stock to certain accredited investors pursuant
to certain securities purchase agreements at a price of $1,000 per
share. Each Series E preferred stock share converts into 4,000
shares of our common stock shares. The Series E preferred stock
will have cumulative dividends at the rate per share of 8% per
annum. The stated value of the Series E preferred stock is
$1,000.
Certificate
of Designation of Preferences, Rights and Limitations of Series D
Convertible Preferred Stock (incorporated by reference to Exhibit
3.4 to the annual report on Form 10-K, filed April 20,2020)
3.5
Certificate
of Designation of Preferences, Rights and Limitations of Series E
Convertible Preferred Stock
Secured
Promissory Note, dated September 10, 2014 (incorporated by
reference to Exhibit 4.1 to the current report on Form 8-K filed
September 10, 2014)
Amendment
#1 to Secured Promissory Note, dated March 10, 2015 (incorporated
by reference to Exhibit 10.1 to the current report on Form 8-K
filed March 19, 2015)
Amendment
#2 to Secured Promissory Note, dated May 4, 2015 (incorporated by
reference to Exhibit 10.1 to the current report on Form 8-K filed
May 7, 2015)
Amendment
#3 to Secured Promissory Note, dated June 1, 2015 (incorporated by
reference to Exhibit 10.1 to the current report on Form 8-K filed
June 5, 2015)
Amendment
#4 to Secured Promissory Note, dated June 16, 2015 (incorporated by
reference to Exhibit 10.4 to the current report on Form 8-K filed
June 30, 2015)
Amendment
#5 to Secured Promissory Note, dated June 29, 2015 (incorporated by
reference to Exhibit 10.5 to the current report on Form 8-K filed
June 30, 2015)
Amendment
#6 to Secured Promissory Note, dated January 20, 2016 (incorporated
by reference to Exhibit 10.1 to the current report on Form 8-K
filed February 16, 2016)
Amendment
#8 to Secured Promissory Note, dated March 7, 2016 (incorporated by
reference to Exhibit 10.1 to the current report on Form 8-K filed
March 7, 2016)
Senior
Secured Convertible Note, dated February 12, 2016 (incorporated by
reference to Exhibit 4.1 to the current report on Form 8-K filed
February 12, 2016)
Form
of Warrant (November 2011 Private Placement) (incorporated by
reference to Exhibit 4.1 to the current report on Form 8-K/A, filed
November 28, 2011)
Form
of Warrant (Series B-Tranche A) (incorporated by reference to
Exhibit 10.2 to amendment no. 1 to the current report on Form 8-K,
filed May 23, 2013)
Form
of Warrant (Series B-Tranche B) (incorporated by reference to
Exhibit 10.3 to amendment no. 1 to the current report on Form 8-K,
filed May 23, 2013)
Form
of Warrant (2014 Public Offering Placement Agent) (incorporated by
reference to Exhibit 4.2 to the current report on Form 8-K filed
December 4, 2014)
Form
of Warrant (2014 Public Offering Warrant Exchanges) (incorporated
by reference to Exhibit 4.1 to the current report on Form 8-K filed
June 30, 2015)
Form
of Warrant (Senior Secured Convertible Note) (incorporated by
reference to Exhibit 10.5 to the current report on Form 8-K filed
February 12, 2016)
Form
of Warrant (Series B-Tranche B Exchanges; GPB Exchange)
(incorporated by reference to Exhibit 4.1 to the current report on
Form 8-K filed June 14, 2016)
Common
Stock Purchase Warrant (Convertible Promissory Note) (incorporated
by reference to Exhibit 4.2 to the current report on Form 8-K filed
February 16, 2017)
Senior
Secured Convertible Note, dated December 17, 2019, by and between
Guided Therapeutics, Inc. and Auctus Fund, LLC (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Securities
Purchase Agreement (Series C), dated June 29, 2015 (incorporated by
reference to Exhibit 10.6 to the current report on Form 8-K filed
June 30, 2015)
Agreement
between Shandong Yaohua Medical Instrument Corporation and Guided
Therapeutics, Inc., Confidential, Final 22 January 2017
(incorporated by reference to Exhibit 10.1 to the current report on
Form 8-K filed January 26, 2017)
Guided
Therapeutics-Shenghuo Medical Agreement, 22 Jan 2017 (incorporated
by reference to Exhibit 10.2 to the current report on Form 8-K
filed January 26, 2017)
Lease
Modification, dated as of February 23, 2018, by and between Guided
Therapeutics, Inc. and TREA Infill Industrial Atlanta, LLC
(incorporated by reference to Exhibit 3.4 to the annual report on
Form 10-K, filed April 20, 2020)
Securities
Purchase Agreement, dated as of March 12, 2018, by and between
Guided Therapeutics, Inc. and Eagle Equities, LLC (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Securities
Purchase Agreement, dated as of May 17, 2018, by and between Guided
Therapeutics, Inc. and GHS Investments, Inc (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Securities
Purchase Agreement, dated as of March 20, 2018, by and between
Guided Therapeutics, Inc. and Auctus Fund, LLC (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Securities
Purchase Agreement, dated as of April 30, 2018, by and between
Guided Therapeutics, Inc. and Power Up (incorporated by reference
to Exhibit 3.4 to the annual report on Form 10-K, filed April 20,2020)
Securities
Purchase Agreement, dated as of June 7, 2018, by and between Guided
Therapeutics, Inc. and Power Up (incorporated by reference to
Exhibit 3.4 to the annual report on Form 10-K, filed April 20,2020)
Securities
Purchase Agreement, dated as of June 22, 2018, by and between
Guided Therapeutics, Inc. and GHS Investments, Inc (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Securities
Purchase Agreement, dated as of July 3, 2018, by and between Guided
Therapeutics, Inc. and Auctus Fund, LLC (incorporated by reference
to Exhibit 3.4 to the annual report on Form 10-K, filed April 20,2020)
Exchange
Agreements, dated as of August 31, 2018, by and between Guided
Therapeutics, Inc. and Series C1 Preferred Stockholders in exchange
for Series C2 Preferred Stock. (incorporated by reference to
Exhibit 10.1 to the current report on Form 8-K filed September 6,2018)
Equity
Financing Agreement, dated as of March 1, 2018, by and between
Guided Therapeutics, Inc. and GHS Investments, Inc (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Purchase and Sale
Agreement, dated as of February 14, 2019, by and between Guided
Therapeutics, Inc. and Everest Business Funding (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Securities
Purchase Agreement, dated as of March 29, 2019, by and between
Guided Therapeutics, Inc. and Auctus Fund, LLC (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Securities
Purchase Agreement, dated as of May 15, 2019, by and between Guided
Therapeutics, Inc. and Eagle Equities, LLC (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Securities
Purchase Agreement, dated as of May 15, 2019, by and between Guided
Therapeutics, Inc. and Adar Bays, LLC (incorporated by reference to
Exhibit 3.4 to the annual report on Form 10-K, filed April 20,2020)
Loan
Agreement, dated as of July 1, 2019, by and between Guided
Therapeutics, Inc. and Accilent Capital Management Inc. / Rev
Royalty Trust Income and Growth Trust (incorporated by reference to
Exhibit 3.4 to the annual report on Form 10-K, filed April 20,2020)
License Agreement
Modification, dated as of July 24, 2019, by and between Guided
Therapeutics, Inc. and Shandong Medical Instrument Corporation
(incorporated by reference to Exhibit 3.4 to the annual report on
Form 10-K, filed April 20, 2020)
Addendum to the
Exchange Agreement, dated as of September 30, 2018, by and between
Guided Therapeutics, Inc. and Dr. Cartwright (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Securities
Purchase Agreement, dated as of December 17, 2019, by and between
Guided Therapeutics, Inc. and Auctus Fund, LLC (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Form
of Securities Purchase Agreement between the Guided Therapeutics,
Inc. and investors set forth therein (incorporated by reference to
Exhibit 3.4 to the annual report on Form 10-K, filed April 20,2020)
Form
of Security Agreement between the Guided Therapeutics, Inc. and
investors set forth therein (incorporated by reference to Exhibit
3.4 to the annual report on Form 10-K, filed April 20,2020)
Form
of Exchange Agreement, dated as of December 30, 2019, by and
between Guided Therapeutics, Inc. and Investors (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Exchange
Agreement, dated as of January 6, 2020, by and between Guided
Therapeutics, Inc. and Jones Day Law Firm (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Finder’s Fee
Agreement, dated as of January 6, 2020, by and between Guided
Therapeutics, Inc. and Iron Stone Capital (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Exchange
Agreement, dated as of January 16, 2020, by and between Guided
Therapeutics, Inc. and GPB Debt Holdings II, LLC (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Promotional
Agreement, dated as of January 22, 2020, by and between Guided
Therapeutics, Inc. and Blumberg & Bowles Consulting, LLC
(incorporated by reference to Exhibit 3.4 to the annual report on
Form 10-K, filed April 20, 2020)
Securities
Purchase Agreement, dated as of March 31, 2020, by and between
Guided Therapeutics, Inc. and Auctus Fund, LLC (incorporated by
reference to Exhibit 3.4 to the annual report on Form 10-K, filed
April 20, 2020)
Consent of
Ellenoff Grossman & Schole LLP (contained in Exhibit
5.1)
24.1*
Power
of Attorney
101.1*
Interactive Data
File
*Filed
herewith
** To
be filed by amendment
ITEM
17. UNDERTAKINGS
The
undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration
statement:
(i)
To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii)
To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the
effective registration statement; and
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
II-10
(2)
That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4)
That, for the purpose of determining liability under the Securities
Act of 1933 to any purchaser, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to an
offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule
430A (§230.430A of this chapter), shall be deemed to be part
of and included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is
part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such
document immediately prior to such date of first use.
(5)
That, for the purpose of determining liability of the registrant
under the Securities Act of 1933 to any purchaser in the initial
distribution of the securities:
The
undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used
to sell the securities to the purchaser, if the securities are
offered or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities
to such purchaser:
(i)
Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant
to Rule 424;
(ii)
Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned registrant or used or referred to by
the undersigned registrant;
(iii)
The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv)
Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such
issue.
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act
of 1933, the registrant has duly caused its registration statement
to be signed on its behalf by the undersigned, thereunto duly
authorized on September 10, 2020.
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers
and directors Guided Therapeutics, Inc., a Delaware corporation, do
hereby constitute and appoint Gene Cartwright and Mark Faupel, and
each of them, as his or her true and lawful attorney-in-fact and
agent, with full power of substitution and re-substitution, for him
and in his name, place, and stead, in any and all capacities, to
sign any and all amendments (including post-effective amendments,
exhibits thereto and other documents in connection therewith) to
this Registration Statement and any subsequent registration
statement filed by the registrant pursuant to Rule 462(b) of
the Securities Act of 1933, as amended, which relates to this
Registration Statement, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the SEC,
granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent,
or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature
Title
Date
/s/
Gene S. Cartwright
Gene S.
Cartwright
President, Chief
Executive Officer and Acting Chief Financial Officer
(Principal
Executive Officer and Principal Financial and Accounting
Officer)