NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
ORGANIZATION,
BACKGROUND, AND BASIS OF PRESENTATION
Guided
Therapeutics, Inc. (formerly SpectRx, Inc.), together with its
wholly owned subsidiary, InterScan, Inc. (formerly Guided
Therapeutics, Inc.), collectively referred to herein as the
“Company”, is a medical
technology company focused on developing innovative medical devices
that have the potential to improve healthcare. The Company’s
primary focus is the continued commercialization of its LuViva
non-invasive cervical cancer detection device and extension of its
cancer detection technology into other cancers, including
esophageal. The Company’s technology, including products in
research and development, primarily relates to biophotonics
technology for the non-invasive detection of
cancers.
Basis
of Presentation
All
information and footnote disclosures included in the consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United
States.
The
accompanying unaudited consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements.
Therefore, these financial statements should be read in conjunction
with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2020 filed with the Securities and Exchange Commission
(“SEC”) pursuant to Section 13 or 15(d) under the
Securities Exchange Act of 1934. In the opinion of management, all
adjustments (consisting of normal recurring accruals and other
items) considered necessary for a fair presentation have been
included.
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, 2021, it had an
accumulated deficit of approximately $140.6 million. To date, the
Company has engaged primarily in research and development efforts
and the early stages of marketing its products. The Company may not
be successful in growing sales for its products. Moreover, required
regulatory clearances or approvals may not be obtained in a timely
manner, or at all. The Company’s products may not ever gain
market acceptance and the Company may not ever generate significant
revenues or achieve profitability. The development and
commercialization of the Company’s products requires
substantial development, regulatory, sales and marketing,
manufacturing and other expenditures. The Company expects operating
losses to continue for the foreseeable future as it continues to
expend substantial resources to complete development of its
products, obtain regulatory clearances or approvals, build its
marketing, sales, manufacturing and finance capabilities, and
conduct further research and development.
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, 2021, the Company had a negative working capital of
approximately $7.3 million, accumulated deficit of $140.6 million,
and incurred a net loss of $0.7 million for the three months then
ended. Stockholders’ deficit totaled approximately $8.0
million at March 31, 2021, primarily due to recurring net losses
from operations.
During
the first quarter of 2021 the Company did raise $2.3 million as
part of the Series F and G preferred stock capital raise. The
Company will need to continue to raise capital in order to provide
funding for its operations and FDA approval process. If sufficient capital cannot be raised during
2021, the Company will continue its plans of curtailing operations
by reducing discretionary spending and staffing levels and
attempting to operate by only pursuing activities for which it has
external financial support. However, there can be no assurance that
such external financial support will be sufficient to maintain even
limited operations or that the Company will be able to raise
additional funds on acceptable terms, or at all. In such a case,
the Company might be required to enter into unfavorable agreements
or, if that is not possible, be unable to continue operations, and
to the extent practicable, liquidate and/or file for bankruptcy
protection.
The
Company had warrants exercisable for approximately 28.0 million
shares of its common stock outstanding at March 31, 2021, with
exercise prices ranging between $0.15 and $0.75 per share.
Exercises of in the money warrants
would generate a total of approximately $7.3 million in cash,
assuming full exercise, although the Company cannot be assured that
holders will exercise any warrants. Management may obtain
additional funds through the public or private sale of debt or
equity, and grants, if available.
2. SIGNIFICANT
ACCOUNTING POLICIES
Use
of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Significant areas where estimates are used include the
allowance for doubtful accounts, inventory valuation and input
variables for Black-Scholes, Monte Carlo simulations and binomial
calculations. The Company uses the Monte Carlo simulations and
binomial calculations in the calculation of the fair value of the
warrant liabilities and the valuation of embedded conversion
options and freestanding warrants.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts
of Guided Therapeutics, Inc. and its wholly owned subsidiary. All
intercompany transactions are eliminated.
Accounting
Standard Updates
In
December 2019, the FASB issued ASU 2019-12, “Income Taxes
(Topic 740)”. The amendments in this ASU simplify the
accounting for income taxes by removing certain exceptions to the
general principles in Topic 740 and by clarifying and amending
other areas of Topic 740. The amendments in this ASU are effective
for annual and interim periods beginning after December 15, 2020.
We adopted this ASU on January 1, 2021 with no material impact on
our consolidated financial statements.
In
August 2020, the FASB issued ASU No. 2020-06, Accounting for
Convertible Instruments and Contracts in an Entity’s Own
Equity (ASU 2020-06), which simplifies the accounting for certain
financial instruments with characteristics of liabilities and
equity, including convertible instruments and contracts in an
entity’s own equity. Among other changes, ASU 2020-06 removes
from U.S. GAAP the liability and equity separation model for
convertible instruments with a cash conversion feature, and as a
result, after adoption, entities will no longer separately present
in equity an embedded conversion feature for such debt. Similarly,
the embedded conversion feature will no longer be amortized into
income as interest expense over the life of the instrument.
Instead, entities will account for a convertible debt instrument
wholly as debt unless (1) a convertible instrument contains
features that require bifurcation as a derivative under ASC Topic
815, Derivatives and Hedging, or (2) a convertible debt instrument
was issued at a substantial premium. Among other potential impacts,
this change is expected to reduce reported interest expense,
increase reported net income, and result in a reclassification of
certain conversion feature balance sheet amounts from
stockholders’ equity to liabilities as it relates to the
Company’s convertible senior notes. Additionally, ASU 2020-06
requires the application of the if-converted method to calculate
the impact of convertible instruments on diluted earnings per share
(EPS), which is consistent with the Company’s accounting
treatment under the current standard. ASU 2020-06 is effective for
fiscal years beginning after December 15, 2021, with early adoption
permitted for fiscal years beginning after December 15, 2020, and
can be adopted on either a fully retrospective or modified
retrospective basis. The Company has early adopted ASU No. 2020-06
under a modified retrospective basis on January 1, 2021. The result
of the early adoption would have been a change to retained earnings
of $102,000 for the year ended December 31, 2020.
Except
as noted above, the guidance issued by the FASB during the current
year is not expected to have a material effect on the
Company’s consolidated financial statements.
A
variety of proposed or otherwise potential accounting standards are
currently under consideration by standard-setting organizations and
certain regulatory agencies. Because of the tentative and
preliminary nature of such proposed standards, management has not
yet determined the effect, if any that the implementation of such
proposed standards would have on the Company’s consolidated
financial statements.
Cash
Equivalents
The
Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be a cash
equivalent.
Accounts
Receivable
The
Company performs periodic credit evaluations of its
distributors’ financial conditions and generally does not
require collateral. The Company reviews all outstanding accounts
receivable for collectability on a quarterly basis. An allowance
for doubtful accounts is recorded for any amounts deemed
uncollectable. Uncollectibility, is determined based on the
determination that a distributor will not be able to make payment
and the time frame has exceeded one year. The Company does not
accrue interest receivables on past due accounts
receivable.
Concentrations
of Credit Risk
The
Company, from time to time during the years covered by these
consolidated financial statements, may have bank balances in excess
of its insured limits. Management has deemed this a normal business
risk.
Inventory
Valuation
All
inventories are stated at lower of cost or net realizable value,
with cost determined substantially on a “first-in,
first-out” basis. Selling, general, and administrative
expenses are not inventoried, but are charged to expense when
incurred. At March 31, 2021 and December 31, 2020, our inventories
were as follows (in thousands):
|
|
|
|
|
|
Raw
materials
|
$1,277
|
$1,276
|
Work in
process
|
80
|
80
|
Finished
goods
|
7
|
7
|
Inventory
reserve
|
(758)
|
(758)
|
Total
|
$606
|
$605
|
|
|
|
The
company periodically reviews the value of items in inventory and
provides write-downs or write-offs of inventory based on its
assessment of market conditions. Write-downs and write-offs are
charged to cost of goods sold.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to
seven years. Leasehold improvements are amortized at the shorter of
the useful life of the asset or the remaining lease term.
Depreciation and amortization expense are included in general and
administrative expense on the statement of operations. Expenditures
for repairs and maintenance are expensed as incurred. Property and
equipment are summarized as follows at March 31, 2021 and December
31, 2020 (in thousands):
|
|
|
|
|
|
Equipment
|
$1,043
|
$1,042
|
Software
|
652
|
652
|
Furniture and
fixtures
|
41
|
41
|
Leasehold
improvement
|
12
|
12
|
|
1,748
|
1,747
|
Less accumulated
depreciation and amortization
|
(1,746)
|
(1,746)
|
Total
|
$2
|
$1
|
|
|
|
During
the three months ended March 31, 2021 and year ended December 31,
2020, the Company disposed of approximately nil and $647,000 of
property and equipment that was fully depreciated,
respectively.
Debt Issuance Costs
Debt
issuance costs are capitalized and amortized over the term of the
associated debt. Debt issuance costs are presented in the balance
sheet as a direct deduction from the carrying amount of the debt
liability consistent with the debt discount.
Patent Costs (Principally Legal Fees)
Costs
incurred in filing, prosecuting, and maintaining patents are
recurring, and expensed as incurred. Maintaining patents are
expensed as incurred as the Company has not yet received U.S. FDA
approval and recovery of these costs is uncertain. Such costs
aggregated approximately $3,000 and $4,000 for the quarter ended
March 31, 2021 and 2020, respectively.
Leases
With the implementation of ASU 2016-02,
“Leases (Topic 842)”, the Company recorded a
lease-right-of-use asset and a lease liability. The Company adopted
the standard on January 1, 2019. The implementation required the
analysis of certain criteria in determining its treatment. The
Company determined that its corporate office lease met those
criteria. The Company implemented the guidance using the
alternative transition method. Under this alternative, the
effective date would be the date of initial application. See
Note 7:
Commitments and Contingencies.
Accrued Liabilities
Accrued
liabilities are summarized as follows (in thousands):
|
|
|
Compensation
|
$888
|
$1,094
|
Professional
fees
|
41
|
83
|
Subscription
receivable
|
3,380
|
-
|
Interest
|
256
|
1,517
|
Vacation
|
43
|
34
|
Preferred
dividends
|
240
|
202
|
Other accrued
expenses
|
47
|
65
|
Total
|
$4,895
|
$2,995
|
Subscription
receivables
Cash
received from investors for common stock shares that has not
completed processing is recorded as a liability to subscription
receivables. As of March 31, 2021, and December 31, 2020 the
Company had an outstanding amount due of $3,380,000 and nil,
respectively. The balance was primarily due to series F preferred
stock that was oversubscribed by cash investment and exchanged debt
in the amount of $3,087,479. The Company issued 3,087 series F-2
preferred stock during the second quarter of 2021 for the
$3,087,479 subscription receivable, excluding the fair value of
warrants issued in conjunction with the series F-2 preferred stock
and any costs to raise capital. The subscription receivable was
also reduced by $56,670 for finder’s fees.
Revenue
Recognition
The Company follows, ASC 606 Revenue from Contracts with Customers
establishes a single and comprehensive framework which sets out how
much revenue is to be recognized, and when. The core principle is
that a vendor should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the vendor expects to be entitled in
exchange for those goods or services. Revenue will now be
recognized by a vendor when control over the goods or services is
transferred to the customer. In contrast, revenue based revenue
recognition around an analysis of the transfer of risks and
rewards; this now forms one of a number of criteria that are
assessed in determining whether control has been transferred. The
application of the core principle in ASC 606 is carried out in five
steps: Step 1 – Identify the contract with a customer: a
contract is defined as an agreement (including oral and implied),
between two or more parties, that creates enforceable rights and
obligations and sets out the criteria for each of those rights and
obligations. The contract needs to have commercial substance and it
is probable that the entity will collect the consideration to which
it will be entitled. Step 2 – Identify the performance
obligations in the contract: a performance obligation in a contract
is a promise (including implicit) to transfer a good or service to
the customer. Each performance obligation should be capable of
being distinct and is separately identifiable in the contract. Step
3 – Determine the transaction price: transaction price is the
amount of consideration that the entity can be entitled to, in
exchange for transferring the promised goods and services to a
customer, excluding amounts collected on behalf of third parties.
Step 4 – Allocate the transaction price to the performance
obligations in the contract: for a contract that has more than one
performance obligation, the entity will allocate the transaction
price to each performance obligation separately, in exchange for
satisfying each performance obligation. The acceptable methods of
allocating the transaction price include adjusted market assessment
approach, expected cost plus a margin approach, and, the residual
approach in limited circumstances. Discounts given should be
allocated proportionately to all performance obligations unless
certain criteria are met and reallocation of changes in standalone
selling prices after inception is not permitted. Step 5 –
Recognize revenue as and when the entity satisfies a performance
obligation: the entity should recognize revenue at a point in time,
except if it meets any of the three criteria, which will require
recognition of revenue over time: the entity’s performance
creates or enhances an asset controlled by the customer, the
customer simultaneously receives and consumes the benefit of the
entity’s performance as the entity performs, and the entity
does not create an asset that has an alternative use to the entity
and the entity has the right to be paid for performance to
date.
The
Company did not have revenues for the three months ended March 31,
2021 and 2020.
Significant
Distributors
Accounts receivable
outstanding was $24,000, the outstanding amount was netted against
a $126,000 allowance, which was from one distributor as of March
31, 2021 and December 31, 2020.
Deferred revenue
The
Company defers payments received as revenue until earned based on
the related contracts and applying ASC 606 as required. As of March
31, 2021, and December 31, 2020, the Company had $62,000 and
$42,000 in deferred revenue, respectively.
Research
and Development
Research
and development expenses consist of expenditures for research
conducted by the Company and payments made under contracts with
consultants or other outside parties and costs associated with
internal and contracted clinical trials. All research and
development costs are expensed as incurred.
Income
Taxes
The
Company uses the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and
tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Management provides valuation
allowances against the deferred tax assets for amounts that are not
considered more likely than not to be realized.
The
Company has filed its 2020 federal and state corporate tax returns.
The Company has entered into an agreed upon payment plan with the
IRS for delinquent payroll taxes. The Company has an established
payment arrangement for its delinquent state income taxes with the
State of Georgia. Although the Company has been experiencing
recurring losses, it is obligated to file tax returns for
compliance with IRS regulations and that of applicable state
jurisdictions. At December 31, 2020, the Company has approximately
$61.6 million of net operating losses carryforward available to
next year. 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.
The
current corporate tax rate in the U.S. is 21%.
Uncertain Tax Positions
The
Company assesses each income tax position is assessed using a
two-step process. A determination is first made as to whether it is
more likely than not that the income tax position will be
sustained, based upon technical merits, upon examination by the
taxing authorities. If the income tax position is expected to meet
the more likely than not criteria, the benefit recorded in the
financial statements equals the largest amount that is greater than
50% likely to be realized upon its ultimate settlement. At December
31, 2020 and, 2019, there were no uncertain tax
positions.
The
Company has entered into an agreed upon payment plan with the IRS
for delinquent payroll taxes. The Company has an established
payment arrangement for its delinquent state income taxes with the
State of Georgia.
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 based on the fair value at the date of issue. The fair
value of warrants classified as equity instruments at the date of
issuance is estimated using the Black-Scholes Model. The fair value
of warrants classified as liabilities at the date of issuance is
estimated using the Monte Carlo Simulation or Binomial
model.
Stock
Based Compensation
The
Company records compensation expense related to options granted to
employees and non-employees based on the fair value of the award.
Compensation cost is recorded as earned for all unvested stock
options outstanding at the beginning of the first year based upon
the grant date fair value estimates, and for compensation cost for
all stock based payments granted or modified subsequently based on
fair value estimates.
On
July 14, 2020, the Company granted stock options to employees and
consultants. The new Stock Plan (the “Plan”) allows for
the issuance of incentive stock options, nonqualified stock
options, and stock purchase rights. The exercise price of options
was determined by the Company’s board of directors, but
incentive stock options were granted at an exercise price equal to
the fair market value of the Company’s common stock as of the
grant date. Options historically granted have generally become
exercisable over four years and expire ten years from the date of
grant.
Stock
options granted have a 10-year life and expire 90 days after
employment or upon termination of consulting agreement. Vesting
schedule varies per grantee. Generally stock options granted vest
as follows: 25% vest immediately, and the remaining stock options
vest over 33 months, beginning three months after
grant.
For
the three months ended March 31, 2021 and 2020 share-based
compensation for options attributable to employees, non-employees,
officers and Board members were approximately $62,000 and $5,000,
respectively. These amounts have been included in the
Company’s statements of operations under general and
administrative expense. Compensation costs for stock options which
vest over time are recognized over the vesting period. As of March
31, 2021, and 2020 the Company had approximately $509,000 and nil
of unrecognized compensation costs related to granted stock options
that will be recognized, respectively.
Beneficial Conversion Features of Convertible
Securities
The
Company has adopted the provisions of ASU 2017-11 to account for
the down round features of warrants issued with private placements
effective as of January 1, 2020. In doing so, warrants with a down
round feature previously treated as a derivative liabilities in the
consolidated balance sheet and measured at fair value are
henceforth treated as equity, with no adjustment for changes in
fair value at each reporting period. Previously, the Company
accounted for conversion options embedded in convertible notes in
accordance with ASC 815. ASC 815 generally requires companies to
bifurcate conversion options embedded in convertible notes from
their host instruments and to account for them as free standing
derivative financial instruments. ASC 815 provides for an exception
to this rule when convertible notes, as host instruments, are
deemed to be conventional, as defined by ASC 815-40. The Company
accounts for convertible notes deemed conventional and conversion
options embedded in non-conventional convertible notes which
qualify as equity under ASC 815, in accordance with the provisions
of ASC 470-20, which provides guidance on accounting for
convertible securities with beneficial conversion features.
Accordingly, the Company records, as a discount to convertible
notes, the intrinsic value of such conversion options based upon
the differences between the fair value of the underlying common
stock at the commitment date of the note transaction and the
effective conversion price embedded in the note. Debt discounts
under these arrangements are amortized over the term of the related
debt.
Conversion
options that are not bifurcated as a derivative pursuant to ASC 815
and not accounted for as a separate equity component under the cash
conversion guidance are evaluated to determine whether they are
beneficial to the investor at inception (a beneficial conversion
feature) or may become beneficial in the future due to potential
adjustments. The beneficial conversion feature guidance in ASC
470-20 applies to convertible stock as well as convertible debt
which are outside the scope of ASC 815. A beneficial conversion
feature is defined as a nondetachable conversion feature that is in
the money at the commitment date. The beneficial conversion feature
guidance requires recognition of the conversion option’s
in-the-money portion, the intrinsic value of the option, in equity,
with an offsetting reduction to the carrying amount of the
instrument. The resulting discount is amortized as a dividend over
either the life of the instrument, if a stated maturity date
exists, or to the earliest conversion date, if there is no stated
maturity date. If the earliest conversion date is immediately upon
issuance, the dividend must be recognized at inception. When there
is a subsequent change to the conversion ratio based on a future
occurrence, the new conversion price may trigger the recognition of
an additional beneficial conversion feature on
occurrence.
The Company also adopted ASU No. 2020-06,
Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity (ASU 2020-06), which simplifies the
accounting for certain financial instruments with characteristics
of liabilities and equity, including convertible instruments and
contracts in an entity’s own equity. Among other changes, ASU
2020-06 removes from U.S. GAAP the liability and equity separation
model for convertible instruments with a cash conversion feature,
and as a result, after adoption, entities will no longer separately
present in equity an embedded conversion feature for such
debt.
Derivatives
The
Company reviews the terms of convertible debt issued to determine
whether there are embedded derivative instruments, including
embedded conversion options, which are required to be bifurcated
and accounted for separately as derivative financial instruments.
In circumstances where the host instrument contains more than one
embedded derivative instrument, including the conversion option,
that is required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative
instrument.
Bifurcated
embedded derivatives are initially recorded at fair value and are
then revalued at each reporting date with changes in the fair value
reported as non-operating income or expense. When the equity or
convertible debt instruments contain embedded derivative
instruments that are to be bifurcated and accounted for as
liabilities, the total proceeds received are first allocated to the
fair value of all the bifurcated derivative instruments. The
remaining proceeds, if any, are then allocated to the host
instruments themselves, usually resulting in those instruments
being recorded at a discount from their face value. The discount
from the face value of the convertible debt, together with the
stated interest on the instrument, is amortized over the life of
the instrument through periodic charges to interest
expense.
4.
STOCKHOLDERS’ DEFICIT
Common
Stock
The
Company has authorized 3,000,000,000 shares of common stock with
$0.001 par value, of which 13,180,417 were issued and outstanding
as of March 31, 2021. As of December 31, 2020, there were
3,000,000,000 authorized shares of common stock, of which
13,138,282 were issued and outstanding.
For the
three months ended March 31, 2021, the Company issued 42,135 shares
of common stock as listed below:
Shares issued for
payments of Series D dividends
|
42,135
|
Issued during the
three months ended March 31, 2021
|
42,135
|
Summary
table of common stock share transactions:
Balance at December
31, 2020
|
13,138,282
|
Issued in
2021
|
42,135
|
Balance at March
31, 2021
|
13,180,417
|
Investments
During
2021, the Company received equity investments in the amount of
$2,099,000 and incurred fees due on these investments of $131,000.
These investors received a total of 1,421 Series F preferred stock
(if the Investor elects to convert their Series F preferred stock,
each Series F preferred stock shares converts into 4,000 shares of
the Company’s common stock shares) and $678,000 was recorded
as subscription receivable for the oversubscribed amounts received
for the three months ended of March 31, 2021. The investors for the
oversubscribed amount received Series F-2 preferred stock shares
during the second quarter of 2021.
During
2021, the Company finalized an investment by Power Up Lending Group
Ltd. Power Up invested $132,000, net to the Company is $125,000,
for 153,000 shares of Series G preferred stock.
During
2020, the Company received equity investments in the amount of
$1,735,500 and incurred fees due on these investments of $96,985.
These investors received a total of 1,736 Series E preferred stock
(if the Investor elects to convert their Series E preferred stock,
each Series E preferred stock shares converts into 4,000 shares of
the Company’s common stock shares).
During
January and April 2020, the Company received equity investments in
the amount of $128,000. These investors received a total of 256,000
common stock shares and 256,000 warrants issued to purchase common
stock shares at a strike price of $0.25, 256,000 warrants to
purchase common stock shares at a strike price of $0.75 and 128
Series D preferred stock (if the Investor elects to convert their
Series D preferred stock, each Series D preferred stock shares
converts into 3,000 shares of the Company’s common stock
shares). Of the amount invested $38,000 was from related
parties.
Debt Exchanges - 2021
On January 8, 2021, the
Company made the final payment of $750,000 out of the total
$1,500,000 as required by this exchange agreement with GPB. On
March 31, 2021, the Company recorded this exchange as a
subscription receivable and it will issue 2,236 series F-2
preferred stock shares in accordance with the terms of the
agreement (see NOTE
10: CONVERTIBLE DEBT) during the second
quarter of 2021.
On February 19, 2021, the Company exchanged
$100,000 and $85,000 of long-term debt for Dr. Cartwright and Dr.
Faupel, The Company recorded
this exchange as a subscription receivable and it will issue 100
and 85 series F-2 preferred stock shares, respectively in
accordance with the terms of the agreement during the second
quarter of 2021.
On March 10, 2021, the Company exchanged $88,000 in accrued
consulting fees for Mr. Blumberg. The Company recorded this
exchange as a subscription receivable and it will issue 88 series
F-2 preferred stock shares in accordance with the terms of the
agreement during the second quarter of 2021.
On March 22, 2021, the Company entered into an
exchange agreement with Richard Fowler. As of December 31, 2020,
the Company owed Mr. Fowler $546,214 ($412,624 in deferred salary
and $133,590 in accrued interest). The Company recorded
this exchange as a subscription receivable and it will issue 50
series F-2 preferred stock shares in accordance with the terms of
the agreement during the second quarter of 2021
(convertible into 200,000
common stock shares), a $150,000 unsecured note and Mr. Fowler
remains on the Company health insurance plan. The note will accrue
interest at the rate of 6% (18% in the event of default) on March
22, 2022 and be payable in monthly installments of $3,600 for four
years, with the first payment being due on March 15,
2022.
Debt Exchanges - 2020
On January 8, 2020, the Company exchanged $2,064,366 in debt for
several equity instruments (noted below) that were determined to
have a total fair value of $2,065,548, resulting in a loss on
extinguishment of debt of $1,183 which is recorded in other income
(expense) on the accompanying consolidated statements of
operations. The Company also issued 6,957,013 warrants to purchase
common stock shares; with exercise prices of $0.25, $0.75 and
$0.20. In addition, one of the investors forgave approximately
$29,000 of debt, which was recorded as a gain for extinguishment of
debt.
On June 3, 2020, the Company exchanged $328,422 in
debt from Auctus, (summarized in footnote
10: Convertible Notes), for
500,000 common stock shares and 700,000 warrants to purchase common
stock shares. The fair value of the common stock shares was
$250,000 (based on a $0.50 fair value for the Company’s
stock) and of the warrants to purchase common stock shares was
$196,818 (based on a $0.281 black scholes fair valuation). This
resulted in a net loss on extinguishment of debt of $118,396
($446,818 fair value less the $328,422 of exchanged
debt).
On
June 30, 2020, the Company exchanged $125,000 in debt (during June
2020, $125,000 in payables had been converted into short-term debt)
from Mr. James Clavijo, for 500,000 common stock shares and 250,000
warrants to purchase common stock shares. The fair value of the
common stock shares was $250,000 (based on a $0.50 fair value for
the Company’s stock) and of the warrants to purchase common
stock shares was $99,963 (based on a $0.40 black scholes fair
valuation). This resulted in a net loss on extinguishment of debt
of $224,963 ($349,963 fair value less the $125,000 of exchanged
debt). After the exchange transaction a balance was due to Mr.
Clavijo of $10,213 which was paid.
On
July 9, 2020, the Company entered into an exchange agreement with
Mr. Bill Wells (one of its former employees) for an outstanding
debt to him of $220,000. In lieu of agreeing to dismiss
approximately half of what is owed by the Company, Mr. Wells will
receive the following: (i) cash payments of $20,000 within 60 days
of the signing of the agreement; cash payments over time in the
amount of $90,000 in the form of an unsecured note with the Company
to be executed within 30 days of a new financing(s) totaling at
least $3.0 million. The note shall bear interest of 6.0% and mature
over 18 months; (ii) 66,000 common share stock options that vest at
a rate of 3,667 per month and have a $0.49 exercise price (if two
consecutive payments in (iii) are not made the stock options will
be canceled and a cash payment will be required; and (iv) the total
amount of forgiveness by creditor of approximately $110,000 shall
be prorated according to amount paid. During the year ended
December 31, 2020, the Company made a payment of $20,000; this
payment allowed the Company to reduce $40,000 in debt, with the
corresponding $20,000 difference recorded as a gain.
The
following table summarizes the 2020 debt exchanges:
|
Total Debt and Accrued Interest
|
|
|
|
Warrants
(Exercise $0.25)
|
Warrants
(Exercise $0.75)
|
Warrants
(Exercise $0.20)
|
Warrants
(Exercise $0.15)
|
Warrants
(Exercise $0.50)
|
Aquarius
|
$145,544
|
$107,500
|
$38044
|
291,088
|
145,544
|
145,544
|
-
|
-
|
-
|
K2 Medical (Shenghuo)3
|
803,653
|
771,927
|
31,726
|
1,905,270
|
704,334
|
704,334
|
496,602
|
-
|
-
|
Mr.
Blumberg
|
305,320
|
292,290
|
13,030
|
1,167,630
|
119,656
|
119,656
|
928,318
|
-
|
-
|
Mr.
Case
|
179,291
|
150,000
|
29,291
|
896,456
|
-
|
-
|
896,456
|
-
|
-
|
Mr.
Grimm
|
51,050
|
50,000
|
1,050
|
255,548
|
-
|
-
|
255,548
|
-
|
-
|
Mr.
Gould
|
111,227
|
100,000
|
11,227
|
556,136
|
-
|
-
|
556,136
|
-
|
-
|
Mr.
Mamula
|
15,577
|
15,000
|
577
|
77,885
|
-
|
-
|
77,885
|
-
|
-
|
Dr. Imhoff2
|
400,417
|
363,480
|
36,937
|
1,699,255
|
100,944
|
100,944
|
1,497,367
|
-
|
-
|
Ms. Rosenstock1
|
50,000
|
50,000
|
-
|
100,000
|
50,000
|
50,000
|
-
|
-
|
-
|
Mr. James2
|
2,286
|
2,000
|
286
|
7,745
|
1,227
|
1,227
|
5,291
|
-
|
-
|
Auctus
|
328,422
|
249,119
|
79,303
|
500,000
|
-
|
-
|
-
|
700,000
|
-
|
Mr.
Clavijo
|
125,000
|
125,000
|
-
|
500,000
|
-
|
-
|
-
|
-
|
500,000
|
Mr. Wells4
|
220,000
|
220,000
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
$2,737,787
|
$2,496,316
|
241471
|
7,957,013
|
1,121,705
|
1,121,705
|
4,713,603
|
700,000
|
500,000
|
1 Ms.
Rosenstock also forgave $28,986 in debt to the
Company.
2 Mr.
Imhoff and Mr. James are members of the board of directors and
therefore related parties.
3 The
Company’s COO and director, Mark Faupel, is a shareholder of
Shenghuo, and a former director, Richard Blumberg, is a managing
member of Shenghuo.
4 Mr.
Wells will also receive 66,000 common share stock options; the
details of which are explained above.
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.
Series C Convertible Preferred Stock
The
board designated 9,000 shares of preferred stock as Series C
Convertible Preferred Stock, (the “Series C Preferred
Stock”). Pursuant to the Series C certificate of
designations, shares of Series C preferred stock are convertible
into common stock by their holder at any time and may be
mandatorily convertible upon the achievement of specified average
trading prices for the Company’s common stock. At March 31,
2021 and December 31, 2020, there were 286 shares outstanding with
a conversion price of $0.50 per share, such that each share of
Series C preferred stock would convert into approximately 2,000
shares of the Company’s common stock; for a total convertible
of 572,000 common stock shares, subject to customary adjustments,
including for any accrued but unpaid dividends and pursuant to
certain anti-dilution provisions, as set forth in the Series C
certificate of designations. The conversion price will
automatically adjust downward to 80% of the then-current market
price of the Company’s common stock 15 trading days after any
reverse stock split of the Company’s common stock, and 5
trading days after any conversions of the Company’s
outstanding convertible debt.
Holders
of the Series C preferred stock are entitled to quarterly
cumulative dividends at an annual rate of 12.0% until 42 months
after the original issuance date (the “Dividend End
Date”), payable in cash or, subject to certain conditions,
the Company’s common stock. In addition, upon conversion of
the Series C preferred stock prior to the Dividend End Date, the
Company will also pay to the converting holder a “make-whole
payment” equal to the number of unpaid dividends through the
Dividend End Date on the converted shares. At March 31, 2021 and
December 31, 2020, the “make-whole payment” for a
converted share of Series C preferred stock would convert to 200
shares of the Company’s common stock. The Series C preferred
stock generally has no voting rights except as required by Delaware
law. Upon the Company’s liquidation or sale to or merger with
another corporation, each share will be entitled to a liquidation
preference of $1,000, plus any accrued but unpaid dividends. In
addition, the purchasers of the Series C preferred stock received,
on a pro rata basis, warrants exercisable to purchase an aggregate
of approximately 1 share of Company’s common stock. The
warrants contain anti-dilution adjustments in the event that the
Company issues shares of common stock, or securities exercisable or
convertible into shares of common stock, at prices below the
exercise price of such warrants. As a result of the anti-dilution
protection, the Company is required to account for the warrants as
a liability recorded at fair value each reporting period. At March
31, 2021 and December 31, 2020, the exercise price per share was
$512,000.
Series C1 Convertible Preferred Stock
The
board designated 20,250 shares of preferred stock as Series C1
Preferred Stock, of which 1,050 shares were issued and outstanding
at March 31, 2021 and December 31, 2020. In addition, some holders
separately agreed to exchange each share of the Series C1 Preferred
Stock held for one (1) share of the Company’s newly created
Series C2 Preferred Stock. In total, for 3,262.25 shares of Series
C1 Preferred Stock to be surrendered, the Company issued 3,262.25
shares of Series C2 Preferred Stock. At March 31, 2021 and December
31, 2020, shares of Series C2 had a conversion price of $0.50 per
share, such that each share of Series C preferred stock would
convert into approximately 2,000 shares of the Company’s
common stock.
Between
April 27, 2016 and May 3, 2016, the Company entered into various
agreements with certain holders of Series C preferred stock,
including directors John Imhoff and Mark Faupel, pursuant to which
those holders separately agreed to exchange each share of Series C
preferred stock held for 2.25 shares of the Company’s newly
created Series C1 Preferred Stock and 12 (9,600 pre-split) shares
of the Company’s common stock (the “Series C
Exchanges”). In connection with the Series C Exchanges, each
holder also agreed to roll over the $1,000 stated value per share
of the holder’s shares of Series C1 Preferred Stock into the
next qualifying financing undertaken by the Company on a
dollar-for-dollar basis and, except in the event of an additional
$50,000 cash investment in the Company by the holder, to execute a
customary “lockup” agreement in connection with the
financing. In total, for 1,916 shares of Series C preferred stock
surrendered, the Company issued 4,312 shares of Series C1 Preferred
Stock and 29 shares of common stock.
On
August 31, 2018, 3,262.25 shares of Series C1 Preferred Stock were
surrendered, and the Company issued 3,262.25 shares of Series C2
Preferred Stock.
At
March 31, 2021 and December 31, 2020, there were 1,049.25 shares
outstanding with a conversion price of $0.50 per share, such that
each share of Series C1 preferred stock would convert into
approximately 2,000 shares of the Company’s common stock; for
a total convertible of 2,098,500 common stock shares.
The
Series C1 preferred stock has terms that are substantially the same
as the Series C preferred stock, except that the Series C1
preferred stock does not pay dividends (unless and to the extent
declared on the common stock) or at-the-market “make-whole
payments” and, while it has the same anti-dilution
protections afforded the Series C preferred stock, it does not
automatically reset in connection with a reverse stock split or
conversion of our outstanding convertible debt.
Series C2 Convertible Preferred Stock
On
August 31, 2018, the Company entered into agreements with certain
holders of the Company’s Series C1 Preferred Stock, including
the chairman of the Company’s board of directors, and the
Chief Operating Officer and a director of the Company pursuant to
which those holders separately agreed to exchange each share of the
Series C1 Preferred Stock held for one (1) share of the
Company’s newly created Series C2 Preferred Stock. In total,
for 3,262.25 shares of Series C1 Preferred Stock to be surrendered,
the Company issued 3,262.25 shares of Series C2 Preferred Stock. At
March 31, 2021 and December 31, 2020, shares of Series C2 had a
conversion price of $0.50 per share, such that each share of Series
C preferred stock would convert into approximately 2,000 shares of
the Company’s common stock; for a total convertible of
6,524,500 common stock shares.
The
terms of the Series C2 Preferred Stock are substantially the same
as the Series C1 Preferred Stock, except that (i) shares of Series
C1 Preferred Stock may not be convertible into the Company’s
common stock by their holder for a period of 180 days following the
date of the filing of the Certificate of Designation (the
“Lock-Up Period”); (ii) the Series C2 Preferred Stock
has the right to vote as a single class with the Company’s
common stock on an as-converted basis, notwithstanding the Lock-Up
Period; and (iii) the Series C2 Preferred Stock will automatically
convert into that number of securities sold in the next Qualified
Financing (as defined in the Exchange Agreement) determined by
dividing the stated value ($1,000 per share) of such share of
Series C2 Preferred Stock by the purchase price of the securities
sold in the Qualified Financing.
Series D Convertible Preferred Stock
The
Board designated 6,000 shares of preferred stock as Series D
Preferred Stock, 763 of which remain outstanding. On January 8,
2020, the Company entered into a Stock Purchase Agreement with
certain accredited investors (“the Series D Investors”)
pursuant to all obligations under the Series D Certificate of
Designation. The Series D Investors included the Chief Executive
Officer, Chief Operating Officer and a director of the Company. In
total, for $763,000 the Company issued 763 shares of Series D
Preferred Stock, 1,526,000 common stock shares, 1,526,000 common
stock warrants, exercisable at $0.25, and 1,526,000 common stock
warrants, exercisable $0.75. Each Series D Preferred Stock is
convertible into 3,000 common stock shares. The Series D Preferred
Stock will have cumulative dividends at the rate per share of 10%
per annum. The stated value and liquidation preference on the
Series D Preferred Stock is $763. The 763 Series D Preferred Shares
are convertible into debt at the option of the holder during a
prescribed time period. If the Series D Preferred Shares are
converted, the Series D preferences are surrendered and the debt is
then secured by the Company’s assets. As of March 31, 2021,
none of the 763 Series E Preferred Shares have been converted to
secured debt.
Each
share of Series D Preferred is convertible, at any time for a
period of 5 years after issuance, into that number of shares of
Common Stock, determined by dividing the Stated Value by $0.25,
subject to certain adjustments set forth in the Series D
Certificate of Designation (the “Series D Conversion
Price”). The conversion of Series D Preferred is subject to a
4.99% beneficial ownership limitation, which may be increased to
9.99% at the election of the holder of the Series D Preferred. If
the average of the VWAPs (as defined in the Series D Certificate of
Designation) for any consecutive 5 trading day period
(“Measurement Period”) exceeds 200% of the then Series
D Conversion Price and the average daily trading volume of the
Common Stock on the primary trading market exceeds 1,000 shares per
trading day during the Measurement Period (subject to adjustments),
the Company may redeem the then outstanding Series D Preferred, for
cash in an amount equal to aggregate Stated Value then outstanding
plus accrued but unpaid dividends.
On
January 8, 2020, the Company also entered into a Registration
Rights Agreement (the “Series D Registration Rights Agreement
“) with the Series D Investors pursuant to which the Company
agreed to file with the SEC, a registration statement on a Form S-3
(or on other appropriate form if a Form S-3 is not available)
covering the Common Stock issuable upon conversion of the Series D
Warrants within 90 days of the date of the Registration Rights
Agreement and cause such registration statement to be declared
effective within 120 days of the date of the Registration Rights
Agreement. All reasonable expenses related to such registration
shall be borne by the Company.
During
January 2021, the Company issued 42,135 common stock shares for the
payment of Series D Preferred Stock dividends accrued. As of March
31, 2021, the Company had accrued dividends of
$14,306.
Series E Convertible Preferred Stock
The
Board designated 6,000 shares of preferred stock as Series E
Preferred Stock, 1,736 of which remain outstanding. During year
ended December 31, 2020, the Company entered into a Stock Purchase
Agreement with certain accredited investors (“the Series E
Investors”). In total, for $1,736,000 the Company issued
1,736 shares of Series E Preferred Stock. Each Series E Preferred
Stock is convertible into 4,000 common stock shares. The Series E
Preferred Stock will have cumulative dividends at the rate per
share of 6% per annum. The stated value and liquidation preference
on the Series E Preferred Stock is $1,736. The Company incurred
fees due on these investments of $91,895.
Each
share of Series E Preferred is convertible, at any time for a
period of 5 years after issuance, into that number of shares of
Common Stock, determined by dividing the Stated Value by $0.25,
subject to certain adjustments set forth in the Series E
Certificate of Designation (the “Series E Conversion
Price”). The conversion of Series E Preferred is subject to a
4.99% beneficial ownership limitation, which may be increased to
9.99% at the election of the holder of the Series E Preferred. If
the average of the VWAPs (as defined in the Series E Certificate of
Designation) for any consecutive 5 trading day period
(“Measurement Period”) exceeds 200% of the then Series
E Conversion Price and the average daily trading volume of the
Common Stock on the primary trading market exceeds 1,000 shares per
trading day during the Measurement Period (subject to adjustments),
the Company may redeem the then outstanding Series E Preferred, for
cash in an amount equal to aggregate Stated Value then outstanding
plus accrued but unpaid dividends. As of March 31, 2021, the
Company had not issued shares as payment of Series E Preferred
Stock dividends. As of March 31, 2021, the Company had accrued
dividends of $101,957.
Series F Convertible Preferred Stock
The
Board designated 1,500 shares of preferred stock as Series F
Preferred Stock, 1,421 of which remain outstanding. During 2021,
the Company entered into a Stock Purchase Agreement with certain
accredited investors (“the Series F Investors”). In
total, for $1,421,000 the Company issued 1,421 shares of Series F
Preferred Stock. Each share of Series F Preferred is convertible,
at any time for a period of 5 years after issuance, into that
number of shares of Common Stock, determined by dividing the Stated
Value by $0.25, subject to certain adjustments set forth in the
Series F Certificate of Designation (the “Series F Conversion
Price”). The conversion of Series F Preferred is subject to a
4.99% beneficial ownership limitation, which may be increased to
9.99% at the election of the holder of the Series F Preferred. If
the average of the VWAPs (as defined in the Series F Certificate of
Designation) for any consecutive 5 trading day period
(“Measurement Period”) exceeds 200% of the then Series
F Conversion Price and the average daily trading volume of the
Common Stock on the primary trading market exceeds 1,000 shares per
trading day during the Measurement Period (subject to adjustments),
the Company may redeem the then outstanding Series F Preferred, for
cash in an amount equal to aggregate Stated Value then outstanding
plus accrued but unpaid dividends.
Powerup
(Series G Convertible Preferred Stock)
During
January 2021, the Company finalized an investment by Power Up
Lending Group Ltd. Power Up invested $78,500, net to the Company is
$75,000, for 91,000 shares of Series G preferred stock with
additional tranches of financing up to $925,000 in the aggregate
over the terms of the Series G preferred stock. Series G will be
non-voting on any matters requiring shareholder vote. The Series G Preferred Stock will have cumulative
dividends at the rate per share of 8% per annum. At any time during
the period indicated below, after the date of the issuance of
shares of Series G preferred stock, the Company will have the
right, at the Company’s option, to redeem all of the shares
of Series G preferred stock by paying an amount equal to: (i) the
number of shares of Series G preferred stock multiplied by then
stated value (including accrued dividends); (ii) multiplied by the
corresponding percentage as follows: Day 1-60, 105%; Day 61-90,
110%; Day 91-120, 115%; and Day 121-180, 122%. After the expiration
of the 180 days following the issuance date, except for mandatory
redemption, the Company shall have no right to redeem the Series G
preferred stock. Mandatory redemption occurs within 24 months. In
addition, if the Company does not redeem the Series G preferred
stock then Power Up will have the option to convert to common stock
shares. The variable conversion price will be the value equal to a
discount of 19% off of the trading price; which is calculated as
the average of the three lowest closing bid prices over the last
fifteen trading days. The conversion of Series G Preferred is
subject to a 4.99% beneficial ownership limitation, which may be
increased to 9.99% at the election of the holder of the Series G
Preferred.
During
February 2021, the Company finalized an investment by Power Up
Lending Group Ltd. Power Up invested $53,500, net to the Company is
$50,000, for 62,000 shares of Series G preferred stock with
additional tranches of financing up to $925,000 in the aggregate
over the terms of the Series G preferred stock. Series G will be
non-voting on any matters requiring shareholder vote. The Series G Preferred Stock will have cumulative
dividends at the rate per share of 8% per annum. At any time during
the period indicated below, after the date of the issuance of
shares of Series G preferred stock, the Company will have the
right, at the Company’s option, to redeem all of the shares
of Series G preferred stock by paying an amount equal to: (i) the
number of shares of Series G preferred stock multiplied by then
stated value (including accrued dividends); (ii) multiplied by the
corresponding percentage as follows: Day 1-60, 105%; Day 61-90,
110%; Day 91-120, 115%; and Day 121-180, 122%. After the expiration
of the 180 days following the issuance date, except for mandatory
redemption, the Company shall have no right to redeem the Series G
preferred stock. Mandatory redemption occurs within 24 months. In
addition, if the Company does not redeem the Series G preferred
stock then Power Up will have the option to convert to common stock
shares. The variable conversion price will be the value equal to a
discount of 19% off of the trading price; which is calculated as
the average of the three lowest closing bid prices over the last
fifteen trading days. The conversion of Series G Preferred is
subject to a 4.99% beneficial ownership limitation, which may be
increased to 9.99% at the election of the holder of the Series G
Preferred.
Due
to the mandatory redemption feature of the Series G preferred
stock, the total amount of proceeds of $125,000 was recorded as a
liability.
Warrants
The
following table summarizes transactions involving the
Company’s outstanding warrants to purchase common stock for
the three months ended March 31, 2021:
|
Warrants
(Underlying
Shares)
|
Outstanding,
January 1, 2021
|
28,324,275
|
Issuances
|
1,446,000
|
Canceled /
Expired
|
(1,729,262)
|
Exercised
|
-
|
Outstanding, March
31, 2021
|
28,041,013
|
The
Company had the following shares reserved for the warrants as of
March 31, 2021:
Warrants
(Underlying Shares)
|
|
|
7,185,000(1)
|
$0.20
per share
|
February
12, 2023
|
325,000(2)
|
$0.18
per share
|
April
4, 2022
|
215,000(3)
|
$0.25
per share
|
July
1, 2022
|
100,000(4)
|
$0.25
per share
|
September
1, 2022
|
7,500,000(5)
|
$0.20
per share
|
December
17, 2024
|
250,000(6)
|
$0.16
per share
|
March
31, 2025
|
2,597,705(7)
|
$0.25
per share
|
December
30, 2022
|
2,597,705(8)
|
$0.75
per share
|
December
30, 2022
|
4,713,603(9)
|
$0.20
per share
|
December
30, 2022
|
60,000(10)
|
$0.25
per share
|
April
23, 2023
|
50,000(11)
|
$0.25
per share
|
December
30, 2022
|
50,000(12)
|
$0.75
per share
|
December
30, 2022
|
700,000(13)
|
$0.15
per share
|
May
21, 2023
|
250,000(14)
|
$0.50
per share
|
June
23, 2023
|
1,000(15)
|
$0.50
per share
|
August
10, 2022
|
1,250,000(16)
|
$0.25
per share
|
February
22, 2023
|
196,000(17)
|
$0.25
per share
|
March
3, 2024
|
28,041,013
|
|
|
(1)
|
Exchanged in
January 2020 from amount issued as part of a February 2016 private
placement with senior secured
debt
holder
|
(2)
|
Issued
to investors for a loan in April 2019
|
(3)
|
Issued
to investors for a loan in July 2019
|
(4)
|
Issued
to investors for a loan in September 2019
|
(5)
|
Issued
to investors for a loan in December 2019
|
(6)
|
Issued
to investors for a loan in January 2020
|
(7)
|
Issued
to investors as part of Series D Preferred Stock Capital raise in
December 2020
|
(8)
|
Issued
to investors as part of Series D Preferred Stock Capital raise in
December 2020
|
(9)
|
Issued
to investors as part of Series D Preferred Stock Capital raise in
December 2020
|
(10)
|
Issued
to a consultant for services in April 2020
|
(11)
(12)
(13)
(14)
(15)
(16)
|
Issued
to an investor as part of Series D Preferred Stock Capital raise in
April 2020
Issued
to an investor as part of Series D Preferred Stock Capital raise in
April 2020
Issued
to an investor for a loan in May 2020
Issued
to an investor in exchange of debt in June 2020
Issued
to a consultant for services in August 2020
Issued
to a consultant (director) in February 2021
|
(17)
|
Issued
to a consultant for Series F Preferred Stock Capital raise in March
2021
|
Footnote (1) - On
January 16, 2020, the Company entered into an exchange agreement
with GPB. This exchange agreement canceled the existing outstanding
warrants, which were subject to anti-dilution and ratchet
provisions, to purchase 35,937,500 shares of common stock at an
exercise price of $0.04 per share and resulted in the issuance of
new warrants to purchase 7,185,000 share of common stock at a price
of $0.20 per share. The new warrants have fixed exercise prices of
$0.20. On January 8, 2021, the Company met the requirement by
making the final payment of $750,000 as required by the exchange
agreement with GPB, which canceled the previously issued
warrants.
Warrant
to purchase 70 shares of common stock were not recorded as their
exercise price after considering reverse stock splits, were greater
than $60,000 and deemed to be immaterial for
disclosure
On
January 6, 2020, the Company entered into a finder’s fee
agreement. The finder will receive 5% cash and 5% warrants on all
funds it raises including bridge loans. The three-year common stock
share warrants will have an exercise price of $0.25. During 2019
and 2020, the finder helped the Company raise $300,000, therefore a
fee of $31,650 was paid and 126,600 warrants will be
issued.
10.
CONVERTIBLE DEBT
Senior Secured Promissory Note
As of March 31, 2021, all Senior Secured debt due
to GPB had been exchanged for a subscription receivable, this
subscription is for 2,236 Series F-2 preferred stock shares
that will be issued in the second quarter of 2021, in accordance
with the terms of the January 15, 2020 exchange agreement. In
addition, the common stock
purchase warrant exercise price had been adjusted to $0.20 and the
number of common stock shares exchangeable for was 7,185,000. The
exchange agreement was subject to the Company meeting repayment
conditions, which the Company did. Those conditions involved in
part the repayment of $450,000, $100,000 and $950,000 for the
completion of each Auctus financing tranche. Further on September
2, 2020, the Company made a payment of $50,000, which provided the
Company a four-month forbearance as well as paying and additional
$150,000 to reduce the balance outstanding at that time. On January
8, 2021, the Company made the final payment of $750,000 as required
by this exchange agreement with GPB.
On
February 12, 2016, the Company entered into a securities purchase
agreement with GPB Debt Holdings II LLC (“GPB”) for the
issuance of a $1,437,500 senior secured convertible note for an
aggregate purchase price of $1,029,000 (representing an original
issue discount of $287,500 and debt issuance costs of $121,000). On
May 28, 2016, the balance of the note was increased by $87,500 for
a total principal balance of $1,525,000. On December 7, 2016, the
Company entered into an exchange agreement with GPB and as a result
the principal balance increased by a transfer $312,500 (see –
“Senior Secured Promissory Note”) for a total principal
balance of $1,837,500.
In
connection with the transaction, on February 12, 2016, the Company
and GPB entered into a four-year consulting agreement, pursuant to
which the investor will provide management consulting services to
the Company in exchange for a royalty payment, payable quarterly,
equal to 3.85% of the Company’s revenues from the sale of
products. As of March 31, 2021 and December 31, 2020, and 2019, GPB
had earned approximately $35,000 in royalties that are unpaid.
Based on the exchange agreement GPB will no longer earn
royalties.
As
of December 31, 2020, the balance due on the convertible debt was
$1,709,414, consisting of principal of $1,362,384 and a prepayment
penalty of $347,030. Interest accrued on the note total $1,233,637
at December 31, 2020, and is included in accrued expenses on the
accompanying consolidated balance sheet.
The
Company used a placement agent in connection with the transaction.
For its services, the placement agent received a cash placement fee
equal to 4% of the aggregate gross proceeds from the transaction
and a warrant to purchase shares of common stock equal to an
aggregate of 6% of the total number of shares underlying the
securities sold in the transaction, at an exercise price equal to,
and terms otherwise identical to, the warrant issued to the
investor. Finally, the Company agreed to reimburse the placement
agent for its reasonable out-of-pocket expenses. The warrants
issued to that placement agent had expired during the three months
ended March 31, 2021.
Other Convertible Debt
GHS
Effective
May 19, 2017, the Company entered into a securities purchase
agreement with GHS for the purchase of a $66,000 convertible
promissory note for the purchase of $60,000 in net proceeds
(representing a 10% original issue discount of $6,000). The accrued
interest rate of 8% per year until it matured in December 31, 2017.
Beginning February 2018, the note is convertible, in whole or in
part, at the holder’s option, into shares of the
Company’s stock at a conversion price equal to 60% of the
lowest trading price during the 25 trading days prior to
conversion. Upon the occurrence of an event of default, the note
will bear interest at a rate of 20% per year and the holder of the
note may require the Company to redeem or convert the note at 150%
of the outstanding principal balance. GHS converted $12,700 of
principal and accrued interest during the year ended December 31,
2019. On December 16, 2020, the Company paid $25,000 on the note
balance. At March 31, 2021 the note was paid in full. On December
31, 2020, the balance due on this note was $63,520 including a
default penalty of $37,926. Interest accrued on the note totaled
$17,816, at December 31, 2020 and is included in accrued expenses
on the accompanying consolidated balance sheet.
Effective
May 17, 2018, the Company entered into a securities purchase
agreement with GHS for the purchase of a convertible promissory
note with a principal of $9,250 for a purchase price of $7,500
(representing an original issue discount of $750 and debt issuance
costs of $1,000). The note accrued interest at a rate of 8% per
year until its matured June 17, 2019. Beginning February 2018, the
note is convertible, in whole or in part, at the holder's option,
into shares of the Company's stock at a conversion price equal to
70% of the lowest trading price during the 25 trading days prior to
conversion (if the note cannot be converted due to Depository Trust
Company freeze then rate decreases to 60%). Upon the occurrence of
an event of default, the note will bear interest at a rate of 20%
per year and the holder of the note may require the Company to
redeem or convert the note at 150% of the outstanding principal
balance. As of March 31, 2021, the note was paid in full. At
December 31, 2020, the balance due on this note was $14,187,
including a default penalty of $4,937. Interest accrued on the note
totaled $5,006 at December 31, 2020, and is included in accrued
expenses on the accompanying consolidated balance
sheet.
Effective
June 22, 2018, the Company entered into a securities purchase
agreement with GHS for the purchase of a $68,000 convertible
promissory note for a purchase price of $60,000 (representing an
original issue discount of $6,000 and debt issuance costs of
$2,000). At issuance, the Company recorded a $29,143 beneficial
conversion feature, which was fully amortized at December 31, 2019.
The accrued interest at a rate of 10% per year until it matured on
June 22, 2019. Beginning May 2019, the note is convertible, in
whole or in part, at the holder's option, into shares of the
Company's stock at a conversion price equal to 70% of the lowest
trading price during the 25 trading days prior to conversion (if
the note cannot be converted due to Depository Trust Company freeze
then rate decreases to 60%). Upon the occurrence of an event of
default, the note will bear interest at a rate of 20% per year and
the holder of the note may require the Company to redeem or convert
the note at 150% of the outstanding principal balance. At March 31,
2021 and December 31, 2020, the balance due on this note was
$90,348 and $103,285, respectively and includes a default penalty
of $35,285. Interest accrued on the note totals $36,906 and $39,644
at March 31, 2021 and December 31, 2020, respectively, and is
included in accrued expenses on the accompanying consolidated
balance sheet.
Auctus
On
May 22, 2020, the Company entered into an exchange agreement with
Auctus. Based on this agreement the Company exchanged three
outstanding notes, in the amounts of $150,000, $89,250, and $65,000
for a total amount $328,422 of debt outstanding, as well as any
accrued interest and default penalty, for: $160,000 in cash
payments (payable in monthly payments of $20,000), converted a
portion of the notes pursuant to original terms of the notes into
500,000 restricted common stock shares (shares were issued on June
3, 2020); and 700,000 warrants issued to purchase common stock
shares at a strike price of $0.15. The fair value of the common
stock shares was $250,000 (based on a $0.50 fair value for the
Company’s stock) and of the warrants to purchase common stock
shares was $196,818 (based on a $0.281 black scholes fair
valuation). During the year ended December 31, 2020, the Company
paid $100,000 to reduce the outstanding balance. As of March 31,
2021, the balance was paid in full. At December 31, 2020, a balance
of $40,000 remained to be paid for these exchanged
loans.
Auctus notes exchanged in the May 22, 2020 transaction
Effective
March 20, 2018, the Company entered into a securities purchase with
Auctus Fund, LLC ("Auctus") for the issuance of a $150,000
convertible promissory note and warrants exercisable for 4,262
shares of the Company's common stock. At issuance, the Company
recorded a $97,685 beneficial conversion feature, which was fully
amortized at December 31, 2018. The warrants are exercisable at any
time, at an exercise price equal to $0.04 per share, subject to
certain customary adjustments and price-protection provisions
contained in the warrant. The warrants have a five-year term. The
note accrued interest at a rate of 12% per year until it matured in
December 2018. Beginning December 2018, the note is convertible, in
whole or in part, at the holder's option, into shares of the
Company's stock at a conversion price equal to 60% of the lowest
trading price during the 20 trading days prior to conversion. Upon
the occurrence of an event of default, the note will bear interest
at a rate of 24% per year and the holder of the note may require
the Company to redeem or convert the note at 150% of the
outstanding principal balance. On May 22, 2020, the default penalty
and outstanding interest was exchanged as described in the
preceding paragraph. As of March 31, 2021, the note was paid in
full. During the year ended December 31, 2020, the Company paid
$100,000 to reduce the outstanding balance. As of December 31,
2020, a balance of $40,000 remained to be paid for these exchanged
loans.
On March 31, 2020, we entered into a securities
purchase agreement with Auctus Fund, LLC for the issuance and sale
to Auctus of $112,750 in aggregate principal amount of a 12%
convertible promissory note. On March 31, 2020, we issued the note
to Auctus and issued 250,000 five-year common stock warrants at an
exercise price of $0.16. On April 3, 2020, we received net proceeds
of $100,000. The note matures on January 26, 2021 and accrues
interest at a rate of 12% per year. We may not prepay the note, in
whole or in part. After the 90th calendar
day after the issuance date, and ending on the later of maturity
date and the date of payment of the default amount, Auctus may
convert the note, at any time, in whole or in part, provided such
conversion does not provide Auctus with more than 4.99% of the
outstanding common share stock. The conversion may be made
converted into shares of the our common stock, at a conversion
price equal to the lesser of: (i) the lowest Trading Price during
the twenty-five (25) trading day period on the last trading prior
to the issue date and (ii) the variable conversion price (55%
multiplied by the market price, market price means the lowest
trading price for the common stock during the twenty-five (25)
trading day period ending on the latest complete trading day prior
to the conversion date. Trading price is the lowest trade price on
the trading market as reported. The note includes customary events
of default provisions and a default interest rate of 24% per year.
As of March 31, 2021 and December 31, 2020, the note outstanding was $112,750, which
consisted of unamortized balance of $8,424 of a beneficial
conversion feature. In addition, as of March 31, 2021 and December
31, 2020, unamortized debt issuance costs of $2,550 and $5,100 and
interest of $13,643 and $10,260 are included in accrued expenses on
the accompanying consolidated balance sheet,
respectively.
The following table summarizes
the Convertible
notes (including debt in default):
|
|
|
GPB
|
$-
|
$-
|
$1,709
|
$1,709
|
GHS
|
-
|
|
64
|
|
|
-
|
|
14
|
|
|
90
|
90
|
103
|
181
|
Auctus
|
110
|
110
|
-
|
40
|
Convertible
notes, past due (including debt in default)
|
|
$200
|
|
$1,930
|
The
convertible notes payable, past due was $200,000 and $1,930,000 at
March 31, 2021 and December 31, 2020, respectively.
Troubled Debt Restructuring
During
2021, the Company restructured debt with GPB resulting in the
exchange of $1,709,000 of convertible debt. This debt restructure
met the criteria for troubled debt. The basic criteria are that the
borrower is troubled, i.e., they are having financial difficulties,
and a concession is granted by the creditor. As of March 31, 2021,
the troubled debt restructuring for Convertible Debt, would have
decreased the net loss by $449,000 and causing the per share
calculation to change from .04 to .07 net loss per
share.
11.
LONG-TERM DEBT
Long-term Debt – Related Parties
On
July 24, 2019, Dr. Faupel and Mr. Cartwright agreed to an addendum
to the debt restructuring exchange agreement and to modify the
terms of the original exchange agreement. Under this modification
Dr. Faupel and Mr. Cartwright agreed to extend the note to be due
in full on the third anniversary of that agreement. The
modification also included simple interest at a 6% rate, with the
principal and accrued interest due in total at the date of maturity
or September 4, 2021, the terms are currently being updated and an
amended modification is expected to be completed.
During
the quarter ended September 30, 2018, the Company entered into an
exchange agreement dated July 14, 2018, Dr Faupel, agreed to
exchange outstanding amounts due to him for loans, interest, bonus,
salary and vacation pay in the amount of $661,000 for a $207,000
promissory note dated September 4, 2018. As a result of the
exchange agreement, the Company recorded a gain for extinguishment
of debt of $199,000 and a capital contribution of $235,000 during
the year ended December 31, 2018. The resulting difference of
$20,000 was recorded to accrued interest. In the July 20, 2018
exchange agreement, Dr, Cartwright, agreed to exchange outstanding
amounts due to him for loans, interest, bonus, salary and vacation
pay in the amount of $1,621,000 for a $319,000 promissory note
dated September 4, 2018. As a result of the exchange agreement, the
Company recorded a gain for extinguishment of debt of $840,000 and
a capital contribution of $432,000 during the year ended December
31, 2018. The resulting difference of $30,000 was recorded to
accrued interest and elimination of debt.
On
February 19, 2021, the Company entered into a new promissory note
replacing the original note from September 4, 2018, with Mark
Faupel and Gene Cartwright. For Dr. Cartwright the principal amount
on the new note was $267,085, matures on February 18, 2023, and
will accrue interest at a rate of 6%. For Dr. Faupel the principal
amount on the new note was $153,178, matures on February 18, 2023,
and will accrue interest at a rate of 6%.
On February 19, 2021, the Company exchanged
$100,000 and $85,000 of long-term debt for Dr. Cartwright and Dr.
Faupel. The Company recorded
this exchange as a subscription receivable and it will issue 100
and 85 series F-2 preferred stock shares, respectively in
accordance with the terms of the agreement during the second
quarter of 2021.
The
table below summarizes the detail of the exchange
agreement:
For
Dr. Faupel:
Salary
|
$134
|
Bonus
|
20
|
Vacation
|
95
|
Interest on
compensation
|
67
|
Loans to
Company
|
196
|
Interest on
loans
|
149
|
Total
outstanding prior to exchange
|
$661
|
Amount
forgiven
|
(454)
|
Total
Interest accrued through December 31, 2020
|
29
|
Balance
outstanding at December 31, 2020
|
$236
|
Exchange
for Series F Preferred Stock
|
(85)
|
Interest
accrued through March 31, 2021
|
3
|
Balance
outstanding at March 31, 2021
|
$154
|
For
Dr. Cartwright:
Salary
|
$337
|
Bonus
|
675
|
Interest on
compensation
|
528
|
Loans to
Company
|
196
|
Interest on
loans
|
149
|
Total
outstanding prior to exchange
|
$1,621
|
Amount
forgiven
|
(1,302)
|
Total
Interest accrued through December 31, 2020
|
45
|
Balance
outstanding at December 31, 2020
|
$364
|
Exchange
for Series F Preferred Stock
|
(100)
|
Interest
accrued through March 31, 2021
|
5
|
Balance
outstanding at March 31, 2021
|
$269
|
On March 22, 2021, the Company entered into an
exchange agreement with Richard Fowler. As of December 31, 2020,
the Company owed Mr. Fowler $546,214 ($412,624 in deferred salary
and $133,590 in accrued interest). The Company recorded
this exchange as a subscription receivable and it will issue 50
series F-2 preferred stock shares in accordance with the terms of
the agreement during the second quarter of 2021
(convertible into 200,000
common stock shares), a $150,000 unsecured note and Mr. Fowler
remains on the Company health insurance plan. The note will accrue
interest at the rate of 6% (18% in the event of default) on March
22, 2022 and be payable in monthly installments of $3,600 for four
years, with the first payment being due on March 15,
2022.
Future
debt obligations at March 31, 2021 for Long-term Debt –
Related Parties are as follows (in thousands):
Year
|
|
2021
|
$-
|
2022
|
-
|
2023
|
456
|
2024
|
43
|
2025
|
43
|
Thereafter
|
31
|
Totals
|
$573
|
Long-term debt
On
May 4, 2020, the Company received a loan from the Small Business
Administration (SBA) pursuant to the Paycheck Protection Program
(PPP) as part of the Coronavirus Aid, Relief, and Economic Security
Act (CARES Act) in the amount of $50,184. The loan bears interest
at a rate of 1.00%, and matures in 24 months, with the principal
and interest payments being deferred until the date of forgiveness
with interest accruing, then converting to monthly principal and
interest payments, at the interest rate provided herein, for the
remaining eighteen (18) months. Lender will apply each payment
first to pay interest accrued to the day Lender received the
payment, then to bring principal current, and will apply any
remaining balance to reduce principal. Payments must be made on the
same day as the date of this Note in the months they are due.
Lender shall adjust payments at least annually as needed to
amortize principal over the remaining term of the Note. Under the
provisions of the PPP, the loan amounts will be forgiven as long
as: the loan proceeds are used to cover payroll costs, and most
mortgage interest, rent, and utility costs over a 24 week period
after the loan is made; and employee and compensation levels are
maintained. In addition, payroll costs are capped at $100,000 on an
annualized basis for each employee. Not more than 40% of the
forgiven amount may be for non-payroll costs. As of March 31, 2021
and December 31, 2020, the outstanding balance was $50,604 and
$50,477 including $420 and $293 in accrued interest, respectively.
The Company was notified that the application for loan forgiveness
was approved in the amount of $23,742 in principal and $234 in
interest. The Company is planning on appealing the amount
forgiven.
Troubled Debt Restructuring
The
debt extinguished for Mr. Cartwright and Mr. Faupel meet the
criteria for troubled debt. The basic criteria are that the
borrower is troubled, i.e., they are having financial difficulties,
and a concession is granted by the creditor. Due to the Company
being in default on several of its loans the debt is considered
troubled debt. As of March 31, 2021, the troubled debt
restructuring for Long-term Debt – Related Parties, would
have decreased the net loss by $346,000 and causing the per share
calculation to change from .04 to .07 net loss per
share.
12.
INCOME (LOSS) PER COMMON SHARE
Basic
net income (loss) per share attributable to common stockholders,
amounts are computed by dividing the net income (loss) plus
preferred stock dividends and deemed dividends on preferred stock
by the weighted average number of shares outstanding during the
year.
Diluted
net income (loss) per share attributable to common stockholders
amounts are computed by dividing the net income (loss) plus
preferred stock dividends, deemed dividends on preferred stock,
after-tax interest on convertible debt and convertible dividends by
the weighted average number of shares outstanding during the year,
plus Series C, Series D, Series E and Series F convertible
preferred stock, Series G preferred stock, convertible debt,
convertible preferred dividends and warrants convertible into
common stock shares.
The
following table sets forth pertinent data relating to the
computation of basic and diluted net loss per share attributable to
common shareholders.
In thousands
|
|
|
|
|
|
|
|
Net (loss) income
|
$(655)
|
$2,716
|
|
Basic weighted average number of shares outstanding
|
13,172
|
5,013
|
|
Net (loss) income per share (basic)
|
$(0.050)
|
$0.542
|
|
Diluted weighted average number of shares outstanding
|
13,172
|
65,620
|
|
Net (loss) income per share (diluted)
|
$(0.050)
|
$0.0415
|
|
|
|
|
|
Dilutive equity instruments (number of equivalent
units):
|
|
|
|
Stock options
|
-
|
-
|
|
Preferred stock
|
9,998
|
-
|
|
Convertible debt
|
315
|
59,282
|
|
Warrants
|
17,400
|
1,325
|
|
Total Dilutive instruments
|
27,713
|
60,607
|
|
For
period of net loss, basic and diluted earnings per share are the
same as the assumed exercise of warrants and the conversion of
convertible debt are anti-dilutive.
Troubled Debt Restructuring
As
provided in the preceding footnotes, several transactions met the
basic criteria for troubled debt, which are that the borrower is
troubled, i.e., they are having financial difficulties, and a
concession is granted by the creditor. Due to the Company being in
default on several of its loans the debt is considered troubled
debt. As of March 31, 2021, the troubled debt restructuring in
total would have decreased the net loss by $972,000 and causing the
per share calculation to change from .04 to .11 net loss per
share.
13.
SUBSEQUENT EVENTS
On
April 29, 2021, the Company made a $25,000 payment to an investment
banker to assist in financing efforts, which will be presented
within prepaid expenses as of June 30, 2021. These costs will be
charged against the gross proceeds of the offering when it
occurs.
During
May 2021, the Company entered into several securities purchase
agreements for the issuance of 10.0% senior secured convertible
debentures. Each debenture unit will represent a subscription price
of $1,000 per debenture unit. The debentures are convertible into
shares of common stock at a price of $0.50 for a period of
thirty-six months from the closing date. In addition, the investors
will receive one two-year warrant to purchase one common stock
share at an exercise price of $0.80 per share. As of May 17, 2021,
the Company had subscription agreements for 868 debentures and
received a total of $868,000.