NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
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 November 7, 2016. As a
result of the reverse stock split, every 800 shares of issued and
outstanding common stock was 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 453,694,400 shares of Common Stock to 570,707
shares as of that date. See Note 4, Stockholders’ Deficit.
Unless otherwise specified, all per share amounts are reported on a
post-stock split basis, as of December 31, 2016. On February 24,
2016, the Company had also implemented a 1:100 reverse stock split
of its issued and outstanding common stock.
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, 2016, it had
an accumulated deficit of approximately $127.6 million. Through
December 31, 2016, the Company has devoted substantial resources to
research and development efforts. The Company first generated
revenue from product sales in 1998, but does not have significant
experience in manufacturing, marketing or selling its products. The
Company’s development efforts may not result in commercially
viable products and it may not be successful in growing sales for
its products. Moreover, required regulatory clearances or approvals
may not be obtained. The Company’s products may not ever gain
market acceptance and the Company may not ever achieve levels of
revenue to sustain further development costs and support ongoing
operations or achieve profitability. The development and continued
commercialization of the Company’s products will require
substantial development, regulatory, sales and marketing,
manufacturing and other expenditures. The Company expects operating
losses to continue through the foreseeable future as it continues
to expend substantial resources to complete development of its
products, obtain regulatory clearances or approvals and conduct
further research and development.
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, 2016, the Company had a negative working capital of
approximately $8.3 million, accumulated deficit of $127.6 million,
and incurred a net loss of $4.0 million for the year then ended.
Stockholders’ deficit totaled approximately $9.3 million at
December 31, 2016, primarily due to recurring net losses from
operations, deemed dividends on warrants and preferred stock,
offset by proceeds from the exercise of options and warrants and
proceeds from sales of stock.
The
Company’s capital-raising efforts are ongoing. If sufficient
capital cannot be raised during the second quarter of 2017, 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 4.3 million
shares of its common stock outstanding at December 31, 2016, with
exercise prices ranging between $0.35 and $84,000 per share.
Exercises of these warrants would generate a total of approximately
$6.2 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. 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.
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
of Guided Therapeutics, Inc. and its wholly owned
subsidiary.
Accounting Standard Updates
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued ASU 2014-09, “Revenue from Contracts with Customers
(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 customers 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 customers 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 Customers (Topic 606), Principal
versus Agent Considerations (Reporting Revenue Gross versus
Net),” (“ASU 2016-08”); ASU 2016-10,
“Revenue from Contracts with Customers (Topic 606),
Identifying Performance Obligations and Licensing,”
(“ASU 2016-10”); ASU 2016-12, “Revenue from
Contracts with Customers (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 Customers,” (“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 is evaluating the impact that
adoption of this guidance will have on the determination or
reporting of its financial results.
In June
2014, the FASB issued ASU 2014-12, “Accounting for
Share-Based Payments When the Terms of an Award Provide that a
Performance Target Could be Achieved after the Requisite Service
Period,” (“ASU 2014-12”). ASU 2014-12 requires
that a performance target that affects vesting, and that could be
achieved after the requisite service period, be treated as a
performance condition. As such, the performance target should not
be reflected in estimating the grant date fair value of the award.
ASU 2014-12 is effective for the reporting periods beginning after
December 15, 2015. Early adoption is permitted. The effective date
of this policy was the first quarter of fiscal year
2016.
In
August 2014, the FASB issued ASU 2014-15, “Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern,” (“ASU 2014-15”). ASU 2014-15
requires management to perform interim and annual assessments of an
entity’s ability to continue as a going concern for a one
year period subsequent to the date of issuance of its financial
statements. An entity must provide certain disclosures if
conditions or events raise substantial doubt about the
entity’s ability to continue as a going concern. The Company
is evaluating the impact that adoption of this guidance will have
on the determination or reporting of its financial
results.
In July
2015, the FASB issued ASU 2015-11, “Simplifying the
Measurement of Inventory,” (“ASU 2015-11”). ASU
2015-11 requires inventory be measured at the lower of cost and net
realizable value and options that currently exist for market value
be eliminated. ASU 2015-11 defines net realizable value as
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. The guidance is effective for reporting periods
beginning after December 15, 2016 and interim periods within
those fiscal years with early adoption permitted. ASU 2015-11
should be applied prospectively. The Company is evaluating the
impact adoption of this guidance will have on determination or
reporting of its financial results.
In
April 2015, the FASB issued ASU 2015-03, “Imputation of
Interest: Simplifying the Presentation of Debt Issuance
Costs,” (“ASU 2015-03”). ASU 2015-03 requires
that debt issuance costs related to a recognized debt liability be
presented in the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt
discounts. The guidance is effective for reporting periods
beginning after December 15, 2015 and interim periods within
those fiscal years with early adoption permitted. ASU 2015-03
should be applied on a retrospective basis, wherein the balance
sheet of each period presented should be adjusted to reflect the
effects of adoption. The effective date of this policy was the
first quarter of fiscal year 2016.
In
November 2015, the FASB issued ASU 2015-17, “Income Taxes
(Topic 740) Balance Sheet Classification of Deferred Taxes.”
The amendments in ASU 2015-17 seek to simplify the presentation of
deferred income taxes and require that deferred tax liabilities and
assets be classified as noncurrent in a classified statement of
financial position. ASU 2015-17 is effective for financial
statements issued for annual periods beginning after December 15,
2016, and interim periods within those annual periods, with early
application permitted for all entities as of the beginning of an
interim or annual reporting period. The Company believes that
adoption of this new standard will not be material to its
consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic
842)” that requires lessees to recognize on the balance sheet
the assets and liabilities associated with the rights and
obligations created by those leases. Under the new guidance, a
lessee will be required to recognize assets and liabilities for
leases with lease terms of more than 12 months. Consistent with
current U.S. GAAP, the recognition, measurement, and presentation
of expenses and cash flows arising from a lease by a lessee
primarily will depend on its classification as finance or operating
lease. The update is effective for reporting periods beginning
after December 15, 2018. Early adoption is permitted. The Company
is evaluating the impact adoption of this guidance will have on
determination or reporting of its financial results.
In
March 2016, the FASB issued ASU 2016-05, “Derivatives and
Hedging (Topic 815),” (“ASU 2016-05”). ASU
2016-05 provides guidance clarifying that novation of a derivative
contract (i.e., a change in counterparty) in a hedge accounting
relationship does not, in and of itself, require dedesignation of
that hedge accounting relationship. The effective date will be the
first quarter of fiscal year 2017, with early adoption permitted.
Adoption is not expected to have a material effect on the
Company’s consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-06, “Derivatives and
Hedging (Topic 815),” (“ASU 2016-06”). ASU
2016-06 simplifies the embedded derivative analysis for debt
instruments containing contingent call or put options by clarifying
that an exercise contingency does not need to be evaluated to
determine whether it relates to interest rates and credit risk in
an embedded derivative analysis. The effective date will be the
first quarter of fiscal year 2017, with early adoption permitted.
Adoption is not expected to have a material effect on the
Company’s consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, “Compensation-Stock
Compensation (Topic 718), Improvements to Employee Share-Based
Payment Accounting,” (“ASU 2016-09”). ASU 2016-09
is intended to simplify several aspects related to how share-based
payments are accounted for and presented in the financial
statements, such as requiring all income tax effects of awards to
be recognized in the income statement when the awards vest or are
settled and allowing a policy election to account for forfeitures
as they occur. In addition, all related cash flows resulting from
share-based payments will be reported as operating activities on
the statement of cash flows. ASU 2016-09 could result in increased
volatility of the Company’s provision for income taxes and
earnings per share, depending on the Company’s share price at
exercise or vesting of share-based awards compared to grant date.
The effective date will be the first quarter of fiscal year 2017,
with early adoption permitted. The Company believes that adoption
of this new standard will not be material to its consolidated
financial statements; however, the impact on future effective tax
rates could be significant.
In June
2016, the FASB issued ASU 2016-13, “Financial Instruments -
Credit Losses,” (“ASU 2016-13”). ASU 2016-13 sets
forth a “current expected credit loss” model which
requires the Company to measure all expected credit losses for
financial instruments held at the reporting date based on
historical experience, current conditions and reasonable
supportable forecasts. The guidance in this new standard replaces
the existing incurred loss model and is applicable to the
measurement of credit losses on financial assets measured at
amortized cost and applies to some off-balance sheet credit
exposures. The effective date will be the first quarter of fiscal
year 2020. The Company is evaluating the impact that adoption of
this new standard will have on its consolidated financial
statements.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash
Flows (Topic 230), Classification of Certain Cash Receipts and Cash
Payments,” (“ASU 2016-15”). ASU 2016-15 reduces
the existing diversity in practice in financial reporting by
clarifying existing principles in ASC 230, “Statement of Cash
Flows,” and provides specific guidance on certain cash flow
classification issues. The effective date for ASU 2016-15 will be
the first quarter of fiscal year 2018, with early adoption
permitted. The Company is evaluating the impact adoption of this
guidance will have on determination or reporting of its financial
results.
In
November 2016, the FASB issued ASU 2016-18, “Statement of
Cash Flows (Topic 230) - Restricted Cash,” (“ASU
2016-18”). ASU 2016-18 requires a statement of cash flows to
explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Amounts generally described as
restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The Company is evaluating the impact
adoption of this guidance will have on determination or reporting
of its financial results.
In
January 2017, the FASB issued ASU 2017-04, “Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment,” (“ASU 2017-04”). ASU 2017-04
eliminates Step 2 from the goodwill impairment test. Instead, an
entity should perform its annual, or interim, goodwill impairment
test by comparing the fair value of a reporting unit with its
carrying amount. An entity should recognize an impairment charge
for the amount by which the carrying amount exceeds the reporting
unit’s fair value, if any. The loss recognized should not
exceed the total amount of goodwill allocated to that reporting
unit. Additionally, an entity should consider income tax effects
from any tax deductible goodwill on the carrying amount of the
reporting unit when measuring the goodwill impairment. The
effective date will be the first quarter of fiscal year 2020, with
early adoption permitted in 2017. Adoption is not expected to have
a material effect on the Company’s consolidated financial
statements.
Except
as noted above, the guidance issued by the FASB during the current
year is not expected to have a material effect on the
Company’s consolidated financial statements.
Cash Equivalents
The
Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be a cash
equivalent.
Accounts Receivable
The
Company performs periodic credit evaluations of its
customers’ 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.
The
Company performs periodic credit evaluations of its
customers’ 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.
Inventory Valuation
All
inventories are stated at lower of cost or market, 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. At December
31, 2016 and December 31, 2015, our inventories were as follows (in
thousands):
|
|
|
|
|
Raw
materials
|
$
795
|
$
686
|
Work in
process
|
115
|
186
|
Finished
goods
|
141
|
365
|
Inventory
reserve
|
(278
)
|
(118
)
|
Total
|
$
773
|
$
1,119
|
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 depreciated at the shorter
of the useful life of the asset or the remaining lease term.
Depreciation 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, 2016 and 2015 (in
thousands):
|
|
|
|
|
Equipment
|
$
1,378
|
$
1,377
|
Software
|
740
|
740
|
Furniture and
fixtures
|
124
|
124
|
Leasehold
Improvement
|
199
|
199
|
|
2,441
|
2,440
|
Less accumulated
depreciation
|
(2,315
)
|
(2,122
)
|
Total
|
$
126
|
$
318
|
Debt Issuance Costs
Debt
issuance costs are capitalized as described in ASU 2015-03 and
adopted retrospectively.
Other Assets
Other
assets primarily consist of short, and long-term deposits for
various tooling inventory that are being constructed for the
Company and deferred financing costs.
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 FDA
approval and recovery of these costs is uncertain. Such costs
aggregated approximately $23,000 and $47,000 in 2016 and 2015,
respectively.
Accrued Liabilities
Accrued
liabilities are summarized as follows at December 31, 2016 and
2015 (in thousands):
|
|
|
|
|
Accrued
compensation
|
$
1,656
|
$
1,235
|
Accrued
professional fees
|
161
|
154
|
Deferred
rent
|
13
|
36
|
Accrued
warranty
|
58
|
82
|
Accrued
vacation
|
175
|
177
|
Accrued
dividends
|
296
|
167
|
Other accrued
expenses
|
311
|
56
|
Total
|
$
2,670
|
$
1,907
|
Revenue Recognition
Revenue
from the sale of the Company’s products is recognized upon
shipment of such products to its customers. The Company recognizes
revenue from contracts on a straight-line basis, over the terms of
the contracts. The Company recognizes revenue from grants based on
the grant agreements, at the time the expenses are
incurred.
Significant Customers
In 2016
and 2015, the majority of the Company’s revenues were from
three and four customers, respectively. Revenue from these
customers totaled approximately $534,000 or 73% and approximately
$280,000 or 73% of gross revenue for the year ended December 31,
2016 and 2015, respectively. Accounts receivable due from those
customers represents 43% and 62% of unreserved accounts receivable
as of December 31, 2016 and 2015, respectively.
Deferred Revenue
The
Company defers payments received as revenue until earned based on
the related contracts on a straight line basis, over the terms of
the contract.
Research and Development
Research
and development expenses consist of expenditures for research
conducted by the Company and payments made under contracts with
consultants or other outside parties and costs associated with
internal and contracted clinical trials. All research and
development costs are expensed as incurred.
Income Taxes
The
Company uses the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and
tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Management provides valuation
allowances against the deferred tax assets for amounts that are not
considered more likely than not to be realized.
The
Company is current with its federal and applicable state tax
returns filings. Although we have been experiencing recurring
losses, its is obligated to file tax returns for compliance with
Internal Revenue Service (“IRS”) regulations and that
of applicable state jurisdictions. At December 31, 2016, the
Company has approximately $33 million of net operating loss as
compared to $28 million for the same period in 2015. 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.
None of
the Company’s federal or state income tax returns are
currently under examination by the IRS or state
authorities.
Uncertain Tax Positions
The
Company assesses each income tax position is assessed using a
two-step process. A determination is first made as to whether it is
more likely than not that the income tax position will be
sustained, based upon technical merits, upon examination by the
taxing authorities. If the income tax position is expected to meet
the more likely than not criteria, the benefit recorded in the
financial statements equals the largest amount that is greater than
50% likely to be realized upon its ultimate settlement. At December
31, 2016 and 2015 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
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, 2016 and 2015, share-based compensation
for options attributable to employees, officers and Board members
were approximately $95,000 and $1,008,000, 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,
2016, the Company had $132,667 of unrecognized compensation costs
related to granted stock options to be recognized over the
remaining vesting period of approximately three years.
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, 2016. 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, 2016 and
2015:
FAIR VALUE MEASUREMENTS (In Thousands)
The
following is summary of items that the Company measures at fair
value on a recurring basis:
|
Fair Value at
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in
connection with Distributor Debt
|
-
|
-
|
(114
)
|
(114
)
|
Warrants issued in
connection with Senior Secured Debt
|
-
|
-
|
(1,306
)
|
(1,306
)
|
Total
long-term liabilities at fair value
|
$
-
|
$
-
|
$
(1,420
)
|
$
(1,420
)
|
|
|
|
|
|
|
Fair Value at
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in
connection with the issuance of Series C preferred
stock
|
$
—
|
$
—
|
$
(1,145
)
|
$
(1,145
)
|
Warrants issued in
connection with the issuance of Series B preferred
stock
|
—
|
—
|
(1,461
)
|
(1,461
)
|
Total
long-term liabilities at fair value
|
$
—
|
$
—
|
$
(2,606
)
|
$
(2,606
)
|
The following is a summary of changes to Level 3 instruments during
the year ended December 31, 2016:
|
Fair Value
Measurements Using Significant Unobservable
Inputs (Level
3)
|
|
|
|
|
|
|
|
Series
C Warrants
|
Series B
Warrants
|
Senior Secured
Debt
|
Distributor
Debt
|
Total
|
Balance,
December 31, 2015
|
$
(1,145
)
|
$
(1,461
)
|
$
-
|
$
-
|
$
(2,606
)
|
Warrants
issued during the period
|
-
|
-
|
(377
)
|
(114
)
|
(491
)
|
Change
in fair value during the period
|
1,145
|
1,461
|
(929
)
|
-
|
1,677
|
Balance, December
31, 2016
|
$
-
|
$
-
|
$
1,306
|
$
(114
)
|
$
(1,420
)
|
As of
December 31, 2016, the fair value of warrants was approximately
$1.4 million. A net change of approximately $1.7 million has been
recorded to the accompanying statement of operations for the year
ended.
4. STOCKHOLDER’S DEFICIT
Common Stock
The
Company has authorized 1,000,000,000 shares of common stock with
$0.001 par value, of which 668,651 were issued and outstanding as
of December 31, 2016. For the year ended December 31, 2015, there
were 1,000,000,000 authorized shares of common stock, of which
2,964 were issued and outstanding.
A 1:800
reverse stock split of all of our issued and outstanding common
stock was implemented on November 7, 2016. As a result of the
reverse stock split, every 800 shares of issued and outstanding
common stock was 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. On February 24, 2016, the Company had
also implemented a 1:100 reverse stock split of its issued and
outstanding common stock. The number of the authorized shares did
not change.
For the
year ended December 31, 2016, the Company issued 665,687 shares of
common stock as listed below:
Series C Preferred
Stock Conversions
|
341,110
|
Series C Preferred
Stock Dividends
|
190,107
|
Common Stock Issued
as Payment for Accrued Dividends
|
38
|
Convertible Debt
Conversions
|
53,080
|
Series C
Exchanges
|
22,996
|
Series B Tranche B
Warrants Exchanges
|
14,766
|
Issuance of shares
due to rounding
|
3,590
|
Issuance of shares
in Transit due to Shandong agreement
|
40,000
|
Total
|
665,687
|
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 as redeemable convertible preferred stock, none
of which remain outstanding; 33,000 shares of preferred stock as
Series B Preferred Stock, none of which remained outstanding, 9,000
shares of preferred stock as Series C Convertible Preferred Stock,
of which 1,643 and 5,555 were issued and outstanding at December
31, 2016 and 2015, respectively, and 20,250 shares of Series C1
Convertible Preferred Stock, of which 4,312 and none were issued
and outstanding at December 31, 2016 and 2015,
respectively.
Series B Convertible Preferred Stock
Pursuant
to the terms of the Series B Preferred Stock set forth in the
Series B designations, shares of Series B Preferred Stock were
convertible into common stock by their holder at any time, and were
mandatorily convertible upon the achievement of certain conditions,
including the receipt of certain approvals from the U.S. Food and
Drug Administration and the achievement by the Company of specified
average trading prices and volumes for the common
stock.
Holders
of the Series B Preferred Stock were entitled to quarterly
dividends at an annual rate of 10.0%, payable in cash or, subject
to certain conditions, common stock, at the Company’s option.
Preferred dividends totaled approximately none and $352,000 for
2016 and 2015, respectively. Dividends were paid via issuance of
common stock.
The
Series B Preferred Stock were issued with Tranche A warrants to
purchase 24 shares of common stock and Tranche B warrants
purchasing 7,539 shares of common stock, at an exercise price of
$8,364 and $75 per share, respectively.
At
December 31, 2015, as a result of the operation of certain
anti-dilution provisions, the Tranche B warrants were convertible
into 1 shares of common stock. These warrants are re-measured based
upon their fair value each reporting period and classified as a
liability on the Balance Sheet.
Series C Convertible Preferred Stock
On June
29, 2015, the Company entered into a securities purchase agreement
with certain accredited investors, including John Imhoff, a member
of the Board, for the issuance 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. On
September 3, 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. Total cash and non-cash expenses were valued at $853,000,
resulting in net proceeds of $3,698,000.
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, 2016, there were
1,643 shares outstanding with a conversion price of $1.119 per
share, such that each share of Series C preferred stock would
convert into approximately 893 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 amount of unpaid dividends through the
Dividend End Date on the converted shares. At December 31, 2016,
the “make-whole payment” for a converted share of
Series C preferred stock would convert to 747 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 150 shares 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, 2016, the exercise price per share was
$640.
On May
23, 2016, an investor canceled certain of these warrants,
exercisable into 903 shares of common stock. The same investor also
transferred certain of these warrants, exercisable for 150 shares
of common stock, to two investors who also had participated in the
2015 Series C financing.
Series C1 Convertible Preferred Stock
Between
April 27, 2016 and May 3, 2016, the Company entered into various
agreements with certain holders of Series C preferred stock,
including directors John Imhoff and Mark Faupel, pursuant to which
those holders separately agreed to exchange each share of Series C
preferred stock held for 2.25 shares of the Company’s newly
created Series C1 preferred stock and 12 (9,600 pre-split) shares
of the Company’s common stock (the “Series C
Exchanges”). In connection with the Series C Exchanges, each
holder also agreed to roll over the $1,000 stated value per share
of the holder’s shares of Series C1 preferred stock into the
next qualifying financing undertaken by the Company on a
dollar-for-dollar basis and, except in the event of an additional
$50,000 cash investment in the Company by the holder, to execute a
customary “lockup” agreement in connection with the
financing. In total, for 1,916 shares of Series C preferred stock
surrendered, the Company issued 4,312 shares of Series C1 preferred
stock and 22,996 shares of common stock. At December 31, 2016,
there were 4,312 shares outstanding with a conversion price of
$1.119 per share, such that each share of Series C preferred stock
would convert into approximately 893 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.
Warrants
The
following table summarizes transactions involving the
Company’s outstanding warrants to purchase common stock for
the year ended December 31, 2016:
|
Warrants
(Underlying
Shares)
|
Outstanding,
January 1, 2016
|
3,503
|
Issuances
|
4,334,898
|
To be
issued
|
21,549
|
Canceled /
Expired
|
(10,188
)
|
Outstanding,
December 31, 2016
|
4,349,762
|
The
Company had the following shares reserved for the warrants as of
December 31, 2016:
Warrants
(Underlying Shares)
|
|
|
|
24
|
(1)
|
$8,368.00 per
share
|
May
23, 2018
|
7,542
|
(2)
|
$75.00
per share
|
June
14, 2021
|
3
|
(3)
|
$40,000.00 per
share
|
April
23, 2019
|
8
|
(4)
|
$36,000.00 per
share
|
May
22, 2019
|
3
|
(5)
|
$30,400.00 per
share
|
September 10,
2019
|
5
|
(6)
|
$36,864.80 per
share
|
September 27,
2019
|
10
|
(7)
|
$22,504.00 per
share
|
December 2,
2019
|
105
|
(8)
|
$7,200.00 per
share
|
December 2,
2020
|
105
|
(9)
|
$8,800.00 per
share
|
December 2,
2020
|
25
|
(11)
|
$20,400.00 per
share
|
March
30, 2018
|
22
|
(12)
|
$9,504.00 per
share
|
June
29, 2020
|
659
|
(10)
|
$640.00 per
share
|
June
29, 2020
|
343
|
(11)
|
$640.00 per
share
|
September 4,
2020
|
363
|
(12)
|
$640.00 per
share
|
September 21,
2020
|
7
|
(13)
|
$9,504.00 per
share
|
September 4,
2020
|
198
|
(14)
|
$640.00 per
share
|
October 23,
2020
|
7
|
(15)
|
$9,504.00 per
share
|
October 23,
2020
|
4,120,977
|
(16)
|
$0.3488 per
share
|
June
14, 2021
|
197,807
|
(17)
|
$0.3488 per
share
|
February 21,
2021
|
21,549
|
(18)
|
$13.92
per share
|
June
6, 2021
|
4,349,762
|
|
|
|
|
|
(1)
|
Issued
in June 2015 in exchange for warrants originally issued as part of
a May 2013 private placement.
|
(2)
|
Issued
in June 2015 in exchange for warrants originally issued as part of
a May 2013 private placement.
|
(3)
|
Issued
to a placement agent in conjunction with an April 2014 private
placement.
|
(4)
|
Issued
to a placement agent in conjunction with a September 2014 private
placement.
|
(5)
|
Issued
as part of a September 2014 Regulation S offering.
|
(6)
|
Issued
to a placement agent in conjunction with a 2014 public
offering.
|
(7)
|
Issued
in June 2015 in exchange for warrants originally issued as part of
a 2014 public offering.
|
(8)
|
Issued
as part of a March 2015 private placement.
|
(9)
|
Issued
to a placement agent in conjunction with 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
as part of a June 2015 private placement.
|
(13)
|
Issued
to a placement agent in conjunction with a June 2015 private
placement.
|
(14)
|
Issued
as part of a June 2015 private placement.
|
(15)
|
Issued
to a placement agent in conjunction with a June 2015 private
placement.
|
(16)
|
Issued
as part of a February 2016 private placement.
|
(17)
|
Issued
to a placement agent in conjunction with a February 2016 private
placement.
|
(18)
|
Contractually
obligated to be issued pursuant to a strategic license
agreement.
|
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 (9). In addition, warrants subject to footnotes (2) and
(10)-(12), (14), and (16) – (18) 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 (2),
(16) and (17) 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.
The
warrants subject to footnote (2) are subject to a mandatory
exercise provision. This provision permits the Company, subject to
certain limitations, to require exercise of such warrants at any
time following (a) the date that is the 30th day after the later of
the Company’s receipt of an approvable letter from the FDA
for LuViva and the date on which the common stock achieves an
average market price for 20 consecutive trading days of at least
$1,040.00 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 $129,600.00 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 (2) in the table above.
The
warrants subject to footnote (5) in the table above are also
subject to a mandatory exercise provision. This provision permits
the Company, subject to certain limitations; to require the
exercise of such warrants should the average trading price of its
common stock over any 30 consecutive day trading period exceed
$92.16.
The
warrants subject to footnote (7) 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.
The
holders of the warrants subject to footnote (2) 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.
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 1,185,357 shares of common
stock (but subject to exponential increase upon operation of
certain anti-dilution provisions), the Company issued or is
obligated to issue 16,897 shares of common stock and new warrants
that, if exercised as of the date hereof, would be exercisable for
an aggregate of 216,707 shares of common stock. As of December 31,
2016, the Company had issued 14,766 shares of common stock and
rights to common stock shares for 2,131. 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, 2016, the company had NOL carryforwards
available through 2035 of approximately $79.3 million to offset its
future income tax liability. The NOL carryforwards began to expire
in 2008. The company has not recorded deferred tax assets 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.
Components
of deferred taxes are as follow at December 31 (in
thousands):
|
|
|
Deferred tax
assets
|
$
795
|
$
626
|
Net operating loss
carry forwards
|
27,958
|
28,201
|
Deferred tax
liabilities: intangible assets and other
|
-
|
-
|
|
28,753
|
28,827
|
Valuation
allowance
|
(28,753
)
|
(28,827
)
|
|
$
0
|
$
0
|
The
following is a summary of the items that caused recorded income
taxes to differ from taxes computed using the statutory federal
income tax rate for the years ended December 31:
|
|
|
Statutory federal
tax rate
|
34
%
|
34
%
|
State taxes, net of
federal benefit
|
4
|
4
|
Nondeductible
expenses
|
-
|
-
|
Valuation
allowance
|
(38
)
|
(38
)
|
|
0
%
|
0
%
|
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, 2016 and 2015. 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
December 31, 2016, the Company has issued and outstanding options
to purchase a total of 125 shares of common stock pursuant to the
Plan, at a weighted average exercise price of $37,920 per
share.
The
fair value of stock options granted in the period ended December
31, 2015 were estimated using the Black-Scholes option pricing
model. No options were issued during the period ended December 31,
2016.
Stock
option activity for December 31, 2016 and 2015 as
follows:
|
|
|
|
Weighted
Average
Exercise
Price
|
Outstanding at
beginning of year
|
87
|
$
36,000
|
Options
granted
|
52
|
$
9,600
|
Options
exercised
|
(2
)
|
$
38,400
|
Options
expired/forfeited
|
(5
)
|
$
34,400
|
Outstanding at end
of year
|
132
|
$
36,000
|
Options available
for issue
|
-
|
|
|
2016
|
|
|
Weighted
Average
Exercise
Price
|
Outstanding at
beginning of year
|
132
|
$
36,000
|
Options
granted
|
-
|
$
-
|
Options
exercised
|
-
|
$
-
|
Options
expired/forfeited
|
(7
)
|
$
74,160
|
Outstanding at end
of year
|
125
|
$
37,920
|
Options available
for issue
|
-
|
|
|
|
|
|
|
|
Options Vested as
of December 31, 2015
|
113
|
$
39,200
|
Options
vested in 2016
|
4
|
$
22,860
|
Options vested as
of December 31, 2016
|
117
|
$
38,640
|
|
|
|
|
|
|
Options Unvested as
of December 31, 2015
|
19
|
$
39,200
|
Options
vested in 2016
|
(4
)
|
$
22,860
|
Options
expired/forfeited in 2016
|
(7
)
|
$
74,160
|
Options Unvested as
of December 31, 2016
|
8
|
|
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 period.
As of
December 31, 2016 and 2015, 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 D, Norcross,
Georgia 30092. The Company leases approximately 23,000 square feet
under a lease that expires in June 2017. The fixed monthly lease
expense is approximately $15,000 plus common charges. The Company
also leases office and equipment under operating lease agreements
with monthly payments of approximately $2,000. These leases expire
at various dates through April 2016. Future minimum rental payments
at December 31, 2016 under non-cancellable operating leases for
office space and equipment are as follows (in
thousands):
Related Party Contracts
On June
5, 2016, the Company entered into a license agreement with Shenghuo
Medical, LLC pursuant to which the Company granted Shenghuo an
exclusive license to manufacture, sell and distribute LuViva in
Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines,
Singapore, Thailand, and Vietnam. Shenghuo was already the
Company’s exclusive distributor in China, Macau and Hong
Kong, and the license extended to manufacturing in those countries
as well. Under the terms of the license agreement, once Shenghuo
was capable of manufacturing LuViva in accordance with ISO 13485
for medical devices, Shenghuo would pay the Company a royalty equal
to $2.00 or 20% of the distributor price (subject to a discount
under certain circumstances), whichever is higher, per disposable
distributed within Shenghuo’s exclusive territories. In
connection with the license grant, Shenghuo was to underwrite the
cost of securing approval of LuViva with Chinese Food and Drug
Administration. At its option, Shenghuo also would provide up to
$1.0 million in furtherance of the Company’s efforts to
secure regulatory approval for LuViva from the U.S. Food and Drug
Administration, in exchange for the right to receive payments equal
to 2% of the Company’s future sales in the United States, up
to an aggregate of $4.0 million. Pursuant to the license agreement,
Shenghuo had the option to have a designee appointed to the
Company’s board of directors (director Richard Blumberg is
that 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 $13.92, 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 21,549 shares of common stock at an
exercise price equal to the conversion price of the note, subject
to customary anti-dilution adjustment. On January 22, 2017, the
Company entered into a license agreement with Shandong Yaohua
Medical Instrument Corporation, or SMI, pursuant to which the
Company granted SMI an exclusive global license to manufacture the
LuViva device and related disposables (subject to a carve-out for
manufacture in Turkey) and exclusive distribution rights in the
Peoples Republic of China, Macau, Hong Kong and Taiwan. In order to
facilitate the SMI agreement, immediately prior to its execution
the Company entered into an agreement with Shenghuo Medical, LLC,
regarding its previous license to Shenghuo. Under the terms of the
new agreement, Shenghuo agreed to relinquish its manufacturing
license and its distribution rights in SMI’s territories, and
to waive its rights under the original Shenghuo agreement, all for
as long as SMI performs under the SMI agreement. See Note 13,
Subsequent Events.
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, 2016 and 2015, the Company maintained notes payable
and accrued interest to both related and non-related parties
totaling $1,539,000 and $133,000, respectively. These notes are
short term, straight-line amortizing notes. The notes carry annual
interest rates between 5% and 10%
and have default rates as high a
16.5%.
Short Term Notes Payable
At
December 31, 2016 and 2015, the Company maintained short term notes
payable and accrued interest to both related and non-related
parties totaling $127,000 and $634,000, respectively. These notes
are short term, straight-line amortizing notes. The notes carry
annual interest rates between 5% and 10%.
In June
2016, the Company entered into a premium finance agreement to
finance its insurance policies totaling $193,862. The note requires
monthly payments of $17,622, including interest at 4.87% and
matures in April 2017. The balance due on this note totaled $70,000
at December 31, 2016.
In June
2015, the Company entered into a similar short-term note payable
for the financing of its insurance policies. This note required
monthly payments of $17,614, including interest at 5.2% and matured
in April 2016. The balance due on this note totaled $70,000 at
December 31, 2015.
10. SHORT-TERM CONVERTIBLE DEBT
Related Party Convertible Note Payable –
Short-Term
On June
5, 2016, the Company entered into a license agreement with a
distributor pursuant to which the Company granted the distributor
an exclusive license to manufacture, sell and distribute the
Company’s LuViva Advanced Cervical Cancer device and related
disposables in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar,
Philippines, Singapore, Thailand, and Vietnam. The distributor was
already the Company’s exclusive distributor in China, Macau
and Hong Kong, and the license will extend to manufacturing in
those countries as well.
As partial consideration for, and as a condition to, the license,
and to further align the strategic interests of the parties, the
Company agreed to issue a convertible note to the distributor, in
exchange for an aggregate cash investment of $200,000. The note
will provide for a payment to the distributor of $240,000, due upon
consummation of any capital raising transaction by the Company
within 90 days and with net cash proceeds of at least $1.0 million.
As of December 31, 2016 the Company had a note due of $300,000. 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
$13.92, 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 17,239 shares of common stock
at an exercise price equal to the conversion price of the note,
subject to customary anti-dilution adjustment.
Convertible Note Payable – Short-Term
On December 28, 2016, the Company entered into a securities
purchase agreement with an investor for the issuance and sale to
investor of up to $330,000 in aggregate principal amount of 10%
original issuance discount convertible promissory notes, for an
aggregate purchase price of $300,000. On that date, the Company
issued to the investor a note in the principal amount of $222,000,
for a purchase price of $200,000. The note matures six months from
their date of issuance and, in addition to the 10% original issue
discount, accrue interest at a rate of 10% per year. The Company
may prepay the notes, 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 until immediately prior to
the maturity date. After six months from the date of issuance
(i.e., if the Company fails to repay all principal and interest due
under the notes at the maturity date), the investor may convert the
notes, at any time, in whole or in part, into shares of the
Company’s common stock, at a conversion price equal to 60% of
the lowest volume weighted average price of our common stock during
the 20 trading days prior to conversion, subject to certain
customary adjustments and anti-dilution provisions contained in the
note.
As of December 31, 2016, the Company had debt issue costs of
$30,000, net of debt of $168,000.
11. CONVERTIBLE DEBT IN DEFAULT
Secured Promissory Note.
On September 10, 2014, the Company sold a secured promissory note
to an accredited investor with an initial principal amount of
$1,275,000, for a purchase price of $700,000 (an original issue
discount of $560,000). The Company may prepay the note at any time.
The note is secured by the Company’s current and future
accounts receivable and inventory, pursuant to a security agreement
entered into in connection with the sale. On March 10, 2015, May 4,
2015, June 1, 2015, June 16, 2015, June 29, 2015, January 21, 2016,
January 29, 2016, and February 12, 2016 the Company amended the
terms of the note to extend the maturity ultimately until August
31, 2016. During the extension, interest accrues on the note at a
rate of the lesser of 18% per year or the maximum rate permitted by
applicable law. On February 11, 2016, the Company consented to an
assignment of the note to two accredited investors. In connection
with the assignment, the holders waived an ongoing event of default
under the notes related to the Company’s minimum market
capitalization, and agreed to eliminate the requirement going
forward. Pursuant to the terms of the amended note, the holder may
convert the outstanding balance into shares of common stock at a
conversion price per share equal to the lower of (1) $25.0 or (2)
75% of the lowest daily volume weighted average price of the common
stock during the five days prior to conversion. If the conversion
price at the time of any conversion is lower than $15.00, the
Company has the option of delivering the conversion amount in cash
in lieu of shares of common stock. On March 7, 2016, the Company
further amended the note to eliminate the volume limitations on
sales of common stock issued or issuable upon conversion. On July
13, 2016, the Company consented to the assignment by one of the
accredited investors of its portion of the note of to a third
accredited investor.
The balance due on the note was $530,691 and $685,864 at December
31, 2016 and 2015, respectively. The balance was reduced by
$306,863 as part of a debt restructuring completed with an
accredited investor on December 7, 2016 (see Note 11).
Total debt issuance costs as originally capitalized were
approximately $130,000. This amount was amortized over nine months
and was fully amortized as of December 31, 2015. Total amortized
expense for the years ended December 31, 2015 was approximately
$49,000. For the year ended December 31, 2015, the Company recorded
amortization of approximately $213,000 on the discount. The
original issue discount of $560,000 was fully amortized as of
December 31, 2015.
On November 2, 2016, the Company entered into a lockup and exchange
agreement with GHS Investments, LLC, holder of approximately
$221,000 in outstanding principal amount of the Company’s
secured promissory note and all of the outstanding shares of the
its Series C preferred stock. Pursuant to the agreement, upon the
effectiveness of the 1:800 reverse stock split and continuing for
45 days after, GHS and its affiliates were prohibited from
converting any portion of the secured promissory note or any of the
shares of Series C preferred stock or selling any of the
Company’s securities that they beneficially owned. The
Company agreed that, upon consummation of its next financing, the
Company would use $260,000 of net cash proceeds first, to repay
GHS’s portion of the secured promissory note and second, with
any remaining amount from the $260,000, to repurchase a portion of
GHS’s shares of Series C preferred stock. In addition, GHS
has agreed to exchange the stated value per share (plus any accrued
but unpaid dividends) of its remaining shares of Series C preferred
stock for new securities of the same type that the Company
separately issue in the next qualifying financing it undertakes, on
a dollar-for-dollar basis in a private placement
exchange.
Senior Secured Promissory Note
On February 11, 2016, the Company entered into a securities
purchase agreement with an accredited investor for the issuance and
sale on February 12, 2016 of $1.4375 million in aggregate principal
amount of a senior secured convertible note for an aggregate
purchase price of $1.15 million (a 20% original issue discount of
$287,500) and a discount for debt issuance costs paid at closing of
$121,000 for a total of $408,500. In addition, the investor
received a warrant exercisable to purchase an aggregate of
approximately 2,246 shares of the Company’s common stock. The
Company allocated proceeds totaling $359,555 to the fair value of
the warrants at issuance. This was recorded as an additional
discount on the debt. The convertible note matures on the second
anniversary of issuance and, in addition to the 20% original issue
discount, accrues interest at a rate of 17% per year. The Company
is required to pay monthly interest coupons and beginning nine
months after issuance, the Company is required to pay amortized
quarterly principal payments. If the Company does not receive, on
or before the first anniversary after issuance, an aggregate of at
least $3.0 million from future equity or debt financings or
non-dilutive grants, then the holder will have the option of
accelerating the maturity date to the first anniversary of
issuance. The Company may prepay the convertible note, in whole or
in part, without penalty, upon 20 days’ prior written notice.
Subject to resale restrictions under Federal securities laws and
the availability of sufficient authorized but unissued shares of
the Company’s common stock, the convertible note is
convertible at any time, in whole or in part, at the holder’s
option, into shares of the Company’s common stock, at a
conversion price equal to the lesser of $0.80 per share or 70% of
the average closing price per share for the five trading days prior
to issuance, subject to certain customary adjustments and
anti-dilution provisions contained in the convertible note. On May
28, 2016, in exchange for an additional $87,500 in cash from the
holder to the Company, the principal balance was increased by the
same amount. The Company is currently in default as they are past
due on the required monthly interest payments. In the event of
default, the Company shall accrue interest at a rate the lesser of
22% or the maximum permitted by law. The Company has accrued
$78,500 for past due interest payments at December 31, 2016. Upon
the occurrence of an event of default, the holder may require the
Company to redeem the convertible note at 120% of the outstanding
principal balance (but as of December 31, 2016, had not done so).
As of December 31, 2016, the balance due on the convertible debt
was $1,830,000 as the Company has fully amortized debt issuance
costs of $47,675 and the debt discount of $768,055 and recorded a
20% penalty totaling $305,000. The convertible note is secured by a
lien on all of the Company’s assets, including its
intellectual property, pursuant to a security agreement entered
into by the Company and the accredited investor with the
transaction holder.
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, 2016,
the exercise price had been adjusted to $0.35 and the number of
common stock shares exchangeable for was 4,120,978. As of December
31, 2016, the effective interest rate considering debt costs was
29%.
The Company used a placement agent in connection with the
transaction. For its services, the placement agent received a cash
placement fee equal to 4% of the aggregate gross proceeds from the
transaction and a warrant to purchase shares of common stock equal
to an aggregate of 6% of the total number of shares underlying the
securities sold in the transaction, at an exercise price equal to,
and terms otherwise identical to, the warrant issued to the
investor. Finally, the Company agreed to reimburse the placement
agent for its reasonable out-of-pocket expenses.
In connection with the transaction, on February 12, 2016, the
Company and the investor entered into a four-year consulting
agreement, pursuant to which the investor will provide management
consulting services to the Company in exchange for a royalty
payment, payable quarterly, equal to 3.5% of the Company’s
revenues from the sale of products. As of December 31, 2016 the
investor had earned approximately $23,000 of
royalties.
Debt Restructuring
.
On December 7, 2016, the Company entered into an exchange agreement
with GPB Debt Holdings II LLC with regard to the $1,525,000 in
outstanding principal amount of senior secured convertible note
originally issued to GPB on February 11, 2016, and the $306,863 in
outstanding principal amount of the Company’s secured
promissory note that GPB holds (see “—Secured
Promissory Note”). Pursuant to the exchange agreement, upon
completion of the next financing resulting in at least $1 million
in cash proceeds, GPB will exchange both securities for a new
convertible note in principal amount of $1,831,863. The new
convertible note will mature on the second anniversary of issuance
and will accrue interest at a rate of 19% per year. The Company
will pay monthly interest coupons and, beginning one year after
issuance, will pay amortized quarterly principal payments. Subject
to resale restrictions under Federal securities laws and the
availability of sufficient authorized but unissued shares of the
Company’s common stock, the new convertible note will be
convertible at any time, in whole or in part, at the holder’s
option, into shares of common stock, at a conversion price equal to
the price offered in the qualifying financing that triggers the
exchange, subject to certain customary adjustments and
anti-dilution provisions contained in the new convertible note. The
new convertible note will include customary event of default
provisions and a default interest rate of the lesser of 21% or the
maximum amount permitted by law. Upon the occurrence of an event of
default, GPB will be entitled to require the Company to redeem the
new convertible note at 120% of the outstanding principal balance.
The new convertible note will be secured by a lien on all of the
Company’s assets, including its intellectual property,
pursuant to the security agreement entered into by the Company and
GPB in connection with the issuance of the original senior secured
convertible note. As an inducement to GPB to enter into these
transactions, the Company agreed to increase the royalty payable to
GPB pursuant to its consulting agreement with us from 3.5% to 3.85%
of revenues from the sales of the Company’s
products.
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
period.
Diluted
net income (loss) per share attributable to common stockholders
amounts are computed by dividing the net income (loss) plus
preferred stock dividends, deemed dividends on preferred stock,
after-tax interest on convertible debt and convertible dividends by
the weighted average number of shares outstanding during the
period, plus Series C convertible preferred stock, convertible
debt, convertible preferred dividends and warrants convertible into
common stock shares.
Diluted
net loss per common share is the same as basic net loss per common
share since the Company was operating in a loss position for 2016
and 2015.
13. SUBSEQUENT EVENTS
On
January 22, 2017, the Company entered into a license agreement with
Shandong Yaohua Medical Instrument Corporation, or SMI, pursuant to
which the Company granted SMI an exclusive global license to
manufacture the LuViva device and related disposables (subject to a
carve-out for manufacture in Turkey) and exclusive distribution
rights in the Peoples Republic of China, Macau, Hong Kong and
Taiwan. In exchange for the license, SMI will pay a $1.0 million
licensing fee, payable in five installments through October 2017,
as well as a royalty on each disposable sold in the territories.
SMI will also underwrite the cost of securing approval of LuViva
with the Chinese Food and Drug Administration, or CFDA. Pursuant to
the SMI agreement, SMI must become capable of manufacturing LuViva
in accordance with ISO 13485 for medical devices by the second
anniversary of the SMI agreement, or else forfeit the license.
During 2017, SMI must purchase no fewer than ten devices (with up
to two devices pushed to 2018 if there is a delay in obtaining
approval from the CFDA). In the three years following CFDA
approval, SMI must purchase a minimum of 3,500 devices (500 in the
first year, 1,000 in the second, and 2,000 in the third) or else
forfeit the license. As manufacturer of the devices and
disposables, SMI will be obligated to sell each to us at costs no
higher than our current costs. As partial consideration for, and as
a condition to, the license, and to further align the strategic
interests of the parties, the Company agreed to issue $1.0 million
in shares of its common stock to SMI, in five installments through
October 2017, at a price per share equal to the lesser of the
average closing price for the five days prior to issuance and
$1.25.
In
order to facilitate the SMI agreement, immediately prior to its
execution the Company entered into an agreement with Shenghuo
Medical, LLC, regarding its previous license to Shenghuo (see Note
8, Commitments and Contingencies). Under the terms of the new
agreement, Shenghuo agreed to relinquish its manufacturing license
and its distribution rights in SMI’s territories, and to
waive its rights under the original Shenghuo agreement, all for as
long as SMI performs under the SMI agreement. As consideration, the
Company agreed to split with Shenghuo the licensing fees and net
royalties from SMI that the Company will receive under the SMI
agreement. Should the SMI agreement be terminated, the Company have
agreed to re-issue the original license to Shenghuo under the
original terms. The Company’s COO and director, Mark Faupel,
is a shareholder of Shenghuo, and another director, Richard
Blumberg, is a managing member of Shenghuo.
On
February 13, 2017, the Company entered into a securities purchase
agreement with Auctus Fund, LLC for the issuance and sale to Auctus
of $170,000 in aggregate principal amount of a 12% convertible
promissory note for an aggregate purchase price of $156,400
(representing a $13,600 original issue discount). On February 13,
2017, the Company issued the note to Auctus. Pursuant to the
purchase agreement, the Company also issued to Auctus a warrant
exercisable to purchase an aggregate of 200,000 shares of the
Company’s common stock. The warrant is exercisable at any
time, at an exercise price per share equal to $0.77 (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,
in addition to the original issue discount, accrues interest at a
rate of 12% per year. The Company may prepay the note, in whole or
in part, for 115% of outstanding principal and interest until 30
days from issuance, for 125% of outstanding principal and interest
at any time from 31 to 60 days from issuance, and for 130% of
outstanding principal and interest at any time from 61 days from
issuance to 180 days from issuance. After six months from the date
of issuance, Auctus may convert the note, at any time, in whole or
in part, into shares of the Company’s common stock, at a
conversion price equal to the lower of the price offered in the
Company’s next public offering or a 40% discount to the
average of the two lowest trading prices of the common stock during
the 20 trading days prior to the conversion, subject to certain
customary adjustments and price-protection provisions contained in
the note. The note includes customary events of default provisions
and a default interest rate of 24% per year. Upon the occurrence of
an event of default, Auctus may require the Company to redeem the
note (or convert it into shares of common stock) at 150% of the
outstanding principal balance plus accrued and unpaid interest. In
connection with the transaction, the Company agreed to reimburse
Auctus for $30,000 in legal and diligence fees, of which we paid
$10,000 in cash and $20,000 in restricted shares of common stock,
valued at $0.40 per share (a 42.86% discount to the closing price
of the common stock on the day prior to issuance).