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 SMI 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).
GUIDED
THERAPEUTICS, INC. AND SUBSIDIARY
|
CONDENSED
CONSOLIDATED BALANCE SHEETS Unaudited (in Thousands)
|
ASSETS
|
|
|
CURRENT ASSETS:
|
|
|
Cash and cash
equivalents
|
$
1
|
$
14
|
Accounts receivable, net
of allowance for doubtful accounts of $244 and $279 at March
31, 2017 and December 31, 2016, respectively
|
41
|
—
|
Inventory, net of
reserves of $279 and $278, at March 31, 2017 and December 31, 2016,
respectively
|
836
|
773
|
Other current
assets
|
206
|
259
|
Total
current assets
|
1,084
|
1,046
|
|
|
|
Property and equipment,
net
|
89
|
126
|
Other
assets
|
319
|
320
|
Total
noncurrent assets
|
408
|
446
|
|
|
|
TOTAL
ASSETS
|
$
1,492
|
$
1,492
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ DEFICIT
|
|
|
CURRENT
LIABILITIES:
|
|
|
Notes payable in
default, including related parties
|
$
651
|
$
1,008
|
Short-term note payable,
including related parties
|
599
|
197
|
Convertible note in
default
|
2,353
|
2,361
|
Short-term convertible
notes payable, net
|
595
|
468
|
Accounts
payable
|
2,748
|
2,600
|
Accrued
liabilities
|
2,721
|
2,670
|
Deferred
revenue
|
30
|
34
|
Total
current liabilities
|
9,697
|
9,338
|
|
|
|
Warrants at fair
value
|
847
|
1,420
|
|
|
|
TOTAL
LIABILITIES
|
10,544
|
10,758
|
|
|
|
COMMITMENTS & CONTINGENCIES (Note
7)
STOCKHOLDERS’
DEFICIT:
|
|
|
Series C convertible
preferred stock, $.001 par value; 9.0 shares authorized, 1.4 and
1.6 shares issued and outstanding as of March 31, 2017 and
December 31, 2016, (Liquidation preference of $1,406 and $1,643 at
March 31, 2017 and December 31, 2016)
|
514
|
601
|
Series C1 convertible
preferred stock, $.001 par value; 20.3 shares authorized, 4.3
shares issued and outstanding as of March 31, 2017 and
December 31, 2016, respectively (Liquidation preference of $4,312
at March 31, 2017 and December 31, 2016, respectively)
|
701
|
701
|
Common stock, $.001 Par
value; 1,000,000 shares authorized, 1,427 and 669 shares issued and
outstanding as of March, 31 2017 and December 31, 2016
|
743
|
742
|
Additional paid-in
capital
|
116,886
|
116,380
|
Treasury stock, at
cost
|
(132
)
|
(132
)
|
Accumulated
deficit
|
(127,764
)
|
(127,558
)
|
|
|
|
TOTAL
STOCKHOLDERS’ DEFICIT
|
(9,052
)
|
(9,266
)
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$
1,492
|
$
1,492
|
|
The accompanying notes are
an integral part of these condensed consolidated financial
statements.
|
|
|
|
G
UIDED THERAPEUTICS INC. AND
SUBSIDIARY
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited, in
Thousands)
|
|
|
|
|
FOR THE THREE MONTHS
ENDED MARCH 31,
|
|
|
|
REVENUE:
|
|
|
Sales
– devices and disposables
|
$
21
|
$
262
|
Cost
of goods sold
|
16
|
68
|
Gross
profit
|
5
|
194
|
|
|
|
OPERATING
EXPENSES:
|
|
|
Research
and development
|
91
|
290
|
Sales
and marketing
|
82
|
117
|
General
and administrative
|
346
|
917
|
Total
operating expenses
|
519
|
1,324
|
|
|
|
Operating
loss
|
(514
)
|
(1,130
)
|
|
|
|
OTHER
(EXPENSES) INCOME:
|
|
|
Other
income
|
2
|
23
|
Interest
expense
|
(223
)
|
(158
)
|
Change
in fair value of warrants
|
628
|
1,395
|
Total
other income
|
407
|
1,260
|
|
|
|
(LOSS) INCOME FROM
OPERATIONS
|
(107
)
|
130
|
|
|
|
PROVISION FOR INCOME
TAXES
|
—
|
—
|
|
|
|
NET
(LOSS) INCOME
|
$
(107
)
|
$
130
|
PREFERRED STOCK DIVIDENDS
|
(99
)
|
(470
)
|
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS
|
$
(206
)
|
$
(340
)
|
|
|
|
BASIC
AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS
|
$
(0.22
)
|
$
(0.11
)
|
|
|
|
WEIGHTED AVERAGE SHARES
OUTSTANDING
|
946
|
39
|
The accompanying
notes are an integral part of these condensed consolidated
financial statements.
GUIDED THERAPEUTICS INC. AND
SUBSIDIARY
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited, in
Thousands)
|
|
FOR THE THREE MONTHS
ENDED MARCH 31,
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net (loss)
income
|
$
(107
)
|
$
130
|
Adjustments to
reconcile net (loss) income to net cash used in operating
activities:
|
|
|
Bad
debt expense
|
(35
)
|
17
|
Depreciation
|
37
|
54
|
Amortization
|
—
|
54
|
Stock
based compensation
|
19
|
30
|
Change
in fair value of warrants
|
(628
)
|
(1,395
)
|
Changes in
operating assets and liabilities:
|
|
|
Inventory
|
(63
)
|
(135
)
|
Accounts
receivable
|
(6
)
|
(56
)
|
Other
current assets
|
52
|
271
|
Other
assets
|
1
|
18
|
Accounts
payable
|
148
|
153
|
Deferred
revenue
|
(4
)
|
(151
)
|
Accrued
liabilities
|
179
|
55
|
Total
adjustments
|
(300
)
|
(1,085
)
|
|
|
|
Net
cash used in operating activities
|
(407
)
|
(955
)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Net proceeds
from issuance of common stock and warrants, net
|
217
|
—
|
Proceeds from
debt financing, net of discounts and debt issuance
costs
|
212
|
1,029
|
Payments made
on notes payable
|
(35
)
|
(53
)
|
|
|
|
Net
cash provided by financing activities
|
394
|
976
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
(13
)
|
21
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
14
|
35
|
CASH
AND CASH EQUIVALENTS, end of period
|
$
1
|
$
56
|
SUPPLEMENTAL SCHEDULE
OF:
|
|
|
Cash paid
for:
|
|
|
Interest
|
$
1
|
$
1
|
NONCASH INVESTING AND
FINANCING ACTIVITIES:
|
|
|
Issuance of
common stock as debt repayment
|
$
17
|
$
125
|
Dividends on
preferred stock
|
$
99
|
$
470
|
|
|
|
The accompanying
notes are an integral part of these condensed consolidated
financial statements.
GUIDED THERAPEUTICS, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. ORGANIZATION, BACKGROUND,
AND BASIS OF PRESENTATION
Organization and Background
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 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 March
31, 2017. 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 March 31, 2017, it had an accumulated deficit of
approximately $128.0 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 through at least the end of 2017 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.
Basis of Presentation
The accompanying
unaudited condensed consolidated financial statements included
herein have been prepared in accordance with U.S. Generally
Accepted Accounting Principles (“GAAP”) for interim
financial reporting and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by GAAP for complete financial
statements. These statements reflect adjustments, all of which
are of a normal, recurring nature, and which are, in the opinion of
management, necessary to present fairly the Company’s
financial position as of March 31, 2017, results of operations for
the three months ended March 31, 2017 and 2016, and cash flows for
the three months ended March 31, 2017 and 2016. The results of
operations for the three months ended March 31, 2017 are not
necessarily indicative of the results for a full fiscal year.
Preparing financial statements requires the Company’s
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. These financial statements
should be read in conjunction with the financial statements and
notes thereto included in the Company’s annual report on Form
10-K for the year ended December 31, 2016.
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.
Going Concern
The Company’s
consolidated financial statements have been prepared and presented
on a basis assuming it will continue as a going concern. The
factors below raise substantial doubt about the Company’s
ability to continue as a going concern. The financial statements do
not include any adjustments that might be necessary from the
outcome of this uncertainty.
At March 31, 2017,
the Company had a negative working capital of approximately $8.6
million, accumulated deficit of $128.0 million, and incurred a net
loss of $107,000 for the quarter then ended. Stockholders’
deficit totaled approximately $9.1 million at March 31, 2017,
primarily due to recurring net losses from operations and deemed
dividends on warrants and preferred stock, offset by proceeds from
the exercise of 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 5.1 million shares of its
common stock outstanding at March 31, 2017, with exercise prices
ranging between $0.31 and $40,000 per share. Exercises of these
warrants would generate a total of approximately $5.2 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. SIGNIFICANT ACCOUNTING
POLICIES
The Company’s
significant accounting policies were set forth in the audited
financial statements and notes thereto for the year ended December
31, 2016 included in its annual report on Form 10-K, filed with the
Securities and Exchange Commission
(“SEC”).
Use of Estimates
The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Significant areas where estimates are used include the allowance
for doubtful accounts, inventory valuation and input variables for
Black-Scholes, Monte Carlo simulations and binomial
calculations.
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
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 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 has adopted this guidance during the
quarter ended March 31, 2017 on a prospective basis. The adoption
of this guidance did not have a significant impact on the operating
results for the three months ended March 31, 2017.
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. The
Company has adopted this guidance during the quarter ended March
31, 2017 on a prospective basis. The adoption of this guidance did
not have a significant impact on the operating results for the
three months ended March 31, 2017.
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. The Company has adopted
this guidance during the quarter ended March 31, 2017 on a
prospective basis. The adoption of this guidance did not have a
significant impact on the operating results for the three months
ended March 31, 2017.
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 has adopted this
guidance during the quarter ended March 31, 2017 on a prospective
basis. The adoption of this guidance did not have a significant
impact on the operating results for the three months ended March
31, 2017.
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.
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 contract.
The Company recognizes revenue from grants based on the grant
agreement, at the time the expenses are incurred.
During the three
months ended March 31, 2017, all of the Company’s revenues
were from one customer. Revenue from this customer totaled
approximately $21,000 for the period ended March 31, 2017. Accounts
receivable due from this customer represents 0% for the period
ended March 31, 2017. At March 31, 2016, there were revenues from
four customers, revenue from those customers totaled approximately
$262,000.
Inventory Valuation
All inventories are
stated at lower of cost or net realizable value, with cost
determined substantially on a “first-in, first-out”
basis. Selling, general, and administrative expenses are not
inventoried, but are charged to expense when incurred. At March 31,
2017 and December 31, 2016, our inventories were as follows (in
thousands):
|
|
|
|
|
|
Raw
materials
|
$
795
|
$
795
|
Work in
process
|
115
|
115
|
Finished
goods
|
245
|
141
|
Inventory
reserve
|
(279
)
|
(278
)
|
Total
|
$
836
|
$
773
|
|
|
|
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 March 31, 2017 and December 31, 2016
(in thousands):
|
|
|
|
|
|
Equipment
|
$
1,378
|
$
1,378
|
Software
|
740
|
740
|
Furniture and
fixtures
|
124
|
124
|
Leasehold
Improvement
|
199
|
199
|
|
2,441
|
2,441
|
Less accumulated
depreciation and amortization
|
(2,352
)
|
(2,315
)
|
Total
|
$
89
|
$
126
|
|
|
|
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
$5,000 and $23,000 as of March 31, 2017 and December 31, 2016,
respectively.
Accrued Liabilities
Accrued liabilities
are summarized as follows (in thousands):
|
|
|
Accrued
compensation
|
$
1,805
|
$
1,656
|
Accrued professional
fees
|
71
|
161
|
Deferred
rent
|
6
|
13
|
Accrued
warranty
|
53
|
58
|
Accrued
vacation
|
172
|
175
|
Accrued
interest
|
160
|
—
|
Accrued
dividends
|
295
|
296
|
Other accrued
expenses
|
159
|
311
|
Total
|
$
2,721
|
$
2,670
|
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 currently delinquent with its
federal and applicable state tax returns filings. Some of the
federal income tax returns are currently under examination by the
IRS. None of the Company’s state income tax returns are
currently under review by state authorities. 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 March
31, 2017and December 31, 2016, the Company has approximately $33
million of net operating losses. This net operating loss will be
eligible to be carried forward for tax purposes at federal and
applicable states level. A full valuation allowance has been
recorded related the deferred tax assets generated from the net
operating losses.
Uncertain
Tax Positions
The Company assesses each income tax position
is assessed using a two-step process. A determination is first made
as to whether it is more likely than not that the income tax
position will be sustained, based upon technical merits, upon
examination by the taxing authorities. If the income tax position
is expected to meet the more likely than not criteria, the benefit
recorded in the financial statements equals the largest amount that
is greater than 50% likely to be realized upon its ultimate
settlement. At March 31, 2017 and December 31, 2016 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 three ended
March 31, 2017 and 2016 share-based compensation for options
attributable to employees, officers and Board members were
approximately $19,000 and $30,000. These amounts have been included
in the Company’s statements of operations. Compensation costs
for stock options which vest over time are recognized over the
vesting period. As of March 31, 2017, the Company had approximately
$90,000 of unrecognized compensation costs related to granted stock
options that will 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 follows:
|
•
|
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 March 31, 2017. The fair value of the warrants was
estimated using the Binomial Simulation model. Gains and losses
from derivative contracts are included in net gain (loss) from
derivative contracts in the statement of operations. The fair value
of the Company’s derivative warrants is classified as a Level
3 measurement, since unobservable inputs are used in the
valuation.
The following table
presents the fair value for those liabilities measured on a
recurring basis as of March 31, 2017 and December 31,
2016:
FAIR VALUE MEASUREMENTS (In
Thousands)
The following is
summary of items that the Company measures at fair value on a
recurring basis:
|
Fair Value at March 31,
2017
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in
connection with Senior Secured Debt
|
$
—
|
$
—
|
$
(847
)
|
$
(847
)
|
|
|
|
|
|
Total
long-term liabilities at fair value
|
$
—
|
$
—
|
$
(847
)
|
$
(847
)
|
|
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
)
|
|
|
|
|
|
The following is a
summary of changes to Level 3 instruments during the three months
ended March 31, 2017:
|
Fair Value
Measurements Using Significant Unobservable Inputs (Level
3)
|
|
|
|
|
|
|
Balance, December
31, 2016
|
$
—
|
$
—
|
$
(1,306
)
|
$
(114
)
|
$
(1,420
)
|
Warrants issued
during the period
|
—
|
—
|
(55
)
|
—
|
(55
)
|
Change in fair
value during the period
|
—
|
—
|
628
|
—
|
628
|
|
|
|
|
|
|
Balance, March
31, 2017
|
$
—
|
$
—
|
$
(733
)
|
$
(114
)
|
$
(847
)
|
As of March 31,
2017, the fair value of warrants was approximately $847,000. A net
change of approximately $628,000 has been recorded to the
accompanying statement of operations for the three months ended
March 31, 2017.
4. STOCKHOLDERS’
DEFICIT
Common Stock
The Company has
authorized 1,000,000,000 shares of common stock with $0.001 par
value, of which 1,556,427 were issued and outstanding as of March
31, 2017. As of December 31, 2016, there were 1,000,000,000
authorized shares of common stock, of which 668,651 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 three
months ended March 31, 2017, the Company issued 887,776 shares of
common stock as listed below:
Series C Preferred Stock
Conversions
|
472,278
|
Series C Preferred Stock
Dividends
|
230,392
|
Issuance of shares in
Transit due to Shandong agreement
|
49,256
|
Issuance of shares due
to commitment in Debt agreement
|
50,000
|
Convertible Debt
Conversions
|
45,850
|
Total
|
887,776
|
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 7, Commitments
and Contingencies). Under the terms of the new agreement, Shenghuo
agreed to relinquish its manufacturing license and its distribution
rights in SMI’s territories, and to waive its rights under
the original Shenghuo agreement, all for as long as SMI performs
under the SMI agreement. As consideration, the Company agreed to
split with Shenghuo the licensing fees and net royalties from SMI
that the Company will receive under the SMI agreement. Should the
SMI agreement be terminated, the Company have agreed to re-issue
the original license to Shenghuo under the original terms. The
Company’s COO and director, Mark Faupel, is a shareholder of
Shenghuo, and another director, Richard Blumberg, is a managing
member of Shenghuo.
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,
of which 1,406 and 1,643 were issued and outstanding at March 31,
2017 and December 31, 2016, respectively, and 20,250 shares of
preferred stock as Series C1 Convertible Preferred Stock, of which
4,312 shares were issued and outstanding at March 31, 2017 and
December 31, 2016.
Series B
Convertible Preferred 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. There were
no preferred dividends for the first quarter of 2017 or for the
same period in 2016.
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 and Mark
Faupel, members 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 March 31, 2017, there were 1,406 shares outstanding with
a conversion price of $0.4016 per share, such that each share of
Series C preferred stock would convert into approximately 2,490
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 March 31, 2017, the
“make-whole payment” for a converted share of Series C
preferred stock would convert to 1,619 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 March
31, 2017, 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 March 31, 2017, there
were 4,312 shares outstanding with a conversion price of $0.4016
per share, such that each share of Series C preferred stock would
convert into approximately 2,490 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 quarter ended March 31,
2017:
|
Warrants
(Underlying Shares)
|
Outstanding, January 1,
2017
|
4,349,762
|
Issuances
|
774,245
|
Canceled /
Expired
|
—
|
Exercised
|
—
|
Outstanding, March 31,
2017
|
5,124,007
|
The Company had the
following shares reserved for the warrants as of March 31,
2017:
Warrants
(Underlying Shares)
|
|
Exercise Price
|
Expiration Date
|
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
|
362
|
(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
|
4,673,034
|
(16)
|
$0.3077 per
share
|
June 14,
2021
|
224,306
|
(17)
|
$0.3077 per
share
|
February 21,
2021
|
17,239
|
(18)
|
$13.92 per
share
|
June 6,
2021
|
200,000
|
(19)
|
$0.67 per
share
|
February 13,
2022
|
5,124,007
|
|
|
|
(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)
|
|
Issued pursuant to a strategic license
agreement.
|
(19)
|
|
Issued as part of a February 2017 private
placement.
|
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 March 31, 2017, 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. STOCK
OPTIONS
The Company’s
1995 Stock Plan (the “Plan”) has expired pursuant to
its terms, so zero shares remained available for issuance at March
31, 2017. 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 after four
years and expire ten years from the date of grant.
As of March 31,
2017, the Company has issued and outstanding options to purchase a
total of 123 shares of common stock pursuant to the Plan, at a
weighted average exercise price of $38,309 per share.
The fair value of
stock options are estimated using the Black-Scholes option pricing
model. No options were issued during the period ended March 31,
2017.
Stock option
activity for March 31, 2017 as follows:
|
|
|
|
|
|
|
|
Outstanding at beginning
of year
|
125
|
$
37,920.00
|
Options granted
|
-
|
$
-
|
Options exercised
|
-
|
$
-
|
Options
expired/forfeited
|
(2
)
|
$
14,000.00
|
Outstanding at end of
the period
|
123
|
$
38,309.00
|
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
period.
As of March 31,
2017 and December 31, 2016, there was no accrual recorded for any
potential losses related to pending litigation.
7. COMMITMENTS AND
CONTINGENCIES
Operating Leases
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 June 2017.
Future minimum rental payments at March 31, 2017 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 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 regarding its previous license to Shenghuo. Under the
terms of the new agreement, Shenghuo agreed to relinquish its
manufacturing license and its distribution rights in SMI’s
territories, and to waive its rights under the original Shenghuo
agreement, all for as long as SMI performs under the SMI
agreement.
On September 6,
2016, the Company entered into a royalty agreement with one of its
directors, John Imhoff, and another stockholder, Dolores Maloof,
pursuant to which the Company sold to them a royalty of future
sales of single-use cervical guides for LuViva. Under the terms of
the royalty agreement, and for consideration of $50,000, the
Company will pay them an aggregate perpetual royalty initially
equal to $0.10, and from and after October 2, 2016, equal to $0.20,
for each disposable that the Company sells (or that is sold by a
third party pursuant to a licensing arrangement with the
Company).
See also Note 8,
Notes Payable, with respect to certain short term notes payable
issued to certain of the Company’s officers and
directors.
8. NOTES
PAYABLE
Notes Payable in Default
At March 31, 2017
and December 31, 2016, the Company maintained notes payable and
accrued interest to both related and non-related parties totaling
$651,000. 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 March 31, 2017
and December 31, 2016, the Company maintained short term notes
payable and accrued interest to both related and non-related
parties totaling $564,000 and $127,000, 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 $35,000 at March
31, 2017.
9. SHORT-TERM CONVERTIBLE
DEBT
Related Party Convertible Note Payable –
Short-Term
On June 5, 2016,
the Company entered into a license agreement with a distributor
pursuant to which the Company granted the distributor an exclusive
license to manufacture, sell and distribute the Company’s
LuViva Advanced Cervical Cancer device and related disposables in
Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines,
Singapore, Thailand, and Vietnam. The distributor was already the
Company’s exclusive distributor in China, Macau and Hong
Kong, and the license will extend to manufacturing in those
countries as well.
As partial
consideration for, and as a condition to, the license, and to
further align the strategic interests of the parties, the Company
agreed to issue a convertible note to the distributor, in exchange
for an aggregate cash investment of $200,000. The note will provide
for a payment to the distributor of $240,000, due upon consummation
of any capital raising transaction by the Company within 90 days
and with net cash proceeds of at least $1.0 million. As of March
31, 2017 the Company had a note due of $356,595. 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 March 31,
2017, the Company had debt issuance costs net of accumulated
amortization of $15,000, unamortized original issue discount of
$11,000 and net of debt of $194,000.
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). The Company allocated
proceeds of $90,000 to the warrants and common stock issued in
connection with the financing. As of March 31, 2017, the Company
has net debt of $42,000, including unamortized original issue
discount of $14,000, unamortized debt issuance costs of $34,000 and
unamortized discount related to common stock and warrants of
$80,000.
10. CONVERTIBLE DEBT IN
DEFAULT
Secured Promissory Note.
On September 10,
2014, the Company sold a secured promissory note to an accredited
investor with an initial principal amount of $1,275,000, for a
purchase price of $700,000 (an original issue discount of
$560,000). The Company may prepay the note at any time. The note is
secured by the Company’s current and future accounts
receivable and inventory, pursuant to a security agreement entered
into in connection with the sale. On March 10, 2015, May 4, 2015,
June 1, 2015, June 16, 2015, June 29, 2015, January 21, 2016,
January 29, 2016, and February 12, 2016 the Company amended the
terms of the note to extend the maturity ultimately until August
31, 2016. During the extension, interest accrues on the note at a
rate of the lesser of 18% per year or the maximum rate permitted by
applicable law. On February 11, 2016, the Company consented to an
assignment of the note to two accredited investors. In connection
with the assignment, the holders waived an ongoing event of default
under the notes related to the Company’s minimum market
capitalization, and agreed to eliminate the requirement going
forward. Pursuant to the terms of the amended note, the holder may
convert the outstanding balance into shares of common stock at a
conversion price per share equal to the lower of (1) $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 $216,231 and $530,691 at March 31, 2017 and December
31, 2016, respectively. The balance was reduced by $306,863 as part
of a debt restructuring on December 7, 2016.
Total debt issuance
costs as originally capitalized were approximately $130,000. This
amount was amortized over nine months and was fully amortized as of
December 31, 2015. 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
GPB Debt Holdings II LLC for the issuance and sale on February 12,
2016 of $1.4375 million in aggregate principal amount of a senior
secured convertible note for an aggregate purchase price of $1.15
million (a 20% original issue discount of $287,500) and a discount
for debt issuance costs paid at closing of $121,000 for a total of
$408,500. In addition, GPB received a warrant exercisable to
purchase an aggregate of approximately 2,246 shares of the
Company’s common stock. The Company allocated proceeds
totaling $359,555 to the fair value of the warrants at issuance.
This was recorded as an additional discount on the debt. The
convertible note matures on the second anniversary of issuance and,
in addition to the 20% original issue discount, accrues interest at
a rate of 17% per year. The Company is required to pay monthly
interest coupons and beginning nine months after issuance, the
Company is required to pay amortized quarterly principal payments.
If the Company does not receive, on or before the first anniversary
after issuance, an aggregate of at least $3.0 million from future
equity or debt financings or non-dilutive grants, then the holder
will have the option of accelerating the maturity date to the first
anniversary of issuance. The Company may prepay the convertible
note, in whole or in part, without penalty, upon 20 days’
prior written notice. Subject to resale restrictions under Federal
securities laws and the availability of sufficient authorized but
unissued shares of the Company’s common stock, the
convertible note is convertible at any time, in whole or in part,
at the holder’s option, into shares of the Company’s
common stock, at a conversion price equal to the lesser of $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 GPB to the Company, the principal balance was
increased by the same amount. The Company is currently in default
as they are past due on the required monthly interest payments. In
the event of default, the Company shall accrue interest at a rate
the lesser of 22% or the maximum permitted by law. The Company has
accrued $117,000 for past due interest payments at December 31,
2016. Upon the occurrence of an event of default, the holder may
require the Company to redeem the convertible note at 120% of the
outstanding principal balance (but as of March 31, 2017, had not
done so). As of March 31, 2017, the balance due on the convertible
debt was $1,831,863 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 GPB.
The warrant is
exercisable at any time, pending availability of sufficient
authorized but unissued shares of the Company’s common stock,
at an exercise price per share equal to the conversion price of the
convertible note, subject to certain customary adjustments and
anti-dilution provisions contained in the warrant. The warrant has
a five-year term. As of March 31, 2017, the exercise price had been
adjusted to $0.3077 and the number of common stock shares
exchangeable for was 4,673,034. As of March 31, 2017, the effective
interest rate considering debt costs was 29%.
The Company used a
placement agent in connection with the transaction. For its
services, the placement agent received a cash placement fee equal
to 4% of the aggregate gross proceeds from the transaction and a
warrant to purchase shares of common stock equal to an aggregate of
6% of the total number of shares underlying the securities sold in
the transaction, at an exercise price equal to, and terms otherwise
identical to, the warrant issued to the investor. Finally, the
Company agreed to reimburse the placement agent for its reasonable
out-of-pocket expenses.
In connection with
the transaction, on February 12, 2016, the Company and GPB entered
into a four-year consulting agreement, pursuant to which the
investor will provide management consulting services to the Company
in exchange for a royalty payment, payable quarterly, equal to 3.5%
of the Company’s revenues from the sale of products. As of
March 31, 2017, GPB had earned approximately $24,000 in
royalties.
Debt Restructuring
.
On December 7,
2016, the Company entered into an exchange agreement with GPB with
regard to the $1,525,000 in outstanding principal amount of senior
secured convertible note originally issued to GPB on February 11,
2016, and the $306,863 in outstanding principal amount of the
Company’s secured promissory note that GPB holds (see
“—Secured Promissory Note”). Pursuant to the
exchange agreement, upon completion of the next financing resulting
in at least $1 million in cash proceeds, GPB will exchange both
securities for a new convertible note in principal amount of
$1,831,863. The new convertible note will mature on the second
anniversary of issuance and will accrue interest at a rate of 19%
per year. The Company will pay monthly interest coupons and,
beginning one year after issuance, will pay amortized quarterly
principal payments. Subject to resale restrictions under Federal
securities laws and the availability of sufficient authorized but
unissued shares of the Company’s common stock, the new
convertible note will be convertible at any time, in whole or in
part, at the holder’s option, into shares of common stock, at
a conversion price equal to the price offered in the qualifying
financing that triggers the exchange, subject to certain customary
adjustments and anti-dilution provisions contained in the new
convertible note. The new convertible note will include customary
event of default provisions and a default interest rate of the
lesser of 21% or the maximum amount permitted by law. Upon the
occurrence of an event of default, GPB will be entitled to require
the Company to redeem the new convertible note at 120% of the
outstanding principal balance. The new convertible note will be
secured by a lien on all 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.
11. INCOME (LOSS) PER COMMON
SHARE
Basic net income
(loss) per share attributable to common stockholders amounts are
computed by dividing the net income (loss) plus preferred stock
dividends and deemed dividends on preferred stock by the weighted
average number of shares outstanding during the
period.
Diluted net income
(loss) per share attributable to common stockholders amounts are
computed by dividing the net income (loss) plus preferred stock
dividends, deemed dividends on preferred stock, after-tax interest
on convertible debt and convertible dividends by the weighted
average number of shares outstanding during the period, plus Series
C convertible preferred stock, convertible debt, convertible
preferred dividends and warrants convertible into common stock
shares.
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 2017 and
2016.