Company Quick10K Filing
Guided Therapeutics
Price0.00 EPS1,780
Shares0 P/E0
MCap0 P/FCF-0
Net Debt0 EBIT7
TEV0 TEV/EBIT0
TTM 2019-03-31, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-05
S-1 2020-09-10 Public Filing
10-Q 2020-06-30 Filed 2020-08-20
10-Q 2020-03-31 Filed 2020-07-07
10-K 2019-12-31 Filed 2020-04-20
10-Q 2019-09-30 Filed 2020-03-09
10-Q 2019-06-30 Filed 2020-02-11
10-Q 2019-03-31 Filed 2019-07-11
10-K 2018-12-31 Filed 2019-05-08
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
S-1 2018-06-14 Public Filing
10-Q 2018-03-31 Filed 2018-05-21
10-K 2017-12-31 Filed 2018-04-17
10-Q 2017-09-30 Filed 2017-11-20
10-Q 2017-06-30 Filed 2017-08-18
10-Q 2017-03-31 Filed 2017-05-22
10-K 2016-12-31 Filed 2017-03-22
10-Q 2016-09-30 Filed 2016-12-05
10-Q 2016-06-30 Filed 2016-08-17
10-Q 2016-03-31 Filed 2016-05-19
10-K 2015-12-31 Filed 2016-03-15
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-13
10-Q 2015-03-31 Filed 2015-05-13
10-K 2014-12-31 Filed 2015-03-25
10-Q 2014-09-30 Filed 2014-11-12
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-15
10-K 2013-12-31 Filed 2014-03-26
10-Q 2013-09-30 Filed 2013-11-13
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-14
10-K 2012-12-31 Filed 2013-03-27
10-Q 2012-09-30 Filed 2012-11-13
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-14
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-30
10-Q 2010-09-30 Filed 2010-11-10
10-Q 2010-06-30 Filed 2010-08-12
10-Q 2010-03-31 Filed 2010-05-13
10-K 2009-12-31 Filed 2010-03-23
8-K 2020-09-16 Officers
8-K 2020-03-31
8-K 2020-03-31
8-K 2019-04-03
8-K 2018-11-14
8-K 2018-10-25
8-K 2018-08-31

GTHP 10Q Quarterly Report

Part I - Financial Information: Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregisterred Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
Item 6. Exhibits
EX-31 ex31.htm
EX-32 ex32.htm

Guided Therapeutics Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
4.4-0.5-5.4-10.2-15.1-20.02012201420172020
Assets, Equity
10.07.44.72.1-0.6-3.22012201420172020
Rev, G Profit, Net Income
2.61.91.30.6-0.0-0.72012201420172020
Ops, Inv, Fin

10-Q 1 gthp10q93020.htm GUIDED THERAPEUTICS, INC.

 

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

 

For the quarterly period ended September 30, 2020

Commission File No. 0-22179

  

GUIDED THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

58-2029543

(I.R.S. Employer Identification No.)

  

 

5835 Peachtree Corners East, Suite B

Norcross, Georgia 30092

(Address of principal executive offices) (Zip Code)

 

(770) 242-8723

(Registrant’s telephone number, including area code)     

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No[ ]

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [  ]
  Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13 (a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X] 

As of November 1, 2020, the registrant had 13,096,189 shares of common Stock, $0.001 par value per share, outstanding.

 

    

  

  

 

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

 

INDEX

 

 

Part I.  Financial Information  3
   
Item 1.     Financial Statements  3
   
                        Consolidated Balance Sheets – (Unaudited) as of  
                        September 30, 2020 and December 31, 2019  3
   
                        Consolidated Statements of Operations (Unaudited) for the  
                        Three and Nine months ended September 30, 2020 and 2019  5
   
                        Consolidated Statements of Stockholder’s Deficit (Unaudited) for the  
                        Three and Nine months ended September 30, 2020 and 2019  6
   
                        Consolidated Statements of Cash Flows (Unaudited) for the  
                        Nine months ended September 30, 2020 and 2019  8
   
                        Notes to Consolidated Financial Statements (Unaudited)  9
   
Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations 37
   
Item 3.     Quantitative and Qualitative Disclosures About Market Risk 47
   
Item 4.     Controls and Procedures 47
   
Part II.  Other Information          47
   
Item 1.     Legal Proceedings          47
   
Item 1A.  Risk Factors 47
   
Item 2.     Unregistered Sale of Equity Securities and Use of Proceeds.         47
   
Item 3.     Defaults Upon Senior Securities     47
   
Item 6.    Exhibits 48
   
Signatures 48
   

 

   

 

 2 

 

 

PART I - FINANCIAL INFORMATION: ITEM 1.  FINANCIAL STATEMENTS

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited, in thousands)

 

       
ASSETS  September 30, 2020  December 31, 2019
CURRENT ASSETS:          
    Cash and cash equivalents  $581   $899 
    Accounts receivable, net of allowance for doubtful accounts of $126 and $114 at
          September 30, 2020 and December 31, 2019, respectively
   1    13 
    Inventory, net of reserves of $827 and $831 at September 30, 2020 and December 31, 2019, respectively   53    48 
    Deposits on inventory   493    —   
    Other current assets   110    70 
                    Total current assets   1,238    1,030 
NONCURRENT ASSETS:          
    Property and equipment, net   1    —   
    Lease-right-of-use asset, net of amortization   61    132 
    Other assets   —      18 
                    Total noncurrent assets   62    150 
                    TOTAL ASSETS   1,300    1,180 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
CURRENT LIABILITIES:          
    Notes payable in default, related parties   1    349 
    Notes payable in default   318    427 
    Short-term notes payable   78    380 
    Short-term notes payable, related parties   —      646 
    Short-term notes payable, related parties, past due   52    —   
    Convertible notes, past due   1,798    —   
    Convertible notes in default   261    2,915 
    Short-term convertible notes payable   67    73 
    Short-term convertible notes payable, related parties   —      513 
    Accounts payable   2,609    2,897 
    Accounts payable, related parties   116    136 
    Accrued liabilities   2,906    3,235 
    Subscription receivable   —      635 
    Current portion of lease liability   57    103 
    Deferred revenue   42    101 
                   Total current liabilities   8,305    12,410 
LONG-TERM LIABILITIES:          
    Warrants, at fair value   5,515    5,092 
    Long-term convertible notes payable, net   622    15 
    Long-term debt-related parties   592    569 
    Long-term debt   50    —   
    Derivative liability   36    —   
    Lease liability   —      29 
                    Total long-term liabilities   6,815    5,705 
                    TOTAL LIABILITIES   15,120    18,115 
           
COMMITMENTS & CONTINGENCIES (Note 7)          
 3 

 

 

  

STOCKHOLDERS’ DEFICIT:      
Series C convertible preferred stock, $.001 par value; 9.0 shares authorized, 0.3 shares issued and outstanding as of September 30, 2020 and December 31, 2019. (Liquidation preference of $286 at September 30, 2020 and December 31, 2019).   105    105 
Series C1 convertible preferred stock, $.001 par value; 20.3 shares authorized, 1.0 shares issued and outstanding as of September 30, 2020 and December 31, 2019. (Liquidation preference of $1,049 at September 30, 2020 and December 31, 2019).   170    170 
Series C2 convertible preferred stock, $.001 par value; 5.0 shares authorized, 3.3 shares issued and outstanding as of September 30, 2020 and December 31, 2019. (Liquidation preference of $3,263 at September 30, 2020 and December 31, 2019).   531    531 
Series D convertible preferred stock, $.001 par value; 6.0 shares authorized, 0.8 and nil shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively. (Liquidation preference of $763 and nil at September 30, 2020 and December 31, 2019).   276    —   
Series E convertible preferred stock, $.001 par value; 5.0 shares authorized, 1.6 and nil shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively. (Liquidation preference of $1,636 and nil at September 30, 2020 and December 31, 2019).   1,539    —   
Common stock, $.001 par value; 3,000,000 shares authorized, 13,096 and 3,319 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively   3,404    3,394 
   Additional paid-in capital   122,362    118,552 
   Treasury stock, at cost   (132)   (132)
   Accumulated deficit   (142,075)   (139,555)
                   TOTAL STOCKHOLDERS’ DEFICIT   (13,820)   (16,935)
  TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   1,300    1,180 
 
 The accompanying notes are an integral part of these consolidated statements.
           

 

 4 

 

 

 

GUIDED THERAPEUTICS INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in Thousands, except per share data)

 
    

FOR THE THREE

MONTHS

ENDED SEPTEMBER 30,

    

FOR THE NINE

MONTHS

ENDED SEPTEMBER 30,

 
    2020    2019    2020    2019 
                     
REVENUE:                    
          Sales – devices and disposables  $77   $1   $77   $20 
          Cost of goods sold   12    —      19    66 
                                Gross profit (loss)   65    1    58   (46)
       
             
OPERATING EXPENSES:            
         Research and development   41    23    121    113 
         Sales and marketing   36    15    107    91 
         General and administrative   141    151    594    522 
                               Total operating expenses   218    189    822    726 
                     
                               Operating loss   (153)   (188)   (764)   (772)
                     
OTHER INCOME (EXPENSES):                    
         Other income   —      26    51    45 
         Interest expense   (317)   (376)   (910)   (1,010)
         Change in fair value of derivative liability   (36)   —      (36)   —   
         Gain (Loss) from extinguishment of debt   20    —      (296)   —   
         Change in fair value of warrants   2,061    412    (490)   (1,267)
                                Total other income (expenses)   1,728    62    (1,681)   (2,232)
                     
INCOME (LOSS) BEFORE INCOME TAXES   1,575    (126)   (2,445)   (3,004)
                     
PROVISION FOR INCOME TAXES   —      —      —      —   
                     
NET INCOME (LOSS)   1,575    (126)   (2,445)   (3,004)

 

PREFERRED STOCK DIVIDENDS

   (46)   —      (75)   —   
                     
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $1,529   $(126)  $(2,520)  $(3,004)
                     

NET INCOME (LOSS) PER SHARE

ATTRIBUTABLE TO COMMON

STOCKHOLDERS

                    
      BASIC  $0.12   $(0.04)  $(0.25)  $(0.91)
      DILUTED  $0.03   $(0.04)  $(0.25)  $(0.91)
                     
WEIGHTED AVERAGE SHARES OUTSTANDING                    
      BASIC   12,995    3,319    9,985    3,296 
      DILUTED   60,331    3,319    9,985    3,296 
                     

 

  The accompanying notes are an integral part of these consolidated financial statements.

 

 5 

 

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (In Thousands except per share data) (Unaudited)

 

   Preferred Stock
Series C
  Preferred Stock Series C1  Preferred Stock Series C2  Preferred Stock Series D  Preferred Stock Series E  Common Stock  Additional Paid-In  Treasury  Accumulated   
   Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Stock  Deficit  TOTAL
 BALANCE, December 31, 2019   —     $105    1   $170    3   $531    —     $—      —     $—      3,319   $3,394   $118,552   $(132)  $(139,555)  $(16,935)
Issuance of preferred stock in financing   —      —      —      —      —      —      1    276    2    1,539    —      —      —      —      —      1,815 
Conversion of debt into common stock   —      —      —      —      —      —      —      —      —      —      8,132    8    2,921    —      —      2,929 
Issuance of common stock in financing   —      —      —      —      —      —      —      —      —      —      1,526    2    460    —      —      462 
Issuance of warrants in financing   —      —      —      —      —      —      —      —      —      —      —      —      70    —      —      70 
Issuance of common stock for manufacturing agreements   —      —      —      —      —      —      —      —      —      —      12    —      —      —      —      —   
Issuance of common stock for series D preferred dividends   —      —      —      —      —      —      —      —      —      —      107    —      26    —      —      26 
Beneficial conversion feature of debt   —      —      —      —      —      —      —      —      —      —      —      —      82    —      —      82 
Stock based compensation   —      —      —      —      —      —      —      —      —      —      —      —      251    —      —      251 
Accrued series D preferred stock dividends   —      —      —      —      —      —      —      —      —      —      —      —      —      —      (75)   (75)
Net loss   —      —      —      —      —      —      —      —      —      —      —      —      —      —      (2,445)   (2,445)

 

BALANCE,

September 30, 2020

   —     $105    1   $170    3   $531    1   $276    2   $1,539    13,096   $3,404   $122,362   $(132)  $(142,075)  $(13,820)
                                                                                 

 

   Preferred Stock
Series C
  Preferred Stock Series C1  Preferred Stock Series C2  Preferred Stock Series D  Preferred Stock Series E  Common Stock  Additional Paid-In  Treasury  Accumulated   
   Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Stock  Deficit  TOTAL
 BALANCE, December 31, 2018   —     $105    1   $170    3   $531    —     $—      —     $—      2,669   $2,877   $118,259   $(132)  $(137,634)  $(15,824)
Shares in transit   —      —      —      —      —      —      —      —      —      —      —      —      692    —      —      692 
Conversion of debt into common stock   —      —      —      —      —      —      —      —      —      —      650    517    (408)   —      —      109 
Stock based compensation   —      —      —      —      —      —      —      —      —      —      —      —      8    —      —      8 
Net loss   —      —      —      —      —      —      —      —      —      —      —      —      —      —      (3,004)   (3,004)

 

BALANCE,

September 30, 2019

   —     $105    1   $170    3   $531    —     $—      —     $—      3,319   $3,394   $118,551   $(132)  $(140,638)  $(18,019)
                                                                                 

The accompanying notes are an integral part of these consolidated statements

 

 

 6 

 

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (In Thousands except per share data) (Unaudited)

 

  

Preferred Stock

Series C

  Preferred Stock Series C1  Preferred Stock Series C2  Preferred Stock Series D  Preferred Stock Series E 

 

Common Stock

  Additional Paid-In 

 

Treasury

 

 

Accumulated

   
   Shares  Amount  Shares  Amount  Shares   Amount  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Stock  Deficit  TOTAL

 

BALANCE, June 30, 2020

   —     $105    1   $170    3   $531    1   $276    1   $798    12,764   $3,403   $122,030   $(132)  $(143,604)  $(16,423)
Issuance of preferred stock in financing   —      —      —      —      —      —      —      —      1    741    —      —      —      —      —      741 
Conversion of debt into common stock   —      —      —      —      —      —      —      —      —      —      175    —      50    —      —      50 
Issuance of common stock in financing   —      —      —      —      —      —      —      —      —      —      50    1    5    —      —      6 
Issuance of common stock for preferred dividends   —      —      —      —      —      —      —      —      —      —      107    —      26    —      —      26 
Stock based compensation   —      —      —      —      —      —      —      —      —      —      —      —      251    —      —      251 
Accrued series D preferred stock dividends   —      —      —      —      —      —      —      —      —      —      —      —      —      —      (46)   (46)
Net income   —      —      —      —      —      —      —      —      —      —      —      —      —      —      1,575    1,575 

 

BALANCE,

September 30, 2020

   —     $105    1   $170    3   $531    1   $276    2   $1,539    13,096   $3,404   $122,362   $(132)  $(142,075)  $(13,820)
                                                                                 
  

Preferred Stock

Series C

  Preferred Stock Series C1  Preferred Stock Series C2  Preferred Stock Series D  Preferred Stock Series E 

 

Common Stock

  Additional Paid-In 

 

Treasury

 

 

Accumulated

   
   Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Stock  Deficit  TOTAL

 

BALANCE,

June 30, 2019

   —     $105    1   $170    3   $531    —     $—      —     $—      3,319   $3,393   $117,860   $(132)  $(140,512)  $(18,585)
Shares in transit   —      —      —      —      —      —      —      —      —      —      —      —      692    —      —      692 
Conversion of debt into common stock   —      —      —      —      —      —      —      —      —      —      —      1    —      —      —      (3)
Stock based compensation   —      —      —      —      —      —      —      —      —      —      —      —      3    —      —      3 
Net loss   —      —      —      —      —      —      —      —      —      —      —      —      —      —      (126)   (2,654)

 

BALANCE,

September 30, 2019

   —     $105    1   $170    3   $531    —     $—      —     $—      3,319   $3,394   $118,551   $(132)  $(140,638)  $(18,019)
                                                                                 

 

The accompanying notes are an integral part of these consolidated statements

 

 7 

 

GUIDED THERAPEUTICS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
  

FOR THE NINE MONTHS

ENDED SEPTEMBER 30,

   2020  2019
CASH FLOWS FROM OPERATING ACTIVITIES:          
     Net loss  $(2,445)  $(3,004)
     Adjustments to reconcile net loss to net cash used in operating activities:          
           Bad debt expense   13    —   
           Depreciation   —      21 
           Amortization of debt issuance costs and discounts   297    54 
           Amortization of beneficial conversion feature   78    73 
           Stock based compensation   251    8 
           Change in fair value of warrants   490    1,267 
           Loss from extinguishment of debt   296    —   
           Change in fair value of derivative   36    —   
           
    Changes in operating assets and liabilities:          
           Accounts receivable   (1)   (1)
           Inventory   (5)   66 
           Other current assets   (532)   (37)
           Other non-current asset   18    —   
           Accounts payable   (189)   62 
           Deferred revenue   (59)   32 
           Accrued liabilities   208    857 
                         Total adjustments   901    2,402 
           
                         Net cash used in operating activities   (1,544)   (602)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
      Additions to property and equipment   (1)   —   
                        Net cash used in investing activities   (1)   —   
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
      Proceeds from debt financing, net of discounts and debt issuance costs   519    748 
      Proceeds from issuance of Series E preferred stock   1,539    —   
      Payments made on notes payable   (959)   (146)
      Proceeds from the issuance of common stock, net of costs   128    —   
                        Net cash provided by financing activities   1,227    602 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   (318)   —   
CASH AND CASH EQUIVALENTS, beginning of year   899    —   
CASH AND CASH EQUIVALENTS, end of period  $581   $—   
SUPPLEMENTAL SCHEDULE OF:          
Cash paid for:          
     Interest  $229   $—   
NONCASH INVESTING AND FINANCING ACTIVITIES:          
  Issuance of common stock as debt repayment  $2,832   $33 
  Dividends on preferred stock  $75   $—   
  Subscription receivable  $635   $—   
  Warrants exchanged for fixed price warrants  $70   $—   
   Settlement of dividends through common stock issuance  $26   $—   
           
           

The accompanying notes are an integral part of these consolidated financial statements.

 8 

 

 

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

  

1.ORGANIZATION, BACKGROUND, AND BASIS OF PRESENTATION

 

Guided Therapeutics, Inc. (formerly SpectRx, Inc.), together with its wholly owned subsidiary, InterScan, Inc. (formerly Guided Therapeutics, Inc.), collectively referred to herein as the “Company”, is a medical technology company focused on developing innovative medical devices that have the potential to improve healthcare. The Company’s primary focus is the continued commercialization of its LuViva non-invasive cervical cancer detection device and extension of its cancer detection technology into other cancers, including esophageal. The Company’s technology, including products in research and development, primarily relates to biophotonics technology for the non-invasive detection of cancers.

 

Basis of Presentation

 

All information and footnote disclosures included in the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934. In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

A 1:800 reverse stock split of all of the Company’s issued and outstanding common stock was implemented on March 29, 2019. As a result of the reverse stock split, every 800 shares of issued and outstanding common stock were converted into 1 share of common stock. All fractional shares created by the reverse stock split were rounded to the nearest whole share. The number of authorized shares of common stock did not change. The reverse stock split decreased the Company’s issued and outstanding shares of common stock from 2,652,309,322 shares to 3,319,469 shares as of that date with rounding. See Note 4, Stockholders’ Deficit. Unless otherwise specified, all per share amounts are reported on a post-stock split basis, as of September 30, 2020 and December 31, 2019.

The Company’s prospects must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate. The Company has experienced net losses since its inception and, as of September 30, 2020, it had an accumulated deficit of approximately $142.1 million. To date, the Company has engaged primarily in research and development efforts and the early stages of marketing its products. The Company may not be successful in growing sales for its products. Moreover, required regulatory clearances or approvals may not be obtained in a timely manner, or at all. The Company’s products may not ever gain market acceptance and the Company may not ever generate significant revenues or achieve profitability. The development and commercialization of the Company’s products requires substantial development, regulatory, sales and marketing, manufacturing and other expenditures. The Company expects operating losses to continue for the foreseeable future as it continues to expend substantial resources to complete development of its products, obtain regulatory clearances or approvals, build its marketing, sales, manufacturing and finance capabilities, and conduct further research and development.

 

Certain prior year amounts have been reclassified in order to conform to the current year presentation.

 

Going Concern

 

The Company’s consolidated financial statements have been prepared and presented on a basis assuming it will continue as a going concern. The factors below raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.

 

At September 30, 2020, the Company had a negative working capital of approximately $7.1 million, accumulated deficit of $142.1 million, and net loss of $2.5 million for the nine months then ended (the net loss was in part the result of a $0.9 million for interest charges on debt and $0.5 million change in fair value of warrants that were recorded in the period). Stockholders’ deficit totaled approximately $13.8 million at September 30, 2020, primarily due to recurring net losses from operations, deemed dividends on warrants and preferred stock.

 

 9 

 

 

 

The Company has taken the following steps to improve certain factors that are generating the going concern opinion, including:

 

During the end of 2019 and during 2020, the Company was able to raise over $4.0 million in equity and debt investments;
The Company has executed several exchange agreements that converted to approximately $2.4 million of debt for equity, as well as eliminate some existing debt;
During the quarter ended September 30, 2020, the Company uplisted to the Over the Counter (OTC) bulletin board;

 

If sufficient capital cannot be raised during 2020 and 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 28.3 million shares of its common stock outstanding at September 30, 2020, with exercise prices ranging between $0.04 and $1.82 per share. Exercises of in the money warrants would generate a total of approximately $5.0 million in cash, assuming full exercise, although the Company cannot be assured that holders will exercise any warrants. Management may obtain additional funds through the public or private sale of debt or equity, and grants, if available.

 

2.   SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant areas where estimates are used include common share stock options, the allowance for doubtful accounts, inventory valuation and input variables for Black-Scholes, Monte Carlo simulations and binomial calculations. The Company uses the Monte Carlo simulations and binomial calculations in the calculation of the fair value of the warrant liabilities and the valuation of embedded conversion options and freestanding warrants.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Guided Therapeutics, Inc. and its wholly owned subsidiary. All intercompany transactions are eliminated.

 

Accounting Standard Updates

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that expected credit losses relating to financial assets are measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The Company adopted the standard on January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on the Company.

 

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. The amendments in ASU 2018-13 eliminate, add, and modify certain disclosure requirements for fair value measurements. The amendments are effective for the Company’s interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for either the entire ASU or only the provisions that eliminate or modify requirements. The amendments with respect to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively. All other amendments are to be applied retrospectively to all periods presented. The adoption of ASU 2016-13 did not have a material impact on the Company.

 

 10 

 

 

 

A variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect, if any, that the implementation of such proposed standards would have on the Company’s consolidated financial statements.

 

Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be a cash equivalent.

 

Accounts Receivable

 

The Company performs periodic credit evaluations of its distributors’ financial conditions and generally does not require collateral. The Company reviews all outstanding accounts receivable for collectability on a quarterly basis. An allowance for doubtful accounts is recorded for any amounts deemed uncollectable. Uncollectibility, is determined based on the determination that a distributor will not be able to make payment and the time frame has exceeded one year. The Company does not accrue interest receivable on past due accounts receivable.

 

Concentrations of Credit Risk

 

The Company, from time to time during the years covered by these consolidated financial statements, may have bank balances in excess of its insured limits. Management has deemed this a normal business risk.

 

Inventory Valuation

 

All inventories are stated at lower of cost or net realizable value, with cost determined substantially on a “first-in, first-out” basis.  Selling, general, and administrative expenses are not inventoried, but are charged to expense when incurred. At September 30, 2020 and December 31, 2019, our inventories were as follows (in thousands):

 

   September 30,  December 31,
   2020  2019
Raw materials  $782   $781 
Work in process   80    81 
Finished goods   18    17 
Inventory reserve   (827)   (831)
       Total  $53   $48 
           

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.

 

Deposits on Inventory

 

Deposits made for long-term inventory parts were recorded in Other Assets. On September 4, 2020, the Company paid and additional deposit of $200,000 for the deposit of a major part in the assembly of the Company’s devices. The Company had a prior deposit of $292,000 with this vendor that was being held until the Company could pay the entire balance of the $493,000 order. The Company had reserved and recorded an expense for the entire balance of $292,000 in prior periods as it was unsure when it would have the financial resources to pay the balance. Upon the payment of the additional deposit the Company reversed the reserve of $292,000. In addition, since the parts will be delivered within 6 months the deposit on inventory was recorded as a current item on the Company’s Balance Sheet.

 

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 September 30, 2020 and December 31, 2019 (in thousands):

 

 

 

 11 

 

 

 

   September 30,  December 31,
   2020  2019
Equipment  $1,042   $1,349 
Software   652    740 
Furniture and fixtures   41    124 
Leasehold Improvement   12    180 
    1,747    2,393 
Less accumulated depreciation and amortization   (1,746)   (2,393)
            Total  $1   $—   

 

During the three months ended September 30, 2020, the Company disposed of approximately $648,000 of property and equipment that was fully depreciated.

 

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 $17,000 and $14,000 for the nine months ended September 30, 2020 and 2019, respectively.

 

Leases

With the implementation of ASU 2016-02, “Leases (Topic 842)”, the Company recorded a lease-right-of-use asset and a lease liability. The implementation required the analysis of certain criteria in determining its treatment. The Company determined that its corporate office lease met those criteria. The Company implemented the guidance using the alternative transition method. Under this alternative, the effective date would be the date of initial application. The Company analyzed the lease at its effective date and calculated an initial lease payment amount of $267,380 with a present value of $213,000 using a 20% discount. As of September 30, 2020, the balance of the lease-right-of-use asset was approximately $61,000 and the lease liability was approximately $57,000.

 

The cumulative effect of initially applying the new guidance had an immaterial impact on the opening balance of retained earnings. The Company elected the practical expedients permitted under the transition guidance within the new standards, which allowed the Company to carry forward the historical lease classification.

 

Accrued Liabilities

 

Accrued liabilities are summarized as follows (in thousands):

  

September 30,

2020

  December 31,
2019
Compensation  $1,141   $1,123 
Professional fees   29    181 
Interest   1,466    1,603 
Warranty   2    2 
Vacation   34    41 
Preferred dividends   169    120 
Other accrued expenses   65    165 
            Total  $2,906   $3,235 

 

 

 12 

 

 

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 September 30, 2020, all common stock shares were issued to investors. As of September 30, 2020, the outstanding subscription receivable was nil. As of December 31, 2019, the Company had reserved 1,270,000 common stock shares in exchange for $635,000.

 

Revenue Recognition

 

The Company follows, ASC 606 Revenue from Contracts with Customers establishes a single and comprehensive framework which sets out how much revenue is to be recognized, and when. The core principle is that a vendor should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. Revenue will now be recognized by a vendor when control over the goods or services is transferred to the customer. In contrast, Revenue based revenue recognition around an analysis of the transfer of risks and rewards; this now forms one of a number of criteria that are assessed in determining whether control has been transferred. The application of the core principle in ASC 606 is carried out in five steps: Step 1 – Identify the contract with a customer: a contract is defined as an agreement (including oral and implied), between two or more parties, that creates enforceable rights and obligations and sets out the criteria for each of those rights and obligations. The contract needs to have commercial substance and it is probable that the entity will collect the consideration to which it will be entitled. Step 2 – Identify the performance obligations in the contract: a performance obligation in a contract is a promise (including implicit) to transfer a good or service to the customer. Each performance obligation should be capable of being distinct and is separately identifiable in the contract. Step 3 – Determine the transaction price: transaction price is the amount of consideration that the entity can be entitled to, in exchange for transferring the promised goods and services to a customer, excluding amounts collected on behalf of third parties. Step 4 – Allocate the transaction price to the performance obligations in the contract: for a contract that has more than one performance obligation, the entity will allocate the transaction price to each performance obligation separately, in exchange for satisfying each performance obligation. The acceptable methods of allocating the transaction price include adjusted market assessment approach, expected cost plus a margin approach, and, the residual approach in limited circumstances. Discounts given should be allocated proportionately to all performance obligations unless certain criteria are met and reallocation of changes in standalone selling prices after inception is not permitted. Step 5 – Recognize revenue as and when the entity satisfies a performance obligation: the entity should recognize revenue at a point in time, except if it meets any of the three criteria, which will require recognition of revenue over time: the entity’s performance creates or enhances an asset controlled by the customer, the customer simultaneously receives and consumes the benefit of the entity’s performance as the entity performs, and the entity does not create an asset that has an alternative use to the entity and the entity has the right to be paid for performance to date.

 

Revenue by product line (in thousands):

   Nine Months Ended September 30,
   2020  2019
Devices  $—       
Disposables   —      2 
Major part components   77    16 
Warranty   —      2 
            Total  $77   $20 

Revenue by geographic location (in thousands):

   Nine Months Ended September 30,
   2020  2019
Asia  $77   $6 
Europe   —      14 
            Total  $77   $20 

 

 

 13 

 

 

Significant Distributors

 

Accounts receivable, that netted to a balance of $1,000, and were reserved against, were from more than one distributor and represents 100% of the balance as of September 30, 2020. During the nine months ended September 30, 2020, revenues were from one distributor and for other parts. During the nine months ended September 30, 2019, revenues were from two distributors and for extended warranties. Revenues from these distributors totaled $20,000 for the period ended September 30, 2019. Accounts receivable, not reserved against, were from one distributor and represents 100% of the balance for the period ended September 30, 2019.

 

Deferred revenue

 

The Company defers payments received as revenue until earned based on the related contracts and applying ASC 606 as required. As of September 30, 2020, and December 31, 2019, the Company had $42,000 and $101,000 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 entered into an agreed upon payment plan with the IRS for delinquent payroll taxes and also with the Georgia Department of State. The Company is currently in process of setting up a payment arrangement for its delinquent state income taxes with the State of Georgia and the returns are currently under review by state authorities. Although the Company has been experiencing recurring losses, it is obligated to file tax returns for compliance with IRS regulations and that of applicable state jurisdictions. At December 31, 2019, the Company has approximately $79 million of cumulative net operating losses. The 2019 Federal and State tax returns have been filed. A full valuation allowance has been recorded related the deferred tax assets generated from the net operating losses.

The current corporate tax rates in the U.S. is 21%.

Uncertain Tax Positions

The Company assesses each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At September 30, 2020 and December 31, 2019, there were no uncertain tax positions.

Warrants

 

The Company has issued warrants, which allow the warrant holder to purchase one share of stock at a specified price for a specified period of time. The Company records equity instruments including warrants issued to non-employees based on the fair value at the date of issue. The fair value of warrants classified as equity instruments at the date of issuance is estimated using the Black-Scholes Model. The fair value of warrants classified as liabilities at the date of issuance is estimated using the Monte Carlo Simulation or Binomial model.

 

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.

 

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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 nine months ended September 30, 2020 and 2019, stock based compensation for options attributable to employees, non-employees, officers and Board members was approximately $251,000 and $8,000, 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 September 30, 2020, and 2019 the Company had $618,000 and nil, of unrecognized compensation costs related to granted stock options that will be recognized, respectively.

 

Beneficial Conversion Features of Convertible Securities

 

Conversion options that are not bifurcated as a derivative pursuant to ASC 815 and not accounted for as a separate equity component under the cash conversion guidance are evaluated to determine whether they are beneficial to the investor at inception (a beneficial conversion feature) or may become beneficial in the future due to potential adjustments. The beneficial conversion feature guidance in ASC 470-20 applies to convertible stock as well as convertible debt which are outside the scope of ASC 815. A beneficial conversion feature is defined as a nondetachable conversion feature that is in the money at the commitment date. The beneficial conversion feature guidance requires recognition of the conversion option’s in-the-money portion, the intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting discount is amortized as a dividend over either the life of the instrument, if a stated maturity date exists, or to the earliest conversion date, if there is no stated maturity date. If the earliest conversion date is immediately upon issuance, the dividend must be recognized at inception. When there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion feature on occurrence.

 

Derivatives

 

The Company reviews the terms of convertible debt issued to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value. The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense.

 

3.   FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The guidance for fair value measurements, ASC 820, Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy based upon observable and non-observable inputs as follow:

 

     • Level 1 - Quoted market prices in active markets for identical assets and liabilities;
     • Level 2 - Inputs, other than level 1 inputs, either directly or indirectly observable; and
     • Level 3 - Unobservable inputs developed using internal estimates and assumptions (there is little or no market date) which reflect those that market participants would use.
       

 

 

 15 

 

 

The Company records its derivative activities at fair value, which consisted of warrants as of September 30, 2020. The fair value of the warrants was estimated using the Binomial Simulation model. Gains and losses from changes to derivatives are included in change in fair value of warrants in the statement of operations. The fair value of the Company’s derivative warrants is classified as a Level 3 measurement, since unobservable inputs are used in the valuation.

 

The following table presents the fair value for those liabilities measured on a recurring basis as of September 30, 2020 and December 31, 2019: 

 

FAIR VALUE MEASUREMENTS (In Thousands)

The following is summary of items that the Company measures at fair value on a recurring basis:

   Fair Value at September 30, 2020
   Level 1  Level 2  Level 3  Total
             
Warrants issued in connection with Short-term loans   —      —      (83)   (83)
Warrants issued in connection with Long-term loans   —      —      (2,594)   (2,594)
Warrants issued in connection with Senior Secured Debt   —      —      (2,838)   (2,838)
Derivative liability/bifurcated conversion option in connection with Auctus $1,100,000 loan on December 17, 2019   —      —      (36)   (36)
            Total long-term liabilities at fair value  $—     $—     $(5,551)  $(5,551)

 

  

 

 

Fair Value at December 31, 2019

   Level 1  Level 2  Level 3  Total
             
Warrants issued in connection with Distributor Debt   —      —      (114)   (114)
Warrants issued in connection with Short-term loans   —      —      (83)   (83)
Warrants issued in connection with Long-term loans   —      —      (893)   (893)
Warrants issued in connection with Senior Secured Debt   —      —      (4,002)   (4,002)
Derivative liability/bifurcated conversion option in connection with Auctus $1,100,000 loan on December 17, 2019   —      —      —      —   
            Total long-term liabilities at fair value  $—     $—     $(5,092)  $(5,092)
                     
                     

 

The following is a summary of changes to Level 3 instruments during the nine months ended September 30, 2020:

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Distributor Debt  Short-Term Loans  Long-Term Loans  Senior Secured Debt  Derivative    Total
                 
Balance,  December 31, 2019  $(114)  $(83)  $(893)  $(4,002)  $—     $ (5,092)
Warrants exchanged for fixed price warrants   67    —      —      —      —       67
Change in fair value of
derivatives during the year
   —      —      —      —      (36)    (36)
Change in fair value of
warrants during the year
   47    —      (1,701)   1,164    —       (490)
Balance, September 30, 2020  $—     $(83)  $(2,594)  $(2,838)  $(36)  $ (5,551)

 

 

 

 16 

 

As of September 30, 2020, the fair value of warrants was approximately $5.6 million and the fair value of the derivative liability was $36,000. A net change of approximately $0.5 million has been recorded to the accompanying statement of operations for the nine months ended September 30, 2020.

4.  STOCKHOLDERS’ DEFICIT

 Common Stock

 

The Company has authorized 3,000,000,000 shares of common stock with $0.001 par value, of which 13,096,189 were issued and outstanding as of September 30, 2020. As of December 31, 2019, there were 3,000,000,000 authorized shares of common stock, of which 3,319,469 were issued and outstanding.

 

For the nine months ended September 30, 2020, the Company issued 9,776,720 shares of common stock as listed below:

 

Exchange of Debt for common stock shares and warrants   8,132,013 
Shares issued for manufacturing agreements   12,147 
Shares issued for payment of Series D dividends   106,560 
Investments   1,526,000 
Issued during the nine months ended September 30, 2020   9,776,720 

 

Summary table of common stock share transactions:

 

Balance at December 31, 2019   3,319,469 
Issued in 2020   9,776,720 
Balance at September 30, 2020   13,096,189 

 

Investments

 

During the second and third quarters of 2020, the Company received equity investments in the amount of $1,636,000 and incurred fees due on these investments of $97,000. These investors received a total of 1,653.5 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.

 

During December 2019, the Company received equity investments in the amount of $635,000. The $635,000 of investments were recorded as a subscription liability in December 2019. The common stock shares were issued in January 2020. These investors received a total of 1,270,000 common stock shares and 1,270,000 warrants to purchase common stock shares at a strike price of $0.25, 1,270,000 warrants issued to purchase common stock shares at a strike price of $0.75 and 635 Series D preferred stock (each Series D preferred stock shares converts into 3,000 shares of the Company’s common stock shares). Of the amount invested $350,000 was from related parties.

 

Debt Exchanges

 

On January 8, 2020, the Company exchanged $2,064,366 in debt for several equity instruments (noted below) that were determined to have a total fair value of $2,065,548, resulting in a loss on extinguishment of debt of $1,183 which is recorded in other income (expense) on the accompanying consolidated statements of operations. The Company also issued 6,957,013 warrants to purchase common stock shares; with exercise prices of $0.25, $0.75 and $0.20. In addition, one of the investors forgave approximately $29,000 of debt, which was recorded as a gain for extinguishment of debt.

 

 17 

 

 

 

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.

 

The following table summarizes the debt exchanges:

 

   Total Debt and Accrued Interest 

 

 

 

Total Debt

 

 

 

Total Accrued Interest

  Common Stock Shares  Warrants (Exercise $0.25)  Warrants (Exercise $0.75)  Warrants (Exercise $0.20)  Warrants (Exercise $0.15)  Warrants (Exercise $0.50)
                            
Aquarius  $145,544    107,500    38,044    291,088    145,544    145,544    —      —      —   
K2 Medical (Shenghuo)3   803,653    771,927    31,726    1,905,270    704,334    704,334    496,602    —      —   
Mr. Blumberg   305,320    292,290    13,030    1,167,630    119,656    119,656    928,318    —      —   
Mr. Case   179,291    150,000    29,291    896,456    —      —      896,456    —      —   
Mr. Grimm   51,050    50,000    1,050    255,548    —      —      255,548    —      —   
Mr. Gould   111,227    100,000    11,227    556,136    —      —      556,136    —      —   
Mr. Mamula   15,577    15,000    577    77,885    —      —      77,885    —      —   
Dr. Imhoff2   400,417    363,480    36,937    1,699,255    100,944    100,944    1,497,367    —      —   
Ms. Rosenstock1   50,000    50,000    —      100,000    50,000    50,000    —      —      —   
Mr. James2   2,286    2,000    286    7,745    1,227    1,227    5,291    —      —   
Auctus   328,422    249,119    79,303    500,000    —      —      —      700,000    —   
Mr. Clavijo   125,000    125,000    —      500,000    —      —      —      —      500,000 
Mr. Wells4   220,000    220,000    —      —      —      —      —      —      —   
   $2,737,787   $2,496,316   $241,471    7,957,013    1,121,705    1,121,705    4,713,603    700,000    500,000 

 

1 Ms. Rosenstock also forgave $28,986 in debt to the Company.

2 Mr. Imhoff and Mr. James are members of the board of directors and therefore related parties.

3 The Company’s COO and director, Mark Faupel, is a shareholder of Shenghuo, and a former director, Richard Blumberg, is a managing member of Shenghuo.

4 Mr. Wells will also receive 66,000 common share stock options; the details of which are explained in the following paragraph.

 

On July 9, 2020, the Company entered into an exchange agreement with Mr. Bill Wells (one of its former employees). 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; (iii) 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 (ii) 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 three months ended September 30, 2020, the Company made a payment of $20,000; this payment allowed the Company to write off a total of $40,000 in debt, with the corresponding $20,000 difference recorded as a gain.

 

Preferred Stock

 

 18 

 

 

Overview

The Company has authorized 5,000,000 shares of preferred stock with a $.001 par value. The board of directors has the authority to issue these shares and to set dividends, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions. The board of directors designated 525,000 shares of preferred stock redeemable convertible preferred stock, none of which remain outstanding, 33,000 shares of preferred stock as Series B Preferred Stock, none of which remain outstanding, 9,000 shares of preferred stock as Series C Convertible Preferred Stock, (the “Series C Preferred Stock”), of which 286 were issued and outstanding at September 30, 2020 and December 31, 2019, respectively and 20,250 shares of preferred stock as Series C1 Preferred Stock, of which 1,050 shares were issued and outstanding at September 30, 2020 and December 31, 2019. In addition, some holders separately agreed to exchange each share of the Series C1 Preferred Stock held for one (1) share of the Company’s newly created Series C2 Preferred Stock. In total, for 3,262.25 shares of Series C1 Preferred Stock to be surrendered, the Company issued 3,262.25 shares of Series C2 Preferred Stock. At September 30, 2020, shares of Series C2 had a conversion price of $0.50 per share, such that each share of Series C preferred stock would convert into approximately 2,000 shares of the Company’s common stock.

Series C Convertible Preferred Stock

 

Pursuant to the Series C certificate of designations, shares of Series C preferred stock are convertible into common stock by their holder at any time and may be mandatorily convertible upon the achievement of specified average trading prices for the Company’s common stock. At September 30, 2020 and December 31, 2019, there were 286 shares outstanding with a conversion price of $0.50 per share, such that each share of Series C preferred stock would convert into approximately 2,000 shares of the Company’s common stock, subject to customary adjustments, including for any accrued but unpaid dividends and pursuant to certain anti-dilution provisions, as set forth in the Series C certificate of designations. The conversion price will automatically adjust downward to 80% of the then-current market price of the Company’s common stock 15 trading days after any reverse stock split of the Company’s common stock, and 5 trading days after any conversions of the Company’s outstanding convertible debt.

Holders of the Series C preferred stock are entitled to quarterly cumulative dividends at an annual rate of 12.0% until 42 months after the original issuance date (the “Dividend End Date”), payable in cash or, subject to certain conditions, the Company’s common stock. In addition, upon conversion of the Series C preferred stock prior to the Dividend End Date, the Company will also pay to the converting holder a “make-whole payment” equal to the number of unpaid dividends through the Dividend End Date on the converted shares. At December 31, 2019, the “make-whole payment” for a converted share of Series C preferred stock would convert to 200 shares of the Company’s common stock. The Series C preferred stock generally has no voting rights except as required by Delaware law. Upon the Company’s liquidation or sale to or merger with another corporation, each share will be entitled to a liquidation preference of $1,000, plus any accrued but unpaid dividends. In addition, the purchasers of the Series C preferred stock received, on a pro rata basis, warrants exercisable to purchase an aggregate of approximately 1 share of Company’s common stock. The warrants contain anti-dilution adjustments in the event that the Company issues shares of common stock, or securities exercisable or convertible into shares of common stock, at prices below the exercise price of such warrants. As a result of the anti-dilution protection, the Company is required to account for the warrants as a liability recorded at fair value each reporting period. At September 30, 2020, the exercise price per share was $512,000.

On May 23, 2016, an investor canceled certain of these warrants, exercisable into 903 shares of common stock. The same investor also transferred certain of these warrants, exercisable for 150 shares of common stock, to two investors who also had participated in the 2015 Series C financing.

Series C1 Convertible Preferred Stock

Between April 27, 2016 and May 3, 2016, the Company entered into various agreements with certain holders of Series C preferred stock, including directors John Imhoff and Mark Faupel, pursuant to which those holders separately agreed to exchange each share of Series C preferred stock held for 2.25 shares of the Company’s newly created Series C1 Preferred Stock and 12 (9,600 pre-split) shares of the Company’s common stock (the “Series C Exchanges”). In connection with the Series C Exchanges, each holder also agreed to roll over the $1,000 stated value per share of the holder’s shares of Series C1 Preferred Stock into the next qualifying financing undertaken by the Company on a dollar-for-dollar basis and, except in the event of an additional $50,000 cash investment in the Company by the holder, to execute a customary “lockup” agreement in connection with the financing. In total, for 1,916 shares of Series C preferred stock surrendered, the Company issued 4,312 shares of Series C1 Preferred Stock and 29 shares of common stock.

At September 30, 2020, there were 1,050 shares outstanding with a conversion price of $0.50 per share, such that each share of Series C preferred stock would convert into approximately 381,098 shares of the Company’s common stock.

On August 31, 2018, 3,262.25 shares of Series C1 Preferred Stock were surrendered, and the Company issued 3,262.25 shares of Series C2 Preferred Stock.

 19 

 

 

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 September 30, 2020, shares of Series C2 had a conversion price of $0.50 per share, such that each share of Series C preferred stock would convert into approximately 2,000 shares of the Company’s common stock.

The terms of the Series C2 Preferred Stock are substantially the same as the Series C1 Preferred Stock, except that (i) shares of Series C1 Preferred Stock may not be convertible into the Company’s common stock by their holder for a period of 180 days following the date of the filing of the Certificate of Designation (the “Lock-Up Period”); (ii) the Series C2 Preferred Stock has the right to vote as a single class with the Company’s common stock on an as-converted basis, notwithstanding the Lock-Up Period; and (iii) the Series C2 Preferred Stock will automatically convert into that number of securities sold in the next Qualified Financing (as defined in the Exchange Agreement) determined by dividing the stated value ($1,000 per share) of such share of Series C2 Preferred Stock by the purchase price of the securities sold in the Qualified Financing.

Series D Convertible Preferred Stock

On January 8, 2020, the Company entered into a Security Agreement with the Series D Investors (the “Series D Security Agreement”) pursuant to which all obligations under the Series D Certificate of Designation are secured by all of the Company’s assets and personal properties, with certain accredited investors, including the Chief Executive Officer, Chief Operating Officer and a director of the Company. In total, for $763,000 the Company issued 763 shares of Series D Preferred Stock, 1,526,000 common stock shares, 1,526,000 common stock warrants, exercisable at $0.25, and 1,526,000 common stock warrants, exercisable $0.75. Each Series D Preferred Stock is convertible into 3,000 common stock shares. The Series D Preferred Stock will have cumulative dividends at the rate per share of 10% per annum. The stated value and liquidation preference on the Series D Preferred Stock is $554.

 

Each share of Series D Preferred is convertible, at any time for a period of 5 years after issuance, into that number of shares of Common Stock, determined by dividing the Stated Value by $0.25, subject to certain adjustments set forth in the Series D Certificate of Designation (the “Series D Conversion Price”). The conversion of Series D Preferred is subject to a 4.99% beneficial ownership limitation, which may be increased to 9.99% at the election of the holder of the Series D Preferred. If the average of the VWAPs (as defined in the Series D Certificate of Designation) for any consecutive 5 trading day period (“Measurement Period”) exceeds 200% of the then Series D Conversion Price and the average daily trading volume of the Common Stock on the primary trading market exceeds 1,000 shares per trading day during the Measurement Period (subject to adjustments), the Company may redeem the then outstanding Series D Preferred, for cash in an amount equal to aggregate Stated Value then outstanding plus accrued but unpaid dividends .

 

The Series D Warrants may be exercised cashlessly if there is no effective registration statement covering the Common Stock issuable upon exercise of the Series D Warrants. The Series D Warrants contain a 4.99% beneficial ownership blocker which may be increased to 9.99% at the holder’s election.

 

On January 8, 2020, the Company also entered into a Registration Rights Agreement (the “Series D Registration Rights Agreement “) with the Series D Investors pursuant to which the Company agreed to file with the SEC, a registration statement on a Form S-3 (or on other appropriate form if a Form S-3 is not available) covering the Common Stock issuable upon conversion of the Series D Warrants within 90 days of the date of the Registration Rights Agreement and cause such registration statement to be declared effective within 120 days of the date of the Registration Rights Agreement. All reasonable expenses related to such registration shall be borne by the Company.

 

During August 2020, the Company issued 106,560 common stock shares for the payment of Series D Preferred Stock dividends accrued.

 

 20 

 

 

Series E Convertible Preferred Stock

During the nine months ended September 30, 2020, the Company entered into a Security Agreement with the Series E Investors (the “Series E Security Agreement”) pursuant to which all obligations under the Series E Certificate of Designation are secured by all of the Company’s assets and personal properties, with certain accredited investors. In total, for $1,636,000 the Company issued 1,635.5 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 $1,636. The Company incurred fees due on these investments of $97,000.

 

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.

 

Warrants

 

The following table summarizes transactions involving the Company’s outstanding warrants to purchase common stock for the nine months ended September 30, 2020:

  

Warrants

(Underlying Shares)

Outstanding, January 1, 2020   46,016,840 
Issuances   11,270,013 
Cancelled / Expired   (70)
Exchanged in debt restructuring   (28,962,508)
Exercised   —   
Outstanding, September 30, 2020   28,324,275 

 

The Company had the following shares reserved for the warrants as of September 30, 2020:

 

Warrants
(Underlying Shares)

 

Exercise Price

Expiration Date

4,262 (1) $1.824 per share March 19, 2021
7,185,000 (2) $0.20 per share February 12, 2023
1,725,000 (3) $0.04 per share February 21, 2021
325,000 (4) $0.18 per share April 4, 2022
215,000 (5) $0.25 per share July 1, 2022
100,000 (6) $0.25 per share September 1, 2022
7,500,000 (7) $0.20 per share December 17, 2024
250,000 (8) $0.16 per share March 31, 2025
2,597,705 (9) $0.25 per share December 30, 2022
2,597,705 (10) $0.75 per share December 30, 2022
4,713,603 (11) $0.20 per share December 30, 2022
60,000 (12) $0.25 per share April 23, 2023
50,000 (13) $0.25 per share December 30, 2022
50,000 (14) $0.75 per share December 30, 2022
700,000 (15) $0.15 per share May 21, 2023
250,000 (16) $0.50 per share June 23, 2023
1,000 (17) $0.50 per share August 10, 2022
28,324,275*      

 

* However, please refer to Footnote 10 - CONVERTIBLE DEBT in the paragraph: Debt Restructuring for more information regarding our warrants.

 

 21 

 

 

 

   
(1) Issued to investors for a loan in March 2018.
(2)

Exchanged in January 2020 from amount issued as part of a February 2016 private placement with senior secured

debt holder

(3) Issued to a placement agent in conjunction with a February 2016 private placement with senior secured debt holder
(4) Issued to investors for a loan in April 2019
(5) Issued to investors for a loan in July 2019
(6) Issued to investors for a loan in September 2019
(7) Issued to investors for a loan in December 2019
(8) Issued to investors for a loan in January 2020
(9) Issued to investors as part of Series D Preferred Stock Capital raise in December 2020
(10) Issued to investors as part of Series D Preferred Stock Capital raise in December 2020

(11)

(12)

(13)

(14)

(15)

(16)

Issued to investors as part of Series D Preferred Stock Capital raise in December 2020

Issued to a consultant for services in April 2020

Issued to an investor as part of Series D Preferred Stock Capital raise in April 2020

Issued to an investor as part of Series D Preferred Stock Capital raise in April 2020

Issued to an investor for a loan in May 2020

Issued to an investor in exchange of debt in June 2020

(17)

Issued to a consultant for services in August 2020

 

     

Footnote (2) - On January 16, 2020, the Company entered into an exchange agreement with GPB. This exchange agreement canceled the existing outstanding warrants, which were subject to anti-dilution and ratchet provisions, to purchase 35,937,500 shares of common stock at an exercise price of $0.04 per share and resulted in the issuance of new warrants to purchase 7,185,000 share of common stock at a price of $0.20 per share. The new warrants have fixed exercise prices of $0.20; subject to the Company meeting the agreed upon terms of the exchange agreement.

 

Warrant to purchase 70 shares of common stock were not recorded as their exercise price after considering reverse stock splits, were greater than $60,000 and deemed to be immaterial for disclosure

 

On January 6, 2020, the Company entered into a finder’s fee agreement. The finder will receive 5% cash and 5% warrants on all funds it raises including bridge loans. The three-year common stock share warrants will have an exercise price of $0.25. During 2019 and 2020, the finder helped the Company raise $300,000, therefore a fee of $15,000 was paid and 60,000 warrants will be issued.

 

On January 22, 2020, the Company entered into a promotional agreement with a consultant. The consultant will provide the Company investor and public relations services. As compensation for these services, the Company will issue a total of 5,000,000 common stock warrants at a $0.25 strike price and expiring in three years, if the following conditions occur: 1,250,000 common stock warrants, 6 months after the close of the Series D Preferred Stock units, if the minimum common stock share price is a at least $0.50 based on a 30-day VWAP, with a two year term; 1,250,000 common stock warrants, 12 months after the close of the Series D Preferred Stock units, if the minimum common stock share price is at least $0.75 based on a 30-day VWAP, with a one and half year term; 1,250,000 common stock warrants, 18 months after the close of the Series D Preferred Stock units, if the minimum common stock share price is a minimum of $1.00 based on a 30-day VWAP, with a one year term; and 1,250,000 common stock warrants, 24 months after the close of the Series D Preferred Stock units, if the minimum common stock share price is a minimum of $1.25 based on a 30-day VWAP, with a one year term. The consultant agrees to a 10.0% blocker at any single point in time it cannot own 10.0% of the total common stock shares outstanding.

 

5.   STOCK OPTIONS

 

The Company’s 1995 Stock Plan (the “Plan”) has expired pursuant to its terms, so zero shares remained available for issuance at September 30, 2020 and December 31, 2019. The Plan allowed for the issuance of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price of options was determined by the Company’s board of directors, but incentive stock options were granted at an exercise price equal to the fair market value of the Company’s common stock as of the grant date. Options historically granted have generally become exercisable over four years and expire ten years from the date of grant. As of September 30, 2020, and December 31, 2019, there were no stock options outstanding and exercisable.

 

On July 14, 2020, the Company granted 1,800,000 stock options to employees and consultants. The new Stock Plan (the “Plan”) allows for the issuance of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price of options was determined by the Company’s board of directors, but incentive stock options were granted at an exercise price equal to the fair market value of the Company’s common stock as of the grant date. Options historically granted have generally become exercisable over four years and expire ten years from the date of grant. The plan provides for stock options to be granted up to 10% of the outstanding common stock shares.

 

 22 

 

 

 

The fair value of options issued during the nine months ended September 30, 2020 was estimated using the Black-Scholes option-pricing model and the following assumptions:

 

• 

a dividend yield of 0%;

   
 •

an expected life of 10 years;

   
 •

volatility of 153.1%; and

   
 •

risk-free interest rate of 0.98%.

 

The fair value of each option grant made during 2020 was estimated on the date of each grant using the Black-Scholes option pricing model and recognized as stock based compensation rateably over the option vesting periods, which approximates the service period.

 

The following lists the stock options granted:

 

    Grant Date     Expiration Date  

 

 

Vesting Period

  Number of Stock Options Granted         Exercise Price   Black Scholes Valuation
                                 
Cartwright, Gene   07/14/2020     07/12/2030   Vesting(1)   400,000         $0.49   $0.483
Faupel, Mark   07/14/2020     07/12/2030   Vesting(1)   400,000         $0.49   $0.483
Imhoff, John   07/14/2020     07/12/2030   Immediate   50,000         $0.49   $0.483
James, Michael   07/14/2020     07/12/2030   Immediate   50,000         $0.49   $0.483
Clavijo, James   07/14/2020     07/12/2030   Vesting(1)   300,000         $0.49   $0.483
Battle, Lisa   07/14/2020     07/12/2030   Vesting(1)   178,000         $0.49   $0.483
Sufka, Melissa   07/14/2020     07/12/2030   Vesting(1)   178,000         $0.49   $0.483
Waterstreet, Alesandra   07/14/2020     07/12/2030   Vesting(1)   178,000         $0.49   $0.483
Wells, William   07/14/2020     07/12/2030   18 months   66,000         $0.49   $0.483
                  1,800,000              

 

(1)25% immediate and 25% each year thereafter; 36 months in total

 

As of September 30, 2020, the Company has issued and outstanding options to purchase a total of 1,800,000 shares of common stock pursuant to the plan, at a weighted average exercise price of $0.49 per share.

 

As of September 30, 2020,

 

Stock options vested   519,500 
Stock options unvested   1,280,500 
Total stock options granted at September 30, 2020   1,800,000 

 

Stock option activity for the nine months ended September 30, 2020 is as follows:

   September 30, 2020
   Shares  Weighted Average Exercise Price
       
Outstanding at beginning of year   —      —   
Options granted   1,800,000   $0.49 
Options exercised   —      —   
Options expired/forfeited   —      —   
Outstanding at end of the period   1,800,000   $0.49 

 

 

 23 

 

 

 6.   LITIGATION AND CLAIMS

 

From time to time, the Company may be involved in various legal proceedings and claims arising in the ordinary course of business. Management believes that the dispositions of these matters, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial condition. However, depending on the amount and timing of such disposition, an unfavorable resolution of some or all of these matters could materially affect the future results of operations or cash flows in a particular year.

 

As of September 30, 2020, and December 31, 2019, there was no accrual recorded for any potential losses related to pending litigation.

 

7. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

In December 2009, the Company moved its offices, which comprise its administrative, research and development, marketing and production facilities to 5835 Peachtree Corners East, Suite B, Peachtree Corners, Georgia 30092. The Company leased approximately 23,000 square feet under a lease that expired in June 2017. In July 2017, the Company leased the offices on a month to month basis. On February 23, 2018, the Company modified its lease to reduce its occupancy to 12,835 square feet. The fixed monthly lease expense will be: $13,859 each month for the period beginning January 1, 2018 and ending June 30, 2018; $8,022 each month for the period beginning April 1, 2018 and ending June 30, 2019; $8,268 each month for the period beginning April 1, 2019 and ending June 30, 2020; and $8,514 each month for the period beginning April 1, 2020 and ending March 31, 2021.

 

The Company recognizes lease expense on a straight-line basis over the estimated lease term and combine lease and non-lease components. Future minimum rental payments at September 30, 2020 under non-cancellable operating leases for office space and equipment are as follows (in thousands):

 

Year  Amount
 2020    30 
 2021    30 
 Total    60 
 Less: Interest    3 
 Present value of lease liability    57 

 

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 (current director Richard Blumberg is the designee).

 

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On July 24, 2019, Shandong Yaohua Medical Instrument Corporation (“SMI”), agreed to modify its existing agreement. Under the terms of this modification, the Company agreed to grant (1) exclusive manufacturing rights, excepting the disposable cervical guides for the Republic of Turkey, and the final assembly rights for Hungary, and (2) exclusive distribution and sales for LuViva in jurisdictions, subject to the following terms and conditions. First, SMI shall complete the payment for parts, per the purchase order, for five additional LuViva devices. Second, in consideration for the $885,144 that the Company received, SMI will receive 12,147 common stock shares. Third, SMI shall honor all existing purchase orders it has executed to date with the Company, in order to maintain jurisdiction sales and distribution rights. If SMI needs to purchase cervical guides then it will do so at a cost including labor, plus ten percent markup. The Company will provide 200 cervical guides at no cost for the clinical trials. Fourth, the Company and SMI will make best efforts to sell devices after CFDA approval. With an initial estimate of year one sales of 200 LuViva devices; year two sales of 500 LuViva devices; year three sales of 1,000 LuViva devices; and year four sales of 1,250 LuViva devices. Fifth, SMI shall pay for entire costs of securing approval of LuViva with the Chinese FDA. Sixth, SMI shall arrange, at its sole cost, for a manufacturer in China to build tooling to support manufacture. In addition, SMI retains the right to manufacture for China, Hong Kong, Macau and Taiwan, where SMI has distribution and sales rights. For each single-use cervical guide sold by SMI in the jurisdictions, SMI shall transfer funds to escrow agent at a rate of $1.90 per device chip. If within 18 months of the license’s effective date, SMI fails to achieve commercialization of LuViva in China, SMI shall no longer have any rights to manufacture, distribute or sell LuViva. Commercialization is defined as: filing an application with the Chinese FDA for the approval of LuViva; any assembly or manufacture of the devices or disposables that begins in China; and purchase of at least 10 devices and disposables for clinical evaluations and regulatory use and or sales in the jurisdictions. On March 5, 2020 the Company had recorded an accrued liability for SMI of $692,335, which was reclassified to additional paid in capital and 12,147 common stock shares.

 

On September 6, 2016, the Company entered into a royalty agreement with one of its directors, John Imhoff, and another stockholder, Dolores Maloof, pursuant to which the Company sold to them a royalty of future sales of single-use cervical guides for LuViva. Under the terms of the royalty agreement, and for consideration of $50,000, the Company will pay them an aggregate perpetual royalty initially equal to $0.10, and from and after October 2, 2016, equal to $0.20, for each disposable that the Company sells (or that is sold by a third party pursuant to a licensing arrangement with the Company).

 

Contingencies

 

Based on the current outbreak of the Coronavirus SARS-CoV-2, the pathogen responsible for COVID-19, which has already had an impact on financial markets, there could be additional repercussions to the Company’s operating business, including but not limited to, the sourcing of materials for product candidates, manufacture of supplies for preclinical and/or clinical studies, delays in clinical operations, which may include the availability or the continued availability of patients for trials due to such things as quarantines, conduct of patient monitoring and clinical trial data retrieval at investigational study sites.

 

The future impact of the outbreak is highly uncertain and cannot be predicted, and the Company cannot provide any assurance that the outbreak will not have a material adverse impact on the Company’s operations or future results or filings with regulatory health authorities. The extent of the impact to the Company, if any, will depend on future developments, including actions taken to contain the coronavirus.

 

8.   NOTES PAYABLE

 

Notes Payable in Default

 

At September 30, 2020 and December 31, 2019, the Company maintained notes payable to both related and non-related parties totaling approximately $319,000 and $776,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry annual interest rates between 0% and 10% and have default rates as high as 20%. The Company is accruing interest at the default rate of 18.0% on two of the loans. As described in Note 4: STOCKHOLDERS’ DEFICIT certain notes payable in default outstanding had been exchanged for equity and cash as described in the note.

 

As described previously, the Company entered into an exchange agreement with Dr. Imhoff. Based on this agreement the Company exchanged $199,417 of short-term debt outstanding.

 

As described previously, the Company entered into an exchange agreement with Ms. Rosenstock. Based on this agreement the Company exchanged $50,000 of short-term debt outstanding and forgave $28,986.

 

On February 8, 2019, a note payable in default to Aquarius as reported in the Company’s Form 10-K report - Footnote 9: Notes payable – Note payable in default, was exchanged for a note with a convertible option. The balance on the note was $107,500 and accrued interest was $38,044 for a total of $145,544 outstanding. As of September 30, 2020, the Company had entered into an exchange agreement with Aquarius. Based on this agreement the Company exchanged $145,544 of debt outstanding for: 291,088 common stock shares; 145,544 warrants issued to purchase common stock shares at a strike price of $0.25; and 145,544 warrants issued to purchase common stock shares at a strike price of $0.75.

 

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On July 1, 2019, the Company entered into a loan agreement with Accilent Capital Management Inc / Rev Royalty Income and Growth Trust (“Accilent”), providing for the purchase by Accilent of an unsecured promissory note in the principal amount of $49,389 (CAD$ 65,500). The note was fully funded on July 9, 2019 (net of an 8% original issue discount and other expenses). The note bears an interest rate of 16% and was due and payable on September 11, 2019. Following maturity, demand, default, or judgment and until actual payment in full, interest rate shall be paid at the rate of 19% per annum. The Company issued 315,000 warrants at an exercise price of $0.25 per warrant and exercisable within 3 years from issuance (the “Initial Warrants”). As of September 30, 2020, the loan had been paid off. As of December 31, 2019, $57,946 remained outstanding, which included a fee of $4,951 and interest of $4,606.

 

As described previously, the Company entered into an exchange agreement with Mr. Blumberg. Based on this agreement the Company exchanged $70,320 of short-term debt outstanding.

 

As described previously, the Company entered into an exchange agreement with Mr. James. Based on this agreement the Company exchanged $2,286 of short-term debt outstanding.

 

The following table summarizes the Notes payable in default, including related parties:

 

 

    
   September 30, 2020  December 31, 2019
Dr. Imhoff  $—     $199 
Dr. Cartwright   1    2 
Ms. Rosenstock   —      50 
Mr. Fowler   26    26 
Mr. Mermelstein   275    244 
GPB   17    17 
Aquarius   —      108 
Accilent   —      58 
Mr. Blumberg   —      70 
Mr. James   —      2 
           Notes payable in default  $319   $776 

 

The notes payable to related parties was $1,000 of the $319,000 balance at September 30, 2020 and $349,000 of the $776,000 balance at December 31, 2019.

 

Short Term Notes Payable

 

At September 30, 2020 and December 31, 2019, the Company maintained short term notes payable to both related and non-related parties totaling $130,000 and $1,026,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry annual interest rates between 5% and 19%.

 

As described previously, the Company entered into an exchange agreement with Dr. Imhoff. Based on this agreement the Company exchanged $167,000 of short-term debt outstanding.

 

The Company issued promissory notes to Mr. Cartwright and Mr. Faupel, in the amounts of approximately $48,000 and $4,000, respectively. The notes were initially issued with 0% interest, however interest increased to 6.0% interest 90 days after the Company received $1,000,000 in financing proceeds.

 

On August 22, 2018, the Company issued a promissory note to Mr. Case for $150,000 in aggregate principal amount of a 6% promissory note for an aggregate purchase price of $157,500 (representing a $7,500 original issue discount). As of September 30, 2020, the Company had exchanged $179,291 of debt outstanding for: 896,456 common stock shares; and 896,455 warrants issued to purchase common stock shares at a strike price of $0.20. As of December 31, 2019, the Company had not repaid the note and original issue discount of $157,500 ($7,500 is recorded in accrued expenses).

 

As described previously, the Company entered into an exchange agreement with Mr. Mamula. Based on this agreement the Company exchanged $15,577 of short-term debt outstanding.

 

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On September 19, 2018, and February 15, 2019, the Company issued promissory notes to Mr. Gould for $50,000 each in aggregate principal amount of a 6% promissory note for an aggregate purchase price of $52,500 each (representing a $2,500 original issue discount). As of September 30, 2020, the Company had entered into an exchange agreement with Mr. Gould. Based on this agreement the Company exchanged $111,227 of debt outstanding for: 556,136 common stock shares; and 556,136 warrants issued to purchase common stock shares at a strike price of $0.20. As of December 31, 2019, the Company had not repaid the note and original issue discount of $52,500 ($2,500 is recorded in accrued expenses) and therefore the accrued interest rate increased to 12%.

 

As described previously, the Company entered into an exchange agreement with K2 Medical. Based on this agreement the Company exchanged $203,000 of short-term debt outstanding.

 

On February 14, 2019, the Company entered into a Purchase and Sale Agreement with Everest Business Funding for the sale of its accounts receivable. The transaction provided the Company with $48,735 after $1,265 in debt issuance costs (bank costs) for a total purchase amount of $50,000, in which the Company would have to repay $68,500. At a minimum the Company would need to pay $535.16 per day or 20.0% of the future collected accounts receivable or “receipts.” The effective interest rate as calculated for this transaction is approximately 132.5%. As of December 31, 2019, $60,105 had been paid, leaving a balance of $8,016. As of September 30, 2020, the balance of $68,121 had been paid in full.

 

In July 2019, the Company entered into a premium finance agreement to finance its insurance policies totaling $142,000. The note requires monthly payments of $14,459, including interest at 4.91% and matures in April 2020. As of September 30, 2020, the balance was paid in full. The balance due on insurance policies totaled $57,483 at December 31, 2019.

 

On July 4, 2020, the Company entered into a premium finance agreement to finance its insurance policies totaling $109,000. The note requires monthly payments of $11,299, including interest at 4.968% and matures in April 2021. As of September 30, 2020, the balance was $78,119.

 

As described previously, the Company entered into an exchange agreement with Mr. Blumberg. Based on this agreement the Company exchanged $223,000 of short-term debt outstanding.

 

As described previously, the Company entered into an exchange agreement with Mr. Grimm. Based on this agreement the Company exchanged $51,050 of short-term debt outstanding.

 

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 Mr. Clavijo of $10,213 which was paid.

 

The following table summarizes the Short-term notes payable, including related parties:

    
   September 30, 2020  December 31, 2019
Dr. Imhoff  $—     $167 
Dr. Cartwright   48    48 
Dr. Faupel   4    4 
Mr. Case   —      150 
Mr. Mamula   —      15 
Mr. Gould   —      100 
K2 (Shenghuo)   —      203 
Everest   —      8 
Premium Finance (insurance)   78    59 
Mr. Blumberg   —      223 
Mr. Grimm   —      49 
           Short-term notes payable, including related parties  $130   $1,026 

 

 

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The short-term notes payable past due to related parties was $52,000 of the $130,000 balance at September 30, 2020 and $645,000 of the $1,026,000 balance at December 31, 2019.

 

Troubled Debt Restructuring

 

The debt extinguished for Notes Payable which closed on January 8, 2020, the Company exchanged $2,064,366 in debt for common stock shares and warrants as described above that were determined to have a total fair value of $2,065,548, resulting in a loss on extinguishment of debt of $1,183 which is recorded in other income (expense) on the accompanying consolidated statements of operations. In addition, one of the investors forgave approximately $29,000 of debt, which was recorded as a gain for extinguishment of debt. Also, during June 2020, the Company exchanged $125,000 in debt for common stock shares and warrants as described. This debt extinguished met the criteria for troubled debt. The basic criteria are that the borrower is troubled, ie., they are having financial difficulties, and a concession is granted by the creditor. Due to the Company being in default on several of its loans the debt is considered troubled debt. The troubled debt restructuring for Notes Payable, had an immaterial effect on the Company’s basic or diluted earnings per share calculation for September 30, 2020 and 2019.

 

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 September 30, 2020, the note had been exchanged for common stock shares and warrants. This was part of the exchange made on January 8, 2020, for $790,544 of debt outstanding for: 1,905,270 common stock shares issued on March 23, 2020; 496,602 warrants issued to purchase common stock shares at a strike price of $0.20; 692,446 warrants issued to purchase common stock shares at a strike price of $0.25; and 692,446 warrants issued to purchase common stock shares at a strike price of $0.75. As of December 31, 2019, the Company had a note due of $512,719.

 

Troubled Debt Restructuring

 

The debt extinguished for Related Party Convertible Note Payable – Short-Term, which closed on January 8, 2020, the Company exchanged in part $512,719 in debt for several common stock shares and warrants as described above. This debt extinguished met the criteria for troubled debt. The basic criteria are that the borrower is troubled, i.e., they are having financial difficulties, and a concession is granted by the creditor. Due to the Company being in default on several of its loans the debt is considered troubled debt. The troubled debt restructuring for Notes Payable, had an immaterial effect on the Company’s basic or diluted earnings per share calculation for September 30, 2020 and 2019.

 

Convertible Note Payable – Short-Term

 

On March 31, 2020, we entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $112,750 in aggregate principal amount of a 12% convertible promissory note. On March 31, 2020, we issued the note to Auctus and issued 250,000 five-year common stock warrants at an exercise price of $0.16. On April 3, 2020, we received net proceeds of $100,000. The note matures on January 26, 2021 and accrues interest at a rate of 12% per year. We may not prepay the note, in whole or in part. After the 90th calendar day after the issuance date, and ending on the later of maturity date and the date of payment of the default amount, Auctus may convert the note, at any time, in whole or in part, provided such conversion does not provide Auctus with more than 4.99% of the outstanding common share stock. The conversion may be made converted into shares of the our common stock, at a conversion price equal to the lesser of: (i) the lowest Trading Price during the twenty-five (25) trading day period on the last trading prior to the issue date and (ii) the variable conversion price (55% multiplied by the market price, market price means the lowest trading price for the common stock during the twenty-five (25) trading day period ending on the latest complete trading day prior to the conversion date. Trading price is the lowest trade price on the trading market as reported. The note includes customary events of default provisions and a default interest rate of 24% per year. As of September 30, 2020, the note outstanding was $112,750, which consisted of unamortized balance of $32,890 of a beneficial conversion feature, unamortized original issue discount of $7,650, unamortized debt issuance costs of $5,517 and interest of $6,803 included in accrued expenses on the accompanying consolidated balance sheet.

 

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On May 15, 2019, the Company entered into a securities purchase agreement with Eagle Equities, LLC, providing for the purchase by Eagle of a convertible redeemable note in the principal amount of $57,750. The note was fully funded on May 21, 2019, upon which the Company received $45,000 of net proceeds (net of a 10% original issue discount and other expenses). The note bears an interest rate of 8% is due and payable on May 15, 2020. The note may be converted by Eagle at any time after five months from issuance into shares of the Company common stock (as determined in the notes) calculated at the time of conversion. The conversion price of the notes will be equal to 60% of the average of the two lowest closing bid prices of the Company’s common stock shares as reported on OTC Markets exchange, for the 20 prior trading days including the day upon which the Company receives a notice of conversion. The notes may be prepaid in accordance with the terms set forth in the notes. The notes also contain certain representations, warranties, covenants and events of default including if the Company are delinquent in our periodic report filings with the SEC and increases in the amount of the principal and interest rates under the notes in the event of such defaults. In the event of default, at Eagle’s option and in its sole discretion, Eagle may consider the notes immediately due and payable. During 2020, Eagle provided a forbearance to the Company on the default after a payment was made. On May 15, 2019, the Company had recorded a $38,500 beneficial conversion feature, $5,250 original issue discount and $7,500 of debt issuance costs. As of December 31, 2019, the outstanding note was for $25,651, which consisted of unamortized balance of $14,438 of a beneficial conversion feature, unamortized original issue discount of $1,942, unamortized debt issuance costs of $2,774 and interest of $1,166 included in accrued expenses on the accompanying consolidated balance sheet. On May 14, 2020, the outstanding note was paid off.

 

On May 15, 2019, the Company entered into a securities purchase agreement with Adar Bays, LLC, providing for the purchase by Adar of a convertible redeemable note in the principal amount of $57,750. The note was fully funded on May 21, 2019, upon which the Company received $45,000 of net proceeds (net of a 10% original issue discount and other expenses). The note bears an interest rate of 8% and are due and payable on May 15, 2020. The note may be converted by Adar at any time after five months from issuance into shares of the Company common stock (as determined in the notes) calculated at the time of conversion. The conversion price of the notes will be equal to 60% of the average of the two lowest closing bid prices of the Company’s common stock shares as reported on OTC Markets exchange, for the 20 prior trading days including the day upon which the Company receives a notice of conversion. The notes may be prepaid in accordance with the terms set forth in the notes. The notes also contain certain representations, warranties, covenants and events of default including if the Company are delinquent in our periodic report filings with the SEC and increases in the amount of the principal and interest rates under the notes in the event of such defaults. In the event of default, at Adar’s option and in its sole discretion, Adar may consider the notes immediately due and payable. During 2020, Adar provided a forbearance to the Company on the default after a payment was made. On May 15, 2019, the Company had recorded a $38,500 beneficial conversion feature, $5,250 original issue discount and $7,500 of debt issuance costs. As of December 31, 2019, the note outstanding increased to $84,780 as a default penalty of $27,030 was added to the outstanding balance of the note, which consisted of unamortized balance of $14,438 of a beneficial conversion feature, unamortized original issue discount of $1,942, unamortized debt issuance costs of $2,774 and interest of $3,190 included in accrued expenses on the accompanying consolidated balance sheet. On May 22, 2020, the outstanding note was paid off.

 

The following table summarizes the Convertible notes payable:

 

   September 30, 2020  December 31, 2019
Shenghuo  $—     $513 
Auctus   113    —   
Eagle   —      26 
Adar   —      85 
Debt discount and issuance costs to be amortized   (13)   (9)
Debt discount related to beneficial conversion   (33)   (29)
           Short-term convertible notes payable  $67   $586 

 

 

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10.  CONVERTIBLE DEBT

 

Senior Secured Promissory Note

Effective February 12, 2016, the Company entered into a securities purchase agreement with GPB Debt Holdings II LLC (“GPB”) for the issuance of a $1,437,500 senior secured convertible note for an aggregate purchase price of $1,029,000 (representing an original issue discount of $287,500 and debt issuance costs of $121,000). On May 28, 2016, the balance of the note was increased by $87,500 for a total principal balance of $1,525,000. On December 7, 2016, the Company entered into an exchange agreement with GPB and as a result the principal balance increased by a transfer $312,500 (see – “Senior Secured Promissory Note”) for a total principal balance of $1,837,500. In addition, GPB received warrants for 2,246 shares of the Company’s common stock. The Company allocated proceeds totaling $359,555 to the fair value of the warrants at issuance and recorded an additional discount on the debt. The warrant is exercisable at any time, pending availability of sufficient authorized but unissued shares of the Company’s common stock, at an exercise price per share equal to the conversion price of the convertible note, subject to certain customary adjustments and anti-dilution provisions contained in the warrant. The warrant has a five-year term. At December 31, 2019, the common stock purchase warrant exercise price had been adjusted to $0.04 and the number of common stock shares exchangeable for was 35,937,500.

As of September 30, 2020, and as a result of the January 15, 2020 exchange agreement, the common stock purchase warrant exercise price had been adjusted to $0.20 and the number of common stock shares exchangeable for was 7,185,000. This exchange is subject to the Company meeting repayment conditions. Those conditions involved in part the repayment of $450,000, $100,000 and $950,000 for the completion of each Auctus financing tranche. The Company has executed Tranche 1 and 2 and has paid GPB $550,000. In addition, the Company would need to begin repaying $50,000, in repayment of $1,500,000, each month, beginning on September 15, 2020 (if the Company is not in default it may request an additional four-month forbearance on that repayment). On September 2, 2020, the Company made a payment of $50,000, which provided the Company an additional four-month forbearance.

The convertible note required monthly interest payments at a rate of 17% per year and was due on February 12, 2018. Subject to resale restrictions and the availability of sufficient authorized but unissued shares of the Company’s common stock, the note is convertible at a conversion price equal to 70% of the average closing price per share for the five trading days prior to issuance. In an event of default, the note will accrue interest at a rate of 22%. Upon the occurrence of an event of default, the holder may require the Company to redeem the convertible note at 120% of the outstanding principal balance, but as of September 30, 2020 and December 31, 2019, had not done so. The note is secured by a lien on substantially all of the Company’s assets.

In connection with the transaction, on February 12, 2016, the Company and GPB entered into a four-year consulting agreement, pursuant to which the investor will provide management consulting services to the Company in exchange for a royalty payment, payable quarterly, equal to 3.85% of the Company’s revenues from the sale of products. As of September 30, 2020, and December 31, 2019, GPB had earned approximately $35,000 and $31,000 in royalties that are unpaid, respectively.

As of September 30, 2020, the balance due on the convertible debt was $1,798,032, consisting of principal of $1,451,002 and a prepayment penalty of $347,030 and compared to December 31, 2019, where the balance due on the convertible debt was $2,177,030 consisting of principal of $1,830,000 and a prepayment penalty of $347,030. Interest accrued on the note total $1,213,105 and $1,175,925 at September 30, 2020 and December 31, 2019, respectively, and is included in accrued expenses on the accompanying consolidated balance sheet.

The Company used a placement agent in connection with the transaction. For its services, the placement agent received a cash placement fee equal to 4% of the aggregate gross proceeds from the transaction and a warrant to purchase shares of common stock equal to an aggregate of 6% of the total number of shares underlying the securities sold in the transaction, at an exercise price equal to, and terms otherwise identical to, the warrant issued to the investor. Finally, the Company agreed to reimburse the placement agent for its reasonable out-of-pocket expenses.

Troubled Debt Restructuring

 

The debt restructured for Convertible Debt, which closed on January 15, 2020, the Company restructured several re-payment plans as described above and in addition cancelled warrants and issued new warrants as part of the restructure. This debt restructure met the criteria for troubled debt. The basic criteria are that the borrower is troubled, i.e., they are having financial difficulties, and a concession is granted by the creditor. Due to the Company being in default on several of its loans the debt is considered troubled debt. See Note 8: Notes Payable, for total gain or loss recorded in the period. The troubled debt restructuring for Convertible Debt, based on the reduction in warrants outstanding would have an effect on the Company’s diluted earnings per share calculation for September 30, 2020, but not on the basic earnings per share calculation. The earnings per share value would have adjusted from 0.026 to 0.014 for the three months ended September 30, 2020. However, for the nine months ended September 30, 2020 the basic and diluted earnings per share would have remained the same as the Company had a loss.

 

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Secured Promissory Note.

 

Effective September 10, 2014, the Company sold a secured promissory note to an accredited investor, GHS Investments, LLC (“GHS”), with an initial principal amount of $1,275,000, for a purchase price of $570,000 (less an original issue discount of $560,000 and debt issuance costs of $145,000). The note is secured by the Company’s current and future accounts receivable and inventory and accrued interest at a rate of 18% per year. The note has subsequently been assigned to different credited investors and the terms of the note were amended extend the maturity until August 31, 2016. The balance of this note was reduced by a transfer of $30