GUIDED THERAPEUTICS INC - Quarter Report: 2021 March (Form 10-Q)

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 March 31, 2021

Commission File No. 0-22179

  

GUIDED THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware	58-2029543
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

 

5835 Peachtree Corners East, Suite D 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  [X]
	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 May 17, 2021, the registrant had 13,278,417 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
March 31, 2021 and December 31, 2020	3
Consolidated Statements of Operations (Unaudited)
Three months ended March 31, 2021 and 2020	5
Consolidated Statements of Stockholders’ Deficit (Unaudited)
Three months ended March 31, 2021 and 2020	6
Consolidated Statements of Cash Flows (Unaudited) for the
Three months ended March 31, 2021 and 2020	8
Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.     Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.     Controls and Procedures	42
Part II. Other Information	43
Item 1.     Legal Proceedings	43
Item 1A.  Risk Factors	43
Item 2.     Unregistered Sale of Equity Securities and Use of Proceeds.	43
Item 3.     Defaults Upon Senior Securities	43
Item 4.    Exhibits	43
Signatures	44

 

 

PART I - FINANCIAL INFORMATION: ITEM 1.  FINANCIAL STATEMENTS

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited, in thousands)

 

ASSETS	March 31, 2021	December 31, 2020
CURRENT ASSETS:
Cash and cash equivalents	$1,247	$182
Accounts receivable, net of allowance for doubtful accounts of $126 at March 31, 2021 and December 31, 2020	24	24
Inventory, net of reserves of $758 at March 31, 2021 and December 31, 2020	606	605
Other current assets	39	85
Total current assets	1,916	896
NONCURRENT ASSETS:
Property and equipment, net	2	1
Lease asset-right, net of amortization	426	453
Other assets	18	-
Total noncurrent assets	446	454
TOTAL ASSETS	2,362	1,350
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt	45	28
Notes payable in default, related parties	-	1
Notes payable in default	296	328
Short-term notes payable	11	45
Short-term notes payable, related parties, past due	74	51
Convertible notes in default	110	-
Convertible notes payable, past due	90	1,930
Short-term convertible notes payable	915	951
Accounts payable	2,427	2,419
Accounts payable, related parties	137	116
Accrued liabilities	1,781	2,995
Mandatorily redeemable Series G convertible preferred stock	125	-
Current portion of lease liability	42	56
Deferred revenue	62	42
Total current liabilities	6,115	8,962
LONG-TERM LIABILITIES:
Warrants, at fair value	-	2,203
Lease liability	376	392
Derivative liability	113	25
Long-term debt	6	23
Long-term debt-related parties	573	600
Total long-term liabilities	1,068	3,243
TOTAL LIABILITIES	7,183	12,205
COMMITMENTS & CONTINGENCIES (Note 7)

 

  

STOCKHOLDERS’ DEFICIT:
Series C convertible preferred stock, $.001 par value; 9.0 shares authorized, 0.3 shares issued and outstanding as of March 31, 2021 and December 31, 2020. (Liquidation preference of $286 at March 31, 2021 and December 31, 2020).	105	105
Series C1 convertible preferred stock, $.001 par value; 20.3 shares authorized, 1.0 shares issued and outstanding as of March 31, 2021 and December 31, 2020. (Liquidation preference of $1,049 at March 31, 2021 and December 31, 2020).	170	170
Series C2 convertible preferred stock, $.001 par value; 5,000 shares authorized, 3.3 shares issued and outstanding as of March 31, 2021 and December 31, 2020. (Liquidation preference of $3,263 at March 31, 2021 and December 31, 2020).	531	531
Series D convertible preferred stock, $.001 par value; 6.0 shares authorized, 0.8 shares issued and outstanding as of March 31, 2021 and December 31, 2020. (Liquidation preference of $763 at March 31, 2021 and December 31, 2020).	276	276
Series E convertible preferred stock, $.001 par value; 5.0 shares authorized, 1.7 shares issued and outstanding as of March 31, 2021 and December 31, 2020. (Liquidation preference of $1,736 at March 31, 2021 and December 31, 2020).	1,639	1,639
Series F convertible preferred stock, $.001 par value; 5.0 shares authorized, 4.5 and nil shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively. (Liquidation preference of $4,508 and nil at March 31, 2021 and December 31, 2020), respectively.	4,226	-
Series G convertible preferred stock, $.001 par value; 1,000 shares authorized, 153 and nil shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively. (Liquidation preference of $153 and nil at March 31, 2021 and December 31, 2020), respectively.	-	-
Common stock, $.001 par value; 3,000,000 shares authorized, 13,180 and 13,138 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively	3,403	3,403
Additional paid-in capital	125,489	123,109
Treasury stock, at cost	(132)	(132)
Accumulated deficit	(140,528)	(139,956)
TOTAL STOCKHOLDERS’ DEFICIT	(4,821)	(10,855)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	2,362	1,350

 

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

 

 

GUIDED THERAPEUTICS INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands)

	FOR THE THREE MONTHS ENDED MARCH 31,
	2021	2020
REVENUE:
Sales – devices and disposables, net	$-	$-
Cost of goods sold	-	-
Gross profit	-	-
OPERATING EXPENSES:
Research and development	16	24
Sales and marketing	36	34
General and administrative	771	184
Total operating expenses	823	242
Operating loss	(823)	(242)
OTHER INCOME (EXPENSE):
Other income	-	1
Interest expense	(141)	(287)
Change in fair value of derivative liability	(88)	-
Gain from extinguishment of debt	87	28
Change in fair value of warrants	448	3,228
Total other income	306	2,970
(LOSS) INCOME BEFORE INCOME TAXES	(517)	2,728
PROVISION FOR INCOME TAXES	-	-
NET (LOSS) INCOME	(517)	2,728
PREFERRED STOCK DIVIDENDS	(55)	(12)
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$(572)	$2,716
NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
BASIC	$(0.043)	$0.542
DILUTED	$(0.043)	$0.041
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC	13,172	5,013
DILUTED	13,172	65,620

 

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

 

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2021 and 2020 (In Thousands)

	Preferred Stock Series C		Preferred Stock Series C1		Preferred Stock Series C2		Preferred Stock Series D		Preferred Stock Series E		Preferred Stock Series F
	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount
BALANCE, December 31, 2019	-	$105	1	$170	3	$531	-	$-	-	$-	-	$-
Issuance of preferred stock in financing	-	-	-	-	-	-	1	268	-	-	-	-
Conversion of debt into common stock	-	-	-	-	-	-	-	-	-	-	-	-
Issuance of common stock in financing	-	-	-	-	-	-	-	-	-	-	-	-
Issuance of warrants in financing	-	-	-	-	-	-	-	-	-	-	-	-
Issuance of common stock for manufacturing agreements	-	-	-	-	-	-	-	-	-	-	-	-
Accrued preferred dividends	-	-	-	-	-	-	-	-	-	-	-	-
Net income	-	-	-	-	-	-	-	-	-	-	-	-
BALANCE, March 31, 2020	-	$105	1	$170	3	$531	1	$268	-	$-	-	$-
BALANCE, December 31, 2020	-	$105	1	$170	3	$531	1	$276	2	$1,639	-	$-
Series D preferred offering	-	-	-	-	-	-	-	-	-	-	-	-
Series E preferred offering	-	-	-	-	-	-	-	-	-	-	-	-
Series F preferred offering	-	-	-	-	-	-	-	-	-	-	2	1,667
Conversion of debt and expenses for Series F preferred stock	-	-	-	-	-	-	-	-	-	-	2	2,559
Issuance of warrants to finders	-	-	-	-	-	-	-	-	-	-	-	-
Series G preferred offering	-	-	-	-	-	-	-	-	-	-	-	-
Issuance of common stock for payment of Series D preferred dividends	-	-	-	-	-	-	-	-	-	-	-	-
Issuance of warrants to consultants	-	-	-	-	-	-	-	-	-	-	-	-
Conversion of warrants from liability to equity	-	-	-	-	-	-	-	-	-	-	-	-
Stock-based compensation	-	-	-	-	-	-	-	-	-	-	-	-
Accrued preferred dividends	-	-	-	-	-	-	-	-	-	-	-	-
Net loss	-	-	-	-	-	-	-	-	-	-	-	-
BALANCE, March 31, 2021	-	$105	1	$170	3	$531	1	$276	2	$1,639	4	$4.226

 

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

 

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2021 and 2020 (In Thousands)

 

 

	Preferred Stock Series G		Common Stock
	Shares	Amount	Shares	Amount	Additional Paid-In Capital	Treasury Stock	Accumulated Deficit	TOTAL
BALANCE, December 31, 2019	-	-	3,319	$3,394	$118,552	$(132)	$(139,555)	$(16,935)
Issuance of preferred stock in financing	-	-	-	-	286	-	-	554
Conversion of debt into common stock	-	-	6,957	7	2,068	-	-	2,075
Issuance of common stock in financing	-	-	1,476	1	177	-	-	178
Issuance of warrants in financing	-	-	-	-	67	-	-	67
Issuance of common stock for manufacturing agreements	-	-	13	-	-	-	-	-
Accrued preferred dividends	-	-	-	-	-	-	(12)	(12)
Net income	-	-	-	-	-	-	2,728	2,728
BALANCE, March 31, 2020	-	$-	11,765	$3,402	$121,150	$(132)	$(136,839)	$(11,345)
BALANCE, December 31, 2020	-	$-	13,138	$3,403	$123,109	$(132)	$(139,956)	$(10,855)
Series D preferred offering	-	-	-	-	-	-	-	-
Series E preferred offering	-	-	-	-	-	-	-	-
Series F preferred offering	-	-	-	-	-	-	-	1,667
Conversion of debt and expenses for Series F preferred stock	-	-	-	-	-	-	-	2,559
Issuance of warrants to finders	-	-	-	-	151	-	-	151
Series G preferred offering	153	-	-	-	-	-	-	-
Issuance of common stock for payment of Series D preferred dividends	-	-	42	-	14	-	-	14
Issuance of warrants to consultants	-	-	-	-	398	-	-	398
Conversion of warrants from liability to equity	-	-	-	-	1,755	-	-	1,755
Stock-based compensation	-	-	-	-	62	-	-	62
Accrued preferred dividends	-	-	-	-	-	-	(55)	(55)
Net loss	-	-	-	-	-	-	(517)	(517)
BALANCE, March 31, 2021	153	$-	13,180	$3,403	$125,489	$(132)	$(140,528)	$(4,821)

 

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

 

 

	FOR THE THREE MONTHS ENDED MARCH 31,
	2021	2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$(517)	$2,728
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of debt issuance costs and discounts	64	94
Amortization of beneficial conversion feature	8	19
Stock-based compensation	62	-
Change in fair value of warrants	(448)	(3,228)
Warrants issued for consulting services	398	-
Gain from extinguishment of debt	(87)	(28)
Change in fair value of derivative	88	-
Changes in operating assets and liabilities:
Accounts receivable	-	(11)
Inventory	(1)	(9)
Other current assets	46	34
Other assets	(18)	-
Accounts payable	29	(67)
Deferred revenue	20	-
Accrued liabilities	36	(62)
Total adjustments	197	(3,258)
Net cash used in operating activities	(320)	(530)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets	(1)	-
Net cash used in investing activities	(1)	-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Series F offering, net of costs	1,818	-
Proceeds from Series G offering, net of costs	125	-
Payments made on notes payable	(557)	(451)
Proceeds from the issuance of common stock	-	103
Net cash provided (used in) by financing activities	1,386	(348)
NET CHANGE IN CASH AND CASH EQUIVALENTS	1,065	(878)
CASH AND CASH EQUIVALENTS, beginning of year	182	899
CASH AND CASH EQUIVALENTS, end of period	$1,247	21
SUPPLEMENTAL SCHEDULE OF:
Cash paid for:
Interest	$405	165
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock as debt repayment	$-	1,902
Issuance of Series F preferred stock	$2,559	-
Issuance of warrants to finders in connection with Series F preferred stock	$151	-
Issuance of common stock for accrued interest of debt repaid	$-	162
Dividends on preferred stock	$55	12
Subscription receivable	$-	635
Settlement of dividends through common stock issuance	$14	-
Warrants exchanged for fixed price warrants	$1,755	67
Other receivable	$-	100

 

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

 

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

  

 

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

 

Basis of Presentation

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934. In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

 

The Company’s prospects must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate. The Company has experienced net losses since its inception and, as of March 31, 2021, it had an accumulated deficit of approximately $140.5 million. To date, the Company has engaged primarily in research and development efforts and the early stages of marketing its products. The Company may not be successful in growing sales for its products. Moreover, required regulatory clearances or approvals may not be obtained in a timely manner, or at all. The Company’s products may not ever gain market acceptance and the Company may not ever generate significant revenues or achieve profitability. The development and commercialization of the Company’s products requires substantial development, regulatory, sales and marketing, manufacturing and other expenditures. The Company expects operating losses to continue for the foreseeable future as it continues to expend substantial resources to complete development of its products, obtain regulatory clearances or approvals, build its marketing, sales, manufacturing and finance capabilities, and conduct further research and development.

 

Going Concern

 

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

 

At March 31, 2021, the Company had a negative working capital of approximately $4.2 million, accumulated deficit of $140.5 million, and incurred a net loss of $0.6 million for the three months then ended. Stockholders’ deficit totaled approximately $4.8 million at March 31, 2021, primarily due to recurring net losses from operations.

 

During the first quarter of 2021 the Company did raise $2.3 million as part of the Series F and G preferred stock capital raise. The Company will need to continue to raise capital in order to provide funding for its operations and FDA approval process. If sufficient capital cannot be raised during 2021, the Company will continue its plans of curtailing operations by reducing discretionary spending and staffing levels and attempting to operate by only pursuing activities for which it has external financial support. However, there can be no assurance that such external financial support will be sufficient to maintain even limited operations or that the Company will be able to raise additional funds on acceptable terms, or at all. In such a case, the Company might be required to enter into unfavorable agreements or, if that is not possible, be unable to continue operations, and to the extent practicable, liquidate and/or file for bankruptcy protection.

 

The Company had warrants exercisable for approximately 28.0 million shares of its common stock outstanding at March 31, 2021, with exercise prices ranging between $0.15 and $0.75 per share. Exercises of in the money warrants would generate a total of approximately $7.3 million in cash, assuming full exercise, although the Company cannot be assured that holders will exercise any warrants. Management may obtain additional funds through the public or private sale of debt or equity, and grants, if available.

 

 

2.   SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

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

 

Principles of Consolidation

 

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

 

Accounting Standard Updates

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740)”. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending other areas of Topic 740. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2020. We adopted this ASU on January 1, 2021 with no material impact on our consolidated financial statements.

 

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes from U.S. GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Among other potential impacts, this change is expected to reduce reported interest expense, increase reported net income, and result in a reclassification of certain conversion feature balance sheet amounts from stockholders’ equity to liabilities as it relates to the Company’s convertible senior notes. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share (EPS), which is consistent with the Company’s accounting treatment under the current standard. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020, and can be adopted on either a fully retrospective or modified retrospective basis. The Company has early adopted ASU No. 2020-06 under a modified retrospective basis on January 1, 2021. The result of the early adoption would have been a change to retained earnings of $102,000 for the year ended December 31, 2020.

 

Except as noted above, the guidance issued by the FASB during the current year is not expected to have a material effect on the Company’s consolidated financial statements.

 

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

 

Cash Equivalents

 

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

 

 

Accounts Receivable

 

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

 

Concentrations of Credit Risk

 

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

 

Inventory Valuation

 

All inventories are stated at lower of cost or net realizable value, with cost determined substantially on a “first-in, first-out” basis.  Selling, general, and administrative expenses are not inventoried, but are charged to expense when incurred. At March 31, 2021 and December 31, 2020, our inventories were as follows (in thousands):

 

	March 31,	December 31,
	2021	2020
Raw materials	$1,277	$1,276
Work in process	80	80
Finished goods	7	7
Inventory reserve	(758)	(758)
Total	$606	$605

The company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements are amortized at the shorter of the useful life of the asset or the remaining lease term. Depreciation and amortization expense are included in general and administrative expense on the statement of operations. Expenditures for repairs and maintenance are expensed as incurred. Property and equipment are summarized as follows at March 31, 2021 and December 31, 2020 (in thousands):

 

	March 31,	December 31,
	2021	2020
Equipment	$1,043	$1,042
Software	652	652
Furniture and fixtures	41	41
Leasehold improvement	12	12
	1,748	1,747
Less accumulated depreciation and amortization	(1,746)	(1,746)
Total	$2	$1

During the three months ended March 31, 2021 and year ended December 31, 2020, the Company disposed of approximately nil and $647,000 of property and equipment that was fully depreciated, respectively.

 

 

Debt Issuance Costs

 

Debt issuance costs are capitalized and amortized over the term of the associated debt. Debt issuance costs are presented in the balance sheet as a direct deduction from the carrying amount of the debt liability consistent with the debt discount.

 

Patent Costs (Principally Legal Fees)

 

Costs incurred in filing, prosecuting, and maintaining patents are recurring, and expensed as incurred. Maintaining patents are expensed as incurred as the Company has not yet received U.S. FDA approval and recovery of these costs is uncertain. Such costs aggregated approximately $3,000 and $4,000 for the quarter ended March 31, 2021 and 2020, respectively.

 

Leases

 

With the implementation of ASU 2016-02, “Leases (Topic 842)”, the Company recorded a lease-right-of-use asset and a lease liability. The Company adopted the standard on January 1, 2019. The implementation required the analysis of certain criteria in determining its treatment. The Company determined that its corporate office lease met those criteria. The Company implemented the guidance using the alternative transition method. Under this alternative, the effective date would be the date of initial application. See Note 7: Commitments and Contingencies.

 

Accrued Liabilities

 

Accrued liabilities are summarized as follows (in thousands):

 

	March 31, 2021	December 31,  2020
Compensation	$802	$1,094
Professional fees	41	83
Subscription receivable	350	-
Interest	256	1,517
Vacation	43	34
Preferred dividends	242	202
Other accrued expenses	47	65
Total	$1,781	$2,995

 

Subscription receivables

 

Cash received from investors for common stock shares that has not completed processing is recorded as a liability to subscription receivables. As of March 31, 2021, and December 31, 2020 the Company had an outstanding amount due from a related party of $350,000 and nil, respectively.

 

 

Revenue Recognition

 

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

 

The Company did not have revenues for the three months ended March 31, 2021 and 2020.

 

Significant Distributors

 

Accounts receivable outstanding was $24,000, the outstanding amount was netted against a $126,000 allowance, which was from one distributor as of March 31, 2021 and December 31, 2020.

 

Deferred revenue

 

The Company defers payments received as revenue until earned based on the related contracts and applying ASC 606 as required. As of March 31, 2021, and December 31, 2020, the Company had $62,000 and $42,000 in deferred revenue, respectively.

 

Research and Development

 

Research and development expenses consist of expenditures for research conducted by the Company and payments made under contracts with consultants or other outside parties and costs associated with internal and contracted clinical trials. All research and development costs are expensed as incurred.

 

Income Taxes

 

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Management provides valuation allowances against the deferred tax assets for amounts that are not considered more likely than not to be realized.

 

The Company has filed its 2020 federal and state corporate tax returns. The Company has entered into an agreed upon payment plan with the IRS for delinquent payroll taxes. The Company has an established payment arrangement for its delinquent state income taxes with the State of Georgia. Although the Company has been experiencing recurring losses, it is obligated to file tax returns for compliance with IRS regulations and that of applicable state jurisdictions. At December 31, 2020, the Company has approximately $61.6 million of net operating losses carryforward available to next year. This net operating loss will be eligible to be carried forward for tax purposes at federal and applicable states level. A full valuation allowance has been recorded related the deferred tax assets generated from the net operating losses.

 

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

 

 

Uncertain Tax Positions

 

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

 

The Company has entered into an agreed upon payment plan with the IRS for delinquent payroll taxes. The Company has an established payment arrangement for its delinquent state income taxes with the State of Georgia.

 

Warrants

 

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

 

Stock Based Compensation

 

The Company records compensation expense related to options granted to employees and non-employees based on the fair value of the award. Compensation cost is recorded as earned for all unvested stock options outstanding at the beginning of the first year based upon the grant date fair value estimates, and for compensation cost for all stock based payments granted or modified subsequently based on fair value estimates.

 

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

 

Stock options granted have a 10-year life and expire 90 days after employment or upon termination of consulting agreement. Vesting schedule varies per grantee. Generally stock options granted vest as follows: 25% vest immediately, and the remaining stock options vest over 33 months, beginning three months after grant.

 

For the three months ended March 31, 2021 and 2020 share-based compensation for options attributable to employees, non-employees, officers and Board members were approximately $62,000 and $5,000, respectively. These amounts have been included in the Company’s statements of operations under general and administrative expense. Compensation costs for stock options which vest over time are recognized over the vesting period. As of March 31, 2021, and 2020 the Company had approximately $509,000 and nil of unrecognized compensation costs related to granted stock options that will be recognized, respectively.

 

Beneficial Conversion Features of Convertible Securities

 

The Company has adopted the provisions of ASU 2017-11 to account for the down round features of warrants issued with private placements effective as of January 1, 2020. In doing so, warrants with a down round feature previously treated as a derivative liabilities in the consolidated balance sheet and measured at fair value are henceforth treated as equity, with no adjustment for changes in fair value at each reporting period. Previously, the Company accounted for conversion options embedded in convertible notes in accordance with ASC 815. ASC 815 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments. ASC 815 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional, as defined by ASC 815-40. The Company accounts for convertible notes deemed conventional and conversion options embedded in non-conventional convertible notes which qualify as equity under ASC 815, in accordance with the provisions of ASC 470-20, which provides guidance on accounting for convertible securities with beneficial conversion features. Accordingly, the Company records, as a discount to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt.

 

 

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

 

The Company also adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes from U.S. GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt.

 

Derivatives

 

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

 

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

 

3.   FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The guidance for fair value measurements, ASC820, Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy based upon observable and non-observable inputs as follow:

 

●Level 1–Quoted market prices in active markets for identical assets and liabilities;

●Level 2–Inputs, other than level 1 inputs, either directly or indirectly observable; and

●Level 3–Unobservable inputs developed using internal estimates and assumptions (there is little or no market date) which reflect those that market participants would use.

 

The Company records its derivative activities at fair value, which consisted of warrants as of March 31, 2021 and December 31, 2020. The fair value of the warrants was estimated using the Binomial Simulation model. Gains and losses from derivative contracts are included in the change in fair value of the derivative liability in the statement of operations. The fair value of the Company’s derivative warrants is classified as a Level 3 measurement, since unobservable inputs are used in the valuation.

 

The following table presents the fair value for those liabilities measured on a recurring basis as of March 31, 2021 and December 31, 2020:

 

 

FAIR VALUE MEASUREMENTS (In Thousands)

 

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

 

	Fair Value at March 31, 2021
	Level 1	Level 2	Level 3	Total
Derivative liability/bifurcated conversion option in connection with Auctus $1,100,000 loan on December 17, 2019	-	-	(113)	(113)
Total long-term liabilities at fair value	$-$	$-	$(113)	$(113)

	Fair Value at December 31, 2020
	Level 1	Level 2	Level 3	Total
Warrants issued in connection with Senior Secured Debt	-		(2,203)	(2,203)
Derivative liability/bifurcated conversion option in connection with Auctus $1,100,000 loan on December 17, 2019	-	-	(25)	(25)
Total long-term liabilities at fair value	$-	$-	$ (2,228)	$(2,228)

 

The following is a summary of changes to Level 3 instruments during the three months ended March 31, 2021:

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

	Senior Secured Debt	Derivative	Total
Balance, December 31, 2020	$(2,203)	$(25)	$(2,228)
Change in the terms of warrants previously recorded as a liability and now reclassified to equity	1,755	-	1,755
Change in value due to warrants expiring during the year	448	-	448
Change in fair value during the year	-	(88)	(88)
Balance, March 31, 2021	$-	$(113)	$(113)

 

As of March 31, 2021, the fair value of warrants was approximately nil and the fair value of the derivative liability was approximately $113,000. A net change of approximately $2.1 million has been recorded to the accompanying statement of operations for the three months ended March 31, 2021. As of December 31, 2020, the fair value of warrants was approximately $2.2 million and the fair value of the derivative liability was $25,000.

 

 

4.  STOCKHOLDERS’ DEFICIT

 

 Common Stock

 

The Company has authorized 3,000,000,000 shares of common stock with $0.001 par value, of which 13,180,417 were issued and outstanding as of March 31, 2021. As of December 31, 2020, there were 3,000,000,000 authorized shares of common stock, of which 13,138,282 were issued and outstanding.

 

For the three months ended March 31, 2021, the Company issued 42,135 shares of common stock as listed below:

 

Shares issued for payments of Series D dividends	42,135
Issued during the three months ended March 31, 2021	42,135

 

Summary table of common stock share transactions:

 

Balance at December 31, 2020	13,138,282
Issued in 2021	42,135
Balance at March 31, 2021	13,180,417

 

Investments

 

During 2021, the Company received equity investments in the amount of $2,099,000 and incurred fees due on these investments of $131,000. These investors received a total of 2,099 Series F and Series F preferred stock (if the Investor elects to convert their Series F preferred stock, each Series F preferred stock shares converts into 4,000 shares of the Company’s common stock shares).

 

During 2021, the Company finalized an investment by Power Up Lending Group Ltd. Power Up invested $132,000, net to the Company is $125,000, for 153,000 shares of Series G preferred stock.

 

During 2020, the Company received equity investments in the amount of $1,735,500 and incurred fees due on these investments of $96,985. These investors received a total of 1,736 Series E preferred stock (if the Investor elects to convert their Series E preferred stock, each Series E preferred stock shares converts into 4,000 shares of the Company’s common stock shares).

 

During January and April 2020, the Company received equity investments in the amount of $128,000. These investors received a total of 256,000 common stock shares and 256,000 warrants issued to purchase common stock shares at a strike price of $0.25, 256,000 warrants to purchase common stock shares at a strike price of $0.75 and 128 Series D preferred stock (if the Investor elects to convert their Series D preferred stock, each Series D preferred stock shares converts into 3,000 shares of the Company’s common stock shares). Of the amount invested $38,000 was from related parties.

 

Debt Exchanges - 2021

 

On January 8, 2021, the Company made the final payment of $750,000 out of the total $1,500,000 as required by this exchange agreement with GPB. On March 31, 2021, the Company issued 2,236 series F preferred stock shares in accordance with the terms of the agreement (see NOTE 10: CONVERTIBLE DEBT).

 

On February 19, 2021, the Company exchanged $100,000 and $85,000 of long-term debt for Dr. Cartwright and Dr. Faupel in exchange for 100 and 85 shares of Series F Preferred Stock, respectively.

 

On March 10, 2021, the Company exchanged $88,000 in accrued consulting fees for Mr. Blumberg for 88 Series F preferred stock shares.

 

On March 22, 2021, the Company entered into an exchange agreement with Richard Fowler. As of December 31, 2020, the Company owed Mr. Fowler $546,214 ($412,624 in deferred salary and $133,590 in accrued interest). The Company exchanged the amount owed of $546,214 for 50 Series F Preferred Shares (convertible into 200,000 common stock shares), a $150,000 unsecured note and Mr. Fowler remains on the Company health insurance plan. The note will accrue interest at the rate of 6% (18% in the event of default) on March 22, 2022 and be payable in monthly installments of $3,600 for four years, with the first payment being due on March 15, 2022.

 

 

Debt Exchanges - 2020

 

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