As filed with the Securities and Exchange Commission on July 1, 2016

Registration No. 333- 

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,

Washington, D.C. 20549

________________________

Form S-1

REGISTRATION

FORM S-1REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

________________________

Guided Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

________________________

Delaware 3845 58-2029543
(State or other jurisdiction of incorporation or organization)Incorporation) (Primary Standard Industrial Classification Code Number) (I.R.S.IRS Employer
Identification Number)

5835 Peachtree Corners East, Suite D
Norcross, Georgia 30092
(770) 242-8723

(Address, including zip code, and telephone number, including area code,
of registrant’sregistrant's principal executive offices)

________________________

Gene S. Cartwright, Ph.D
President and Chief Executive Officer
Guided Therapeutics, Inc.
5835 Peachtree Corners East,

Please send copies of all communications to:
BRUNSON CHANDLER & JONES, PLLC
175 South Main Street, Suite D
Norcross, Georgia 30092
(770) 242-8723

1410

Salt Lake City, Utah 84111
801-303-5772
(Name, address,Address, including zip code, and telephone, number, including area code, of agent for service)

________________________

Copy to:

Joel T. May, Esq. and
Heith D. Rodman, Esq.
Jones Day
1420 Peachtree Street, N.E.
Suite 800
Atlanta, Georgia 30309-3053
(404) 581-3939

________________________

code)

Approximate date of commencement of proposed sale to the public: public:  From time to time followingafter the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.R

☒

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨

☐

If this Form is a post-effective amendment filed pursuant to Rulerule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨

☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨

☐

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

(Check one):
Large accelerated filer¨☐Accelerated filer¨☐
Non-accelerated filer¨☐Smaller reporting company☒
(do not check if a smaller reporting company)Emerging Growth Company☐

 

________________________


CALCULATION OF REGISTRATION FEE

Title of Each Class of
Securities to be Registered (1)		 Proposed Maximum
Aggregate
Offering Price (2)		 Amount of
Registration
Fee (3)
Series D preferred stock, par value $0.001 $  $  
Warrants to purchase shares of common stock (4) $  $  
Shares of common stock issuable upon conversion of Series D preferred stock $  $  
Shares of common stock issuable upon exercise of the Warrants $  $  
        
Total: $5,000,000 $503.50 
Title of Each Class of
securities to be registered
 
Numbert of shares of
common stock to be registered (1)
 
 
Proposed
Maximum
Offering
Price Per
Share (2)
 
 
Proposed
Maximum
Aggregate
Offering
Price
 
 
Amount of
Registration
Fee (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
  70,000,000 
 $0.0075 
 $525,000 
 $65.36
(1)In the event of a stock split, stock dividend or other similar transaction involving the registrant’s common stock, the number of shares of common stock registered hereby shall be automatically increased to cover the additional common shares in accordance with Rule 416(a) under, this registration statement shall also cover an indeterminate number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.
(2)Based on the average of the lowest two (2) volume weighted average trading prices of the Company’s common stock during the fifteen (15) consecutive trading day period immediately preceding the filing of this Registration Statement of approximately $0.0075. The shares offered, hereunder, may be sold by the selling stockholder from time to time in the open market, through privately negotiated transactions, or a combination of these methods at market prices prevailing at the time of sale or at negotiated prices.
(3)The fee is calculated by multiplying the aggregate offering amount by ..00012450, pursuant to Section 6(b) of the Securities Act of 1933.
(2)Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act.
(3)Calculated pursuant to Rule 457(o) under the Securities Act of 1933, on the basis of the maximum aggregate offering price of all of the securities to be registered.
(4)No separate registration fee is payable pursuant to Rule 457(g) under the Securities Act.

The registrant

We hereby amendsamend this registration statement on such date or dates as may be necessary to delay itsour effective date until the registrant shall file a further amendment which specifically states that this registration statement shall, thereafter, become effective in accordance with Section 8(a) of the Securities Act of 1933, or until thisthe registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 


PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED April____, 2018
The information in this prospectus is not complete and may be changed. WeThese securities may not sell or offer these securitiesbe sold until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS

Subject to completion, dated July 1, 2016

$5,000,000

5,000

Guided Therapeutics, Inc.
70,000,000 Common Shares
The selling stockholder identified in this prospectus may offer an indeterminate number of Series D Convertible Preferred Stock

Warrants to Purchaseshares of its common stock, which will consist of up to _________ Shares of Common Stock

_________ Shares of Common Stock Underlying the Series D Preferred Stock

_________ Shares of Common Stock Underlying the Warrants

________________________

We are offering up to 5,000 shares of our Series D convertible preferred stock, together with warrants to purchase __________70,000,000 shares of common stock atto be sold by GHS Investments LLC (“GHS”) pursuant to an Equity Financing Agreement (the “Financing Agreement”) dated March 1, 2018. If issued presently, the 70,000,000 of common stock registered for resale by GHS would represent 24.89% of our issued and outstanding shares of common stock as of June 1, 2018. 

The selling stockholder may sell all or a purchase priceportion of $1,000 (and the shares issuable from time to time upon conversion of the Series D preferred stock and the exercise of the warrants)being offered pursuant to this prospectus. The shares of Series D preferred stockprospectus at fixed prices and warrants are immediately separable and will be separately issued.

Subject to certain ownership limitations, the Series D preferred stock will be convertible at any timeprevailing market prices at the holder’s option intotime of sale, at varying prices, or at negotiated prices.

We will not receive any proceeds from the sale of the shares of our common stock by GHS. However, we will receive proceeds from our initial sale of shares to GHS pursuant to the Financing Agreement. We will sell shares to GHS at an initial conversiona price equal to 80% of $____ per share. Subject to similar ownership limitations, each warrant will be immediately exercisable for _____ sharesthe average of the two (2) lowest volume weighted average trading prices of our common stock have an exercise price of $____ per share, and expire five years fromduring the fifteen (15) consecutive trading day period beginning on the date on which we deliver a put notice to GHS (the “Market Price”).
GHS is an underwriter within the meaning of issuance. The warrants willthe Securities Act of 1933, and any broker-dealers or agents that are involved in selling the shares may be issueddeemed to be “underwriters” within the meaning of the Securities Act of 1933 in book-entry form pursuantconnection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to a warrant agency agreement between us and our transfer agent.

be underwriting commissions or discounts under the Securities Act of 1933.

Our common stock is quotedtraded on the OTCQB marketplaceOTC Markets under the symbol “GTHP.” The“GTHP”. On June 1, 2018, the last reported sale price offor our common stock on the OTCQB on June 15, 2016 was $0.01$0.007 per share. We will use our best efforts
Prior to have the warrants quoted on the OTCQB marketplace on or before the closing.

  Per Share/Warrant Total 
Offering Price $1,000 $5,000,000 
Placement Agent’s Fees (1) $90 $450,000 
Offering Proceeds, Before Expenses $910 $4,550,000 

_____________________________

(1)We have agreed to issue the placement agent a warrant to purchase shares of common stock equal to an aggregate of up to 5% of the total shares of common stock underlying the Series D preferred stock sold in the offering and to reimburse to the placement agent for its reasonable, out-of-pocket expenses. See “Plan of Distribution” on page 18 for more information.

We have retained Ladenburg Thalmann & Co., Inc. to act as our exclusive placement agent in connection with this offering, and to use its “best efforts” to solicit offers to purchase thethere has been a very limited market for our securities. The placement agent is not required to sell any specific number or dollar amount of securities but will use its best efforts to sell the securities offered. This best-efforts offering does not have a minimum purchase requirement and therefore is not certain to raise any specific amount.

Investing inWhile our common stock involvesis on the OTC Markets, there has been negligible trading volume. There is no guarantee that an active trading market will develop in our securities.

This offering is highly speculative and these securities involve a high degree of risk. These risks are described underrisk and should be considered only by persons who can afford the captionloss of their entire investment. See “Risk Factors” that beginsbeginning on page 5 of this prospectus.

5. Neither the Securities and Exchange Commission or SEC, nor any state securities commission has approved or disapproved of these securities or passed upon the securities that may be offered underaccuracy or adequacy of this prospectus, nor have any of these organizations determined if this prospectus is truthful or complete.prospectus. Any representation to the contrary is a criminal offense.

Ladenburg Thalmann

The date of this prospectus is , 2016.

May __, 2018.
 


 

TABLE OF CONTENTS 

Table of Contents
The following table of contents has been designed to help you find information contained in this prospectus. We encourage you to read the entire prospectus.
FORWARD-LOOKING STATEMENTSii
SUMMARY1
RISK FACTORSItem 3. Summary Information5
USE OF PROCEEDS15
DILUTION15
CAPITALIZATION17
PLAN OF DISTRIBUTION18
DESCRIPTION OF SECURITIES WE ARE OFFERING20
DESCRIPTION OF SECURITIESItem 4. Use of Proceeds22
OUR BUSINESS26
PROPERTIESItem 5. Determination of Offering Price3422
LEGAL PROCEEDINGS34
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS35
DIRECTORS AND EXECUTIVE OFFICERS42
CORPORATE GOVERNANCE44
EXECUTIVE COMPENSATION45
SHARE OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  AND DIRECTOR INDEPENDENCE47
LEGAL MATTERS48
EXPERTS48
WHERE YOU CAN GET MORE INFORMATION48

  i
Item 6. Dilution22
 
Item 7. Selling Security Holder22
Item 8. Plan of Distribution24
Item 9. Description of Securities to be Registered25
Item 10. Interests of Named Experts and Counsel27
Item 11. Information with Respect to the Registrant27
Item 12. Incorporation of Certain Information by Reference.43
Item 13. Other Expenses of Issuance and Distribution99
Item 14. Indemnification of Officers and Directors99
Item 15. Recent Sales of Unregistered Securities99
Item 16. Exhibits and Financial Statement Schedules. 100
Item 17. Undertakings.103
Financial Statements46
 

ABOUT THIS PROSPECTUS

We have not authorized any person to give you any supplemental information or to make any representations for us. You should not rely only onupon any information about our company that is not contained in this prospectus. Information contained in this prospectus may become stale. You should not assume the information contained in this prospectus or aany prospectus supplement. We have not authorizedsupplement is accurate as of any date other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus is an offer to sell onlythan their respective dates, regardless of the common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. You should assume that the information appearing intime of delivery of this prospectus, is accurate only asany prospectus supplement or of any sale of the date hereof.shares. Our business, financial condition, results of operations, and prospects may have changed.

changed since those dates. The termsselling stockholders are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted.

In this prospectus, “Guided Therapeutics,”Therapeutics” the “Company,” “our,” “we,” and “us,” as used in this prospectus,and “our” refer to Guided Therapeutics, Inc. and its wholly owned subsidiary.

FORWARD-LOOKING STATEMENTS

Statements in this prospectus, which express “belief,” “anticipation” or “expectation,” as well as other statements that are not historical facts, are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those identified, a Delaware corporation.


Item 3. SUMMARY INFORMATION
You should carefully read all information in the foregoing “Risk Factors” and elsewhere in this prospectus. Examples of these uncertainties and risks include, but are not limited to:

·access to sufficient debt or equity capital to meet our operating and financial needs;
·the extent of dilution of the holdings of our existing stockholders upon the issuance, conversion or exercise of securities issued as part of our capital raising efforts;
·whether and when we or any potential strategic partners will obtain required regulatory approvals in the markets in which we plan to operate;
·the effectiveness and ultimate market acceptance of our products and our ability to generate sufficient sales revenues to sustain our growth and strategy plans;
·whether our products in development will prove safe, feasible and effective;
·our need to achieve manufacturing scale-up in a timely manner, and our need to provide for the efficient manufacturing of sufficient quantities of our products;
·the lack of immediate alternate sources of supply for some critical components of our products;
·our ability to establish and protect the proprietary information on which we base our products, including our patent and intellectual property position;
·the need to fully develop the marketing, distribution, customer service and technical support and other functions critical to the success of our product lines;
·the dependence on potential strategic partners or outside investors for funding, development assistance, clinical trials, distribution and marketing of some of our products; and
·other risks and uncertainties described from time to time in our reports filed with the SEC.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.

Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.

 ii

SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that may be important to you. We urge you to read the entire prospectus, carefully, including the ‘‘Risk Factors’’ section, beforefinancial statements and their explanatory notes under the Financial Statements prior to making an investment decision. Unless otherwise noted, all share and per share data in this prospectus give effect to the 1:___ reverse stock split of our common stock implemented on ___________, 2016, and is based on 67,901,547 pre-reverse split shares outstanding as of June 15, 2016. For more information about our reverse stock split, see “Recent Developments.”

Our Company

Overview
We are a medical technology company focused on developing innovative medical devices that have the potential to improve healthcare. Our primary focus is the sales and marketing of our LuViva® Advanced Cervical Scan non-invasive cervical cancer detection device. The underlying technology of LuViva primarily relates to the use of biophotonics for the non-invasive detection of cancers. LuViva is designed to identify cervical cancers and precancers painlessly, non-invasively and at the point of care by scanning the cervix with light, then analyzing the reflected and fluorescent light.

LuViva provides a less invasive and painless alternative to conventional tests for cervical cancer screening and detection. Additionally, LuViva improves patient well-being not only because it eliminates pain, but also because it is convenient to use and provides rapid results at the point of care. We focus on two primary applications for LuViva: first, as a cancer screening tool in the developing world, where infrastructure to support traditional cancer-screening methods is limited or non-existent, and second, as a triage following traditional screening in the developed world, where a high number of false positive results cause a high rate of unnecessary and ultimately costly follow-up tests.

Screening for cervical cancer represents one of the most significant demands on the practice of diagnostic medicine. As cervical cancer is linked to a sexually transmitted disease—the human pampillomaviruspapillomavirus (HPV)—every woman essentially becomes “at risk” for cervical cancer simply after becoming sexually active. In the developing world, there are approximately 2.0 billion women aged 15 and older who are potentially eligible for screening with LuViva. Guidelines for screening intervals vary across the world, but U.S. guidelines call for screening every three years. Traditionally, the Pap smear screening test, or Pap test, is the primary cervical cancer screening methodology in the developed world. However, in developing countries, cancer screening using Pap tests is expensive and requires infrastructure and skill not currently existing, and not likely to be developed in the near future, in these countries.

We believe LuViva is the answer to the developing world’s cervical cancer screening needs. Screening for cervical cancer in the developing world often requires working directly with foreign governments or non-governmental agencies (NGOs). By partnering with governments or NGOs, we are able tocan provide immediate access to cervical cancer detection to large segments of a nation’s population as part of national or regional governmental healthcare programs, eliminating the need to develop expensive and resource-intensive infrastructures.

In the developed world, we believe LuViva offers a more accurate and ultimately cost-effective triage medical device, to be used once a traditional Pap test or HPV test indicates the possibility of cervical cancer. Due to the high number of false positive results from Pap tests, traditional follow-on tests entail increased medical treatment costs. We believe these costs can be minimized by utilizing LuViva as a triage to determine whether follow-on tests are warranted.
We believe our non-invasive cervical cancer detection technology can be applied to the early detection of other cancers as well. In 2013, we announced a license agreement with Konica Minolta, Inc. allowing us to manufacture and develop a non-invasive esophageal cancer detection product from Konica Minolta based on our biophotonic technology platform. Early market analyses of our biophotonic technology indicated that skin cancer detection was also promising, but currently we are focused primarily on the large-scale commercialization of LuViva.
Cancer
Cancer is a group of many related diseases. All forms of cancer involve the out-of-control growth and spread of abnormal cells. Normal cells grow, divide, and die in an orderly fashion. Cancer cells, however, continue to grow and divide and can spread to other parts of the body. In America, half of all men and one-third of all women will develop some form of cancer during their lifetimes. According to the American Cancer Society, the sooner a cancer is found and treatment begins, the better a patient’s chances are of being cured. We began investigating the applications of our biophotonic technology to cancer detection before 1997, when we initiated a preliminary market analysis. We concluded that our biophotonic technology had applications for the detection of a variety of cancers through the exposure of tissue to light. We selected detection of cervical cancer and skin cancer from a list of the ten most promising applications to pursue initially, and ultimately focused primarily on our LuViva cervical cancer detection device.

Cervical cancer is a cancer that begins in the lining of the cervix (which is located in the lower part of the uterus). Cervical cancer forms over time and may spread to other parts of the body if left untreated. There is generally a gradual change from a normal cervix to a cervix with precancerous cells to cervical cancer. For some women, precancerous changes may go away without any treatment. While the majority of precancerous changes in the cervix do not advance to cancer, if precancers are treated, the risk that they will become cancers can be greatly reduced.
The Developing World
According to the most recent data published by the World Health Organization (WHO), cervical cancer is the fourth most frequent cancer in women worldwide, with an estimated 530,000 new cases in 2012. For women living in less developed regions, however, cervical cancer is the second most common cancer, with an estimated 445,000 new cases in 2012 (84% of the new cases worldwide). In 2012, approximately 270,000 women died from cervical cancer; more than 85% of these deaths occurring in low- and middle-income countries.
As noted by the WHO, in developed countries, programs are in place that enable women to get screened, making most pre-cancerous lesions identifiable at stages when they can easily be treated. Early treatment prevents up to 80% of cervical cancers in these countries. In developing countries, however, limited access to effective screening means that the disease is often not identified until it is further advanced and symptoms develop. In addition, prospects for treatment of such late-stage disease may be poor, resulting in a higher rate of death from cervical cancer in these countries.
We believe that the greatest need and market opportunity for LuViva lies in screening for cervical cancer in developing countries where the infrastructure for traditional screening may be limited or non-existent.
We are actively working with distributors in the following countries to implement government-sponsored screening programs: Turkey, Indonesia, and Nigeria. The number of screening candidates in those countries is approximately 131 million and Indonesia and Nigeria represent 2 of the 10 most populous countries in the world.
The Developed World
The Pap test, which involves a sample of cervical tissue being placed on a slide and observed in a laboratory, is currently the most common form of cervical cancer screening. Since the introduction of screening and diagnostic methods, the number of cervical cancer deaths in the developed world has declined dramatically, due mainly to the increased use of the Pap test. However, the Pap test has a wide variation in sensitivity, which is the ability to detect the disease, and specificity, which is the ability to exclude false positives. A study by Duke University for the U.S. Agency for Health Care Policy and Research published in 1999 showed Pap test performance ranging from a 22%-95% sensitivity and 78%-10% specificity, although new technologies improving the sensitivity and specificity of the Pap test have recently been introduced and are finding acceptance in the marketplace. About 60 million Pap tests are given annually in the United States, at an average price of approximately $26 per test.
After a Pap test returns a positive result for cervical cancer, accepted protocol calls for a visual examination of the cervix using a colposcope, usually followed by a biopsy, or tissue sampling, at one or more locations on the cervix. This method looks for visual changes attributable to cancer. There are about two million colposcope examinations annually in the United States and Europe. In 2003, the average cost of a stand-alone colposcope examination in the United States was $185 and the average cost of a colposcopy with biopsy was $277.
Given this landscape, we believe that there is a material need and market opportunity for LuViva as a triage device in the developed world where LuViva represents a more cost-effective method of verifying a positive Pap test than the alternatives.
The LuViva Advanced Cervical Scan
LuViva is designed to identify cervical cancers and precancers painlessly, non-invasively and at the point of care by scanning the cervix with light, then analyzing the light reflected from the cervix. The information presented by the light would be used to indicate the likelihood of cervical cancer or precancers. Our product, in addition to detecting the structural changes attributed to cervical cancer, is also designed to detect the biochemical changes that precede the development of visual lesions. In this way, cervical cancer may be detected earlier in its development, which should increase the chances of effective treatment. In addition to the device itself, operation of LuViva requires employment of our single-use, disposable calibration and alignment cervical guide.
To date, thousands of women in multiple international clinical settings have been tested with LuViva. As a result, more than 25 papers and presentations have been published regarding LuViva in a clinical setting, including at the International Federation of Gynecology and Obstetrics Congress in London in 2015 and at the Indonesian National Obstetrics and Gynecology (POGI) Meeting in Solo in 2016.

Internationally, we contract with country-specific or regional distributors. We believe that the international market will be significantly larger than the U.S. market due to the international demand for cervical cancer screening. We have formal distribution agreements in place covering 54 countries and plan on adding additional countries in 2018.
We have previously obtained regulatory approval to sell LuViva in Europe under our Edition 3 CE Mark. Additionally, LuViva has also obtained marketing approval from Health Canada, COFEPRIS in Mexico, Ministry of Health in Kenya and the Singapore Health Sciences Authority. We currently are seeking regulatory approval to market LuViva in the United States, but have not yet received approval from the U.S. Food and Drug Administration (FDA). As of March 31, 2018, we have sold 138 LuViva devices and approximately 72,000 single-use-disposable cervical guides to international distributors.
We believe our non-invasive cervical cancer detection technology can be applied to the early detection of other cancers as well. From 2008 to early 2013, we worked with Konica Minolta to explore the feasibility of adapting our microporation and biophotonic cancer detection technology to other areas of medicine and to determine potential markets for these products in anticipation of a development agreement. In February 2013, we replaced our existing agreements with Konica Minolta with a new agreement, pursuant to which, subject to the payment of a nominal license fee due upon FDA approval, Konica Minolta has granted us a five-year, world-wide, non-transferable and non-exclusive right and license to manufacture and to develop a non-invasive esophageal cancer detection product from Konica Minolta and based on our biophotonic technology platform. The license permits us to use certain related intellectual property of Konica Minolta. In return for the license, we have agreed to pay Konica Minolta a royalty for each licensed product we sell. We continue to seek new collaborative partners to further develop our biophotonic technology.
Manufacturing, Sales Marketing and Distribution

We manufacture LuViva at our Norcross, Georgia facility. Most of the components of LuViva are custom made for us by third-party manufacturers. We adhere to ISO 13485:2003 quality standards in our manufacturing processes.

Our single-use cervical guides are manufactured by a vendor that specializes in injection molding of plastic medical products. On January 22, 2017, we entered into a license agreement with Shandong Yaohua Medical Instrument Corporation (“SMI”) pursuant to which we granted SMI an exclusive global license to manufacture the LuViva device and related disposables (subject to a carve-out for manufacture in Turkey).

We rely on distributors to sell our products. Distributors can be country exclusive or cover multiple countries in a region. We manage these distributors, provide them marketing materials and train them to demonstrate and operate LuViva. We seek distributors that have experience in gynecology and in introducing new technology into their assigned territories.
We have only limited experience in the production planning, quality system management, facility development, and production scaling that will be needed to bring production to increased sustained commercial levels. We will likely need to develop additional expertise in order to successfully manufacture, market, and distribute any future products.
Research, Development and Engineering

We have been engaged primarily in the research, development and testing of our LuViva non-invasive cervical cancer detection product and our core biophotonic technology. Since 2013, we have incurred about $7.0$7.5 million in research and development expenses, net of about $927,000 reimbursed through collaborative arrangements and government grants. Research and development costs were approximately $1.5 million$0.3 and $2.8$0.7 million in 20152017 and 2014, respectively

2016, respectively.

Since 2013, we have focused our research and development and our engineering resources almost exclusively on development of our biophotonic technology, with only limited support of other programs funded through government contracts or third-party funding. Because our research and clinical development programs for other cancers are at a very early stage, substantial additional research and development and clinical trials will be necessary before we can produce commercial prototypes of other cancer detection products.
Several of the components used in LuViva currently are available from only one supplier, and substitutes for these components could not be obtained easily or would require substantial modifications to our products.
Patents

We have pursued a course of developing and acquiring patents and patent rights and licensing technology. Our success depends in large part on our ability to establish and maintain the proprietary nature of our technology through the patent process and to license from othersother’s patents and patent applications necessary to develop our products. As of DecemberMarch 31, 2015,2018, we have 24 granted U.S. patents relating to our biophotonic cancer detection technology and six pending U.S. patent applications. We also have three granted patents that apply to our interstitial fluid analysis system.


Competition
The medical device industry in general and the markets for cervical cancer detection in particular, are intensely competitive. If successful in our product development, we will compete with other providers of cervical cancer detection and prevention products.
Current cervical cancer screening and diagnostic tests, primarily the Pap test, HPV test, and colposcopy, are well established and pervasive. Improvements and new technologies for cervical cancer detection and prevention, such as Thin-Prep from Hologic and HPV testing from Qiagen, have led to other new competitors. In addition, there are other companies attempting to develop products using forms of biophotonic technologies in cervical cancer detection, such as Spectrascience, which has a very limited U.S. FDA approval to market its device for detection of cervical cancers but has not yet entered the market. The approval limits use of the Spectrascience device only after a colposcopy, as an adjunct. In addition to the Spectrascience device, there are other technologies that are seeking to enter the market as adjuncts to colposcopy, including devices from Dysis and Zedco. While these technologies are not direct competitors to LuViva, modifications to them or other new technologies will require us to develop devices that are more accurate, easier to use or less costly to administer so that our products have a competitive advantage.
In April 2014, the U.S. FDA approved the use of the Roche cobas HPV test as a primary screener for cervical cancer. Using a sample of cervical cells, the cobas HPV test detects DNA from 14 high-risk HPV types. The test specifically identifies HPV 16 and HPV 18, while concurrently detecting 12 other types of high-risk HPVs. This could make HPV testing a competitor to the Pap test. However, due to its lower specificity, we believe that screening with HPV will increase the number of false positive results if widely adopted.
In June 2006, the U.S. FDA approved the HPV vaccine Gardasil from drug maker Merck. Gardasil is a prophylactic HPV vaccine, meaning that it is designed to prevent the initial establishment of HPV infections. For maximum efficacy, it is recommended that girls receive the vaccine prior to becoming sexually active. Since Gardasil will not block infection with all of the HPV types that can cause cervical cancer, the vaccine should not be considered a substitute for routine Pap tests. On October 16, 2009, GlaxoSmithKline PLC was granted approval in the United States for a similar preventive HPV vaccine, known as Cervarix. Due to the limited availability and lack of 100% protection against all potentially cancer-causing strains of HPV, we believe that the vaccines will have a limited impact on the cervical cancer screening and diagnostic market for many years.
Government Regulation
The medical devices that we manufacture are subject to regulation by numerous regulatory bodies, including the CFDA, the U.S. FDA, and comparable international regulatory agencies. These agencies require manufacturers of medical devices to comply with applicable laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of medical devices. Devices are generally subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation program be conducted before a device receives approval for commercial distribution.
In the European Union, medical devices are required to comply with the Medical Devices Directive and obtain CE Mark certification in order to market medical devices. The CE Mark certification, granted following approval from an independent “Notified Body,” is an international symbol of adherence to quality assurance standards and compliance with applicable European Medical Devices Directives. During 2017 we were unable to pay the annual registration fees to maintain our ISO 13485:2003 certification and our CE Mark. Once our financing is completed, we will make the required payments and reobtain both certifications.
China has a regulatory regime similar to that of the European Union, but due to interaction with the U.S. regulatory regime, the CFDA also shares some similarities with its U.S. counterpart. Devices are classified by the CFDA’s Center for Medical Device Evaluation (CMDE) into three categories based on medical risk, with the level of regulatory oversight determined by degree of risk and invasiveness. CMDE’s device classifications and definitions are as follows:
●
Class I device: The safety and effectiveness of the device can be ensured through routine administration.
●
Class II device: Further control is required to ensure the safety and effectiveness of the device.
●
Class III device: The device is implanted into the human body; used for life support or sustenance; or poses potential risk to the human body, and thus must be strictly controlled in respect to safety and effectiveness.
Based on the above definitions and several discussions with regulatory consultants and potential partners, we believe that LuViva is most likely to be classified as a Class II device, however, this is not certain and the CFDA may determine that LuViva requires a Class III registration. Class III registrations are granted by the national CFDA office while Class I and II registrations occur at the provincial level. Typically, registration granted at the provincial level allows a medical device to be marketed in all of China’s provinces.

While Class I devices usually do not require clinical trial data from Chinese patients and Class III devices almost always do, Class II medical devices sometimes do and sometimes do not require Chinese clinical trials, and this determination may depend on the claim for the device and quality of clinical trials conducted outside of China. If clinical trials conducted in China are required, they usually are less burdensome for Class II devices than Class III devices.
CFDA labs also conduct electrical, mechanical and electromagnetic emission safety testing for medical devices similar to those required for the CE Mark. As is the case with the U.S. FDA, manufacturers in China undergo periodic inspections and must comply with international quality standards such as ISO 13485 for medical devices. As part of our agreement with SMI, SMI will underwrite the cost of securing approval of LuViva with the CFDA.
In the United States, permission to distribute a new device generally can be met in one of two ways. The first process requires that a pre-market notification (510(k) Submission) be made to the U.S. FDA to demonstrate that the device is as safe and effective as, or substantially equivalent to, a legally marketed device that is not subject to premarket approval (PMA). A legally marketed device is a device that (1) was legally marketed prior to May 28, 1976, (2) has been reclassified from Class III to Class II or I, or (3) has been found to be substantially equivalent to another legally marketed device following a 510(k) Submission. The legally marketed device to which equivalence is drawn is known as the “predicate” device. Applicants must submit descriptive data and, when necessary, performance data to establish that the device is substantially equivalent to a predicate device. In some instances, data from human clinical studies must also be submitted in support of a 510(k) Submission. If so, these data must be collected in a manner that conforms with specific requirements in accordance with federal regulations. The U.S. FDA must issue an order finding substantial equivalence before commercial distribution can occur. Changes to existing devices covered by a 510(k) Submission which do not significantly affect safety or effectiveness can generally be made by us without additional 510(k) Submissions.
The second process requires that an application for premarket approval (PMA) be made to the U.S. FDA to demonstrate that the device is safe and effective for its intended use as manufactured. This approval process applies to most Class III devices, including LuViva. In this case, two steps of U.S. FDA approval are generally required before marketing in the United States can begin. First, investigational device exemption (IDE) regulations must be complied with in connection with any human clinical investigation of the device in the United States. Second, the U.S. FDA must review the PMA application, which contains, among other things, clinical information acquired under the IDE. The U.S. FDA will approve the PMA application if it finds that there is a reasonable assurance that the device is safe and effective for its intended purpose.
We completed enrollment in our U.S. FDA pivotal trial of LuViva in 2008 and, after the U.S. FDA requested two-years of follow-up data for patients enrolled in the study, the U.S. FDA accepted our completed PMA application on November 18, 2010, effective September 23, 2010, for substantive review. On March 7, 2011, we announced that the U.S. FDA had inspected two clinical trial sites and audited our clinical trial data base systems as part of its review process and raised no formal compliance issues. On January 20, 2012, we announced our intent to seek an independent panel review of our PMA application after receiving a “not-approvable” letter from the U.S. FDA. On November 14, 2012 we filed an amended PMA with the U.S. FDA. On September 6, 2013, we received a letter from the U.S. FDA with additional questions and met with the U.S. FDA on May 8, 2014 to discuss our response. On July 25, 2014, we announced that we had responded to the U.S. FDA’s most recent questions.
We received a “not-approvable” letter from the U.S. FDA on May 15, 2015. We had a follow up meeting with the U.S. FDA to discuss a path forward on November 30, 2015, at which we agreed to submit a detailed clinical protocol for U.S. FDA review so that additional studies can be completed. These studies will not be completed in 2018, although we intend to pursue FDA approval and start studies in 2018 once funds are available. We remain committed to obtaining U.S. FDA approval, but we are focused on international sales growth, where we believe the commercial opportunities are larger and the clinical need is more significant.
The process of obtaining clearance to market products is costly and time-consuming in virtually all of the major markets in which we sell, or expect to sell, our products and may delay the marketing and sale of our products. Countries around the world have recently adopted more stringent regulatory requirements, which are expected to add to the delays and uncertainties associated with new product releases, as well as the clinical and regulatory costs of supporting those releases. No assurance can be given that our products will be approved on a timely basis in any particular jurisdiction, if at all. In addition, regulations regarding the development, manufacture and sale of medical devices are subject to future change. We cannot predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
Noncompliance with applicable requirements can result in import detentions, fines, civil penalties, injunctions, suspensions or losses of regulatory approvals or clearances, recall or seizure of products, operating restrictions, denial of export applications, governmental prohibitions on entering into supply contracts, and criminal prosecution. Failure to obtain regulatory approvals or the restriction, suspension or revocation of regulatory approvals or clearances, as well as any other failure to comply with regulatory requirements, would have a material adverse effect on our business, financial condition and results of operations.

Regulatory approvals and clearances, if granted, may include significant labeling limitations and limitations on the indicated uses for which the product may be marketed. In addition, to obtain regulatory approvals and clearances, the U.S. FDA and some foreign regulatory authorities impose numerous other requirements with which medical device manufacturers must comply. U.S. FDA enforcement policy strictly prohibits the marketing of approved medical devices for unapproved uses. Any products we manufacture or distribute under U.S. FDA clearances or approvals are subject to pervasive and continuing regulation by the U.S. FDA. The U.S. FDA also requires us to provide it with information on death and serious injuries alleged to have been associated with the use of our products, as well as any malfunctions that would likely cause or contribute to death or serious injury.
The U.S. FDA requires us to register as a medical device manufacturer and list our products. We are also subject to inspections by the U.S. FDA and state agencies acting under contract with the U.S. FDA to confirm compliance with good manufacturing practice. These regulations require that we manufacture our products and maintain documents in a prescribed manner with respect to manufacturing, testing, quality assurance and quality control activities. The U.S. FDA also has promulgated final regulatory changes to these regulations that require, among other things, design controls and maintenance of service records. These changes will increase the cost of complying with good manufacturing practice requirements.
Distributors of medical devices may also be required to comply with other foreign regulatory agencies, and we or our distributors currently have marketing approval for LuViva from Health Canada, COFEPRIS in Mexico, the Ministry of Health in Kenya, and the Singapore Health Sciences Authority. The time required to obtain these foreign approvals to market our products may be longer or shorter than that required in China or the United States, and requirements for those approvals may differ from those required by the CFDA or the U.S. FDA.
We are also subject to a variety of other controls that affect our business. Labeling and promotional activities are subject to scrutiny by the U.S. FDA and, in some instances, by the U.S. Federal Trade Commission. The U.S. FDA actively enforces regulations prohibiting marketing of products for unapproved users. We are also subject, as are our products, to a variety of state and local laws and regulations in those states and localities where our products are or will be marketed. Any applicable state or local regulations may hinder our ability to market our products in those regions. Manufacturers are also subject to numerous federal, state and local laws relating to matters such as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may be required to incur significant costs to comply with these laws and regulations now or in the future. These laws or regulations may have a material adverse effect on our ability to do business.
Although our marketing and distribution partners around the world assist in the regulatory approval process, ultimately, we are be responsible for obtaining and maintaining regulatory approvals for our products. The inability or failure to comply with the varying regulations or the imposition of new regulations would materially adversely affect our business, financial condition and results of operations.
Employees and Consultants
As of March 31, 2018, we had nine regular employees and one consultant to provide services to us on a full- or part-time basis. Of the ten-people employed or engaged by us, 2 are engaged in engineering, manufacturing and development, 4 are engaged in sales and marketing activities, 1 is engaged in clinical testing and regulatory affairs, and 3 are engaged in administration and accounting. No employees are covered by collective bargaining agreements, and we believe we maintain good relations with our employees.
Our ability to operate successfully and manage our potential future growth depends in significant part upon the continued service of key scientific, technical, managerial and finance personnel, and our ability to attract and retain additional highly qualified personnel in these fields. Two of these key employees have an employment contract with us; none are covered by key person or similar insurance. In addition, if we are able to successfully develop and commercialize our products, we likely will need to hire additional scientific, technical, marketing, managerial and finance personnel. We face intense competition for qualified personnel in these areas, many of whom are often subject to competing employment offers. The loss of key personnel or our inability to hire and retain additional qualified personnel in the future could have a material adverse effect on our business, financial condition and results of operations.
Corporate History
We are a Delaware corporation, originally incorporated in 1992 under the name “SpectRx, Inc.,” and, on February 22, 2008, changed our name to Guided Therapeutics, Inc. At the same time, we renamed our wholly owned subsidiary, InterScan, which originally had been incorporated as “Guided Therapeutics.”

 

Since our inception, we have raised capital through the public and private sale of debt and equity, funding from collaborative arrangements, and grants.

Our 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. We have experienced operating losses since our inception and, as of March 31, 2016 we have an accumulated deficit of about $122.9 million. To date, we have engaged primarily in research and development efforts and the early stages of marketing our products. We do not have significant experience in manufacturing, marketing or selling our products. We may not be successful in growing sales for our products. Moreover, required regulatory clearances or approvals may not be obtained in a timely manner, or at all. Our products may not ever gain market acceptance and we may not ever generate significant revenues or achieve profitability. The development and commercialization of our products requires substantial development, regulatory, sales and marketing, manufacturing and other expenditures. We expect our operating losses to continue through at least the end of 2016 as we continue to expend substantial resources to complete commercialization of our products, obtain regulatory clearances or approvals, build our marketing, sales, manufacturing and finance capabilities, and conduct further research and development.

Our product revenues to date have been limited. In 2015 and 2014, the majority of our revenues were from the sale of LuViva devices and disposables, as well as some revenue from grants from the NIH and licensing agreement fees received. We expect that the majority of our revenue in 2016 will be derived from revenue from the sale of LuViva devices and disposables.

Our principal executive and operations facility is located at 5835 Peachtree Corners East, Suite D,B, Norcross, Georgia 30092, and our telephone number is (770) 242-8723.

Recent Developments

Reverse Stock Split. On May 18, 2016, our board determined to recommend that at our 2016 annual stockholders’ meeting, our stockholders grant the board the authority, in its discretion, to effect a reverse stock split by a ratio of not less than 1:10


GHS Equity Financing Agreement and not more than 1:400, with no change in the number of authorized shares of our common stock, and all fractional shares created by the reverse stock split to be rounded to the nearest whole share. On May 26, 2016, our largest stockholder, John Imhoff, who is also one of our directors, agreed to vote his shares of common stock in favorRegistration Rights Agreement
 Summary of the reverse stock split. As of the record date for the 2016 annual meeting, Dr. Imhoff held approximately 19.26% of the outstanding shares of common stock. The reverse stock split will not be effective unless and until the board files an amendment to our certificate of incorporation, which must occur prior to the first anniversary of the 2016 annual meeting. It is our intent to effect the reverse stock split prior to the closing of this offering.

Warrant Restructuring.Between June 13, 2016 and June 14, 2016, we entered into various agreements with holders of certain warrants (including John Imhoff, the chairman of our board of directors) originally issued in May 2013, and with GPB Debt Holdings II LLC, holder of a warrant issued February 12, 2016, pursuant to which each holder separately agreed to exchange warrants for either (1) shares of common stock equal to 166% of the number of shares of common stock underlying the surrendered warrants, or (2) new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered warrants. As a result of the exchanges, we effectively eliminate any potential exponential increase in the number of underlying shares issuable upon exercise of our outstanding warrants. In total, for surrendered warrants then-exercisable for an aggregate of 115,237,788 shares of common stock (but subject to exponential increase upon operation of certain anti-dilution provisions), we issued or are obligated to issue 13,517,342 shares of common stock and new warrants that, if exercised as of June 14, 2016, would be exercisable for an aggregate of 214,189,622 shares of common stock.

In certain circumstances, in lieu of presently issuing all of the shares (for each holder that opted for shares of common stock), we and the holder further agreed that we will, subject to the terms and conditions set forth in the applicable warrant exchange agreement, from time to time, be obligated to issue the remaining shares to the holder. No additional consideration will be payable in connection with the issuance of the remaining shares.

The holders that elected to receive shares for their surrendered warrants have agreed that they will not sell shares on any trading day in an amount, in the aggregate, exceeding 20% of the composite aggregate trading volume of the common stock for that trading day. The holders that elected to receive new warrants will be required to surrender their old warrants upon consummation of this offering. The new warrants will have an initial exercise price equal to the exercise price of the surrendered warrants as of immediately prior to consummation of this offering, subject to customary “downside price protection” for as long as our common stock is not listed on a national securities exchange, and will expire five years from the date of issuance.

Offering
Shares currently outstanding:211,291,990
  2 

Shenghuo License Agreement.On June 5, 2016, we entered into a license agreement with Shenghuo Medical, LLC pursuant to which we 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 our exclusive distributor in China, Macau and Hong Kong, and the license extends to manufacturing in those countries as well. Under the terms of the license agreement, once Shenghuo is capable of manufacturing LuViva in accordance with ISO 13485 for medical devices, Shenghuo will pay us 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 will underwrite the cost of securing approval of LuViva with Chinese Food and Drug Administration. At its option, Shenghuo also will provide up to $1.0 million in furtherance of our 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 our future sales in the United States, up to an aggregate of $4.0 million.

Pursuant to the license agreement, Shenghuo has the option, after our next annual meeting of stockholders, to have a designee appointed to our board of directors.

As partial consideration for, and as a condition to, the license, and to further align the strategic interests of the parties, we have agreed to issue a convertible note to Shenghuo, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment to Shenghuo of $240,000, due upon consummation of any capital raising transaction by us within 90 days and with net cash proceeds of at least $1.0 million. Absent such a transaction, the payment will increase to $300,000 and will be payable by December 31, 2016. The note will accrue interest at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares of our common stock at a conversion price per share of $0.017402, subject to customary anti-dilution adjustment. The note will be unsecured, and is expected to provide for customary events of default. We will also issue Shenghuo a five-year warrant exercisable immediately for approximately 13.8 million shares of common stock at an exercise price equal to the conversion price of the note, subject to customary anti-dilution adjustment.

Short Term Promissory Notes.On May 4, 2016 and May 26, 2016, Aquarius Opportunity Fund advanced us a total of $87,500 for 2% simple interest notes due the earlier of December 31, 2016 or consummation of this offering. Also on May 26, 2016, GPB Debt Holdings II LLC, holder of our outstanding senior secured convertible note, advanced as an additional $87,500, on the same terms as their note. We intend to offer each of them the opportunity to participate in the offering at least up to the extent of the outstanding principal and interest on these cash advances, by extinguishing all or a portion of the debt on a dollar-for-dollar basis.

Series C Exchanges.Between April 27, 2016 and May 3, 2016, we entered into various agreements with certain holders of our Series C preferred stock, including John Imhoff, one of our directors, pursuant to which those holders separately agreed to exchange each share of Series C preferred stock held for 2.25 shares of our newly created Series C1 preferred stock and 9,600 shares of our common stock. In connection with these exchanges, each holder also agreed to exchange the $1,000 stated value per share of the holder’s shares of Series C1 preferred stock for new securities that we issue in the next qualifying financing we undertake on a dollar-for-dollar basis. We expect this offering will be a qualifying financing. Finally, each holder agreed, except in the event of an additional $50,000 cash investment in the financing by the holder, to execute a customary “lockup” agreement in connection with the qualifying financing. In total, for 1,916 shares of Series C preferred stock surrendered, we issued 4,311 shares of Series C1 preferred stock and 18,396,800 shares of common stock.

The Series C1 preferred stock has terms that are substantially the same as the Series C preferred stock, except that the Series C1 preferred stock does not pay dividends (unless and to the extent declared on the common stock) or at-the-market “make-whole payments.” See “Description of Securities” for a description of the material terms of the Series C1 preferred stock.

Separately, on April 27, 2016, we entered into a rollover and amendment agreement with another holder of Series C preferred stock, Aquarius Opportunity Fund, pursuant to which Aquarius agreed to exchange any shares of Series C preferred stock (stated value plus make-whole dividend), as well as any remaining principal and accrued interest on our convertible promissory note Aquarius holds, for new securities that we issue in our next financing, all on a dollar-for-dollar basis, as long as the next financing involves at least $1 million in cash from investors unaffiliated with Aquarius. We expect this offering will be a qualifying financing. Aquarius also agreed to return to us for cancelation warrants exercisable for 722,211 shares of our common stock that it held. Except in the event of an additional $50,000 cash investment by Aquarius in the qualifying financing, Aquarius has agreed to execute a customary “lockup” agreement in connection with the financing. Finally, Aquarius, as the holder of a majority of the outstanding Series C preferred stock, agreed to amend the Series C stock purchase agreement to eliminate any participation rights held by the Series C shareholders and to waive operation of certain anti-dilution provisions of the Series C that would otherwise be triggered by the transactions described in “—Recent Developments.”

Shares being offered:70,000,000
  3 

The Offering

IssuerGuided Therapeutics, Inc.
Securities offeredUp to 5,000 shares of Series D preferred stock and warrants exercisable for an aggregate of ____________ shares of our common stock. Each share of Series D preferred stock will be accompanied by a warrant to purchase _____ of a share of common stock. The shares of Series D preferred stock and the warrants are immediately separable and will be issued separately, but will be purchased together in this offering. This prospectus also covers the shares of common stock issuable upon conversion of the Series D preferred stock and upon the exercise of the warrants.
Offering pricePrice per share:$1,000 combined price for each shareThe selling stockholders may sell all or a portion of Series D preferred stockthe shares being offered pursuant to this prospectus at fixed prices and accompanying warrantprevailing market prices at the time of sale, at varying prices or at negotiated prices.
Description
Use of Series D preferred stockProceeds:Series D preferred stock has a liquidation preference senior to our common stock but junior to our Series C preferred stock, is convertible atWe will not receive any proceeds from the optionsale of the holder (subject to certain ownership limitations) into shares of our common stock at a conversion priceby the selling stockholder. However, we will receive proceeds from our initial sale of $_____ per share, subjectshares to anti-dilution adjustment, and is redeemable under certain circumstances at our option. See “DescriptionGHS, pursuant to the Financing Agreement. The proceeds from the initial sale of Securities We Are Offering—Series D Preferred Stock” on page 20 .
Shares of common stock underlying the shares of Series D preferred stock
____________ shares*
Description of warrantsThe warrants will be immediately exercisable upon issuance (subject to certain ownership limitations) at an exercise price per share equal to $______ (__% of the closing bid price preceding pricing of the offering). The warrants will expire five years after the date of issuance. See “Description of Securities We Are Offering—Warrants” on page 20.
Shares of common stock underlying the warrants
____________ shares*
Shares of common stock outstanding before this offering
67,901,547 shares.* See “Dilution” on page 15.
Common stock to be outstanding after this offering
____________ shares, assuming all shares of Series D preferred stock are sold.* See “Dilution” on page 15.
Use of proceedsWe intend to apply any proceeds received in connection with the offering to increase inventory of LuViva to meet current demandused for the product, and to support generalpurpose of working capital and operations. However, we will retain broad discretion over the use of the net proceeds and may use the money for other corporate purposes. See “Use of Proceeds” on page 15.potential acquisitions.
Market for the common stockOur common stock is quoted on the OTCQB marketplace under the symbol “GTHP.” See “Market for Our Common Stock and Related Stockholder Matters” on page 34.
OTC Markets Symbol:GTHP
Risk factorsFactors:You should readSee “Risk Factors” beginning on page 515 and the other information in this prospectus for an explanationa discussion of the risksfactors you should consider before deciding to invest in shares of investing in this offering.
*Share numbers are based on an assumed conversion or exercise price per share of the Series D preferred stock of $0.01, which was the last reported sale price for our common stock on June 15, 2016 and, with regard to shares outstanding, are as of such date, and exclude:
·104,356 shares of common stock reserved for future issuance under our 1995 Stock Plan;
·433,385,611 shares of common stock reserved for issuance upon conversion of, or issuance as dividends on, our Series C and Series C1 convertible preferred stock, which we assume will be exchanged for shares of Series D preferred stock and warrants as part of this offering;
·151,583,843 shares reserved for issuance upon conversion of our outstanding convertible debt;
·233,615,051 shares of common stock issuable upon the exercise of outstanding warrants or warrants to be exchanged for outstanding warrants
·5,205,101 shares reserved for issuance pursuant to contractual obligations; and
·up to ______ shares of common stock issuable upon exercise of warrants sold as part of this offering, including up to ______ shares of common stock issuable upon exercise of warrants to be issued to the placement agent.

 4stock.
 

Financial Summary
The tables and information below are derived from our audited consolidated financial statements for the 12 months ended December 31, 2017 and the 12 months ended December 31, 2016 and three months ended March 31, 2018 and 2017.
 
 
Year Ended
March 31,
2018
 
 
Year Ended
December 31,
2017
 
 
Year Ended
December 31,
2016
 
 
 
 
 
 
 
 
 
 
 
Cash
 $76 
 $1 
 $14 
Total Assets
  527 
  489 
  1,492 
Total Liabilities
  18,465 
  19,891 
  10,758 
Total Stockholder’s Equity (Deficit)
  (17,938)
  (19,402)
  (9,266)
Statement of Operations
 
Three Months
Ended
March 31,
2018
Three Months Ended
March 31,
2017
 
Year Ended
December 31,
2017
Year Ended
December 31,
2016
 
 
 
 
 
 
 
 
 
 
 
       
 
Revenue
  4 
  21 
  244 
  605 
Total Expenses
  380 
  535 
  3,365 
  4,425 
Total Other income (expense)
  1,458 
  407 
  (7,575)
  (150)
Net Income (Loss) for the Period
  1,082 
  (107)
  (10,696)
  (3,970)
Net Loss per Share
  0.012 
  (0.22)
  (1.29)
  (24.62)

RISK FACTORS

Your

This investment in shareshas a high degree of our common stock involves substantial risks. In consultation with your own advisers,risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.
Special Information Regarding Forward-Looking Statements
Some of the statements in this prospectus are “forward-looking statements.” These forward-looking statements involve certain known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other matters,others, the factors set forth below before deciding whether an investment in sharesherein under “Risk Factors.” The words “believe,” “expect,” “anticipate,” “intend,” “plan,” and similar expressions identify forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update and revise any forward-looking statements or to publicly announce the result of our common stock is suitable for you. Ifany revisions to any of the risks contained in this prospectus develop into actual events, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected, the market price of our common stock could decline and you may lose all or part of your investment. Someforward-looking statements in this prospectus, including statements indocument to reflect any future or developments. However, the following risk factors, constitute forward-looking statements. See “Forward-Looking Statements” in this prospectus.

Risks RelatedPrivate Securities Litigation Reform Act of 1995 is not available to this Offering

As a new investor, you will incur substantial dilutionus as a result of this offering and future equity issuances.

Our net tangible book value deficiency as of March 31, 2016 was approximately $7.3 million, or $1.37 per share of common stock. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. On a pro form basis after giving effect to the assumed sale of 5,000 shares of Series D preferred stock in this offering at a public offering price of $1,000 per share, and assuming the conversion of all the shares of Series D preferred stock sold in the offering at an assumed conversion price of $0.01 per share, which was the last reported sale price of our common stock on June 15, 2016 (and excluding shares of common stock issuable upon exercisenon- reporting issuer. Further, Section 27A(b)(2)(D) of the warrants),Securities Act and after deducting estimated placement agent fees and estimated offering expenses payable by us, if you purchase securities in this offering, you will suffer immediate and substantial dilution of approximately $0.006 per share in the net tangible book valueSection 21E(b)(2)(D) of the common stock underlyingSecurities Exchange Act expressly state that the Series D preferred stock that you acquire. See “Dilution”safe harbor for a more detailed discussion of the dilution you will incur if you participateforward looking statements does not apply to statements made in thisconnection with an initial public offering. In addition to this offering, subject to market conditions and other factors, it is likely that we will pursue additional capital to finance our operations. Accordingly, we may conduct substantial future offerings of equity securities. The exercise of outstanding options and warrants and future equity issuances, including future public offerings or future private placements of equity securities, would result in further dilution to investors.

The actual offering amount, the offering price and the net proceeds to us, if any, in this offering may be substantially less than the amounts set forth above.

Because there is no minimum offering amount or offering price required as a condition to closing in this offering, the actual public offering amount, offering price and net proceeds to us, if any, in this offering are not presently determinable and may be substantially less than the amounts set forth above. We are not required to sell any specific number or dollar amount of the securities offered in this offering, but the placement agent will use its best efforts to sell the securities offered.

Sales of a significant number of shares of our common stock in the public markets, or the perception that such sales could occur, could depress the market price of our common stock.

If our stockholders (including those persons who may become stockholders upon conversion of outstanding convertible securities or exercise of outstanding warrants or options) sell substantial amounts of our common stock, or the public market perceives that stockholders might sell substantial amounts of our common stock, the market price of our common stock could decline significantly. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that our management deems appropriate.

We will have broad discretion over the use of the proceeds of this offering and may not realize a return.

We will have considerable discretion in the application of the net cash proceeds of this offering. We intend to use the net cash proceeds to increase inventory of LuViva to meet current demand for the product, and to support general working capital and operations. However, we will retain broad discretion over the use of the net proceeds and may use the money for other corporate purposes. We may use the net cash proceeds for purposes that do not yield a significant return, if any, for our stockholders.

There is no public market for the Series D preferred stock or warrants being offered in this offering.

There is no established public trading market for the Series D preferred stock or warrants being offered in this offering. We do not expect a market to develop for the Series D preferred stock or the warrants. In addition, we do not intend to apply for listing of the Series D preferred stock or warrants on any securities exchange or expect the Series D preferred stock to trade on the OTCQB marketplace, although we will use our best efforts to have the warrants quoted on the OTCQB marketplace on or before the closing. Without an active market, the liquidity of the Series D preferred stock and warrants will be limited.

 5
 

Risks Related to Our Business

Although we arewill be required to raise additional funds in this offering in order to continue as a going concern,2018, there is no assurance that such funds can be raised on terms that we would find acceptable, on a timely basis, or at all.

Additional debt or equity financing iswill be required for us to continue as a going concern. If this offering is unsuccessful or insufficient, weWe may seek to obtain additional funds for the financing of our cervical cancer detection business through additional debt or equity financings and/or new collaborative arrangements. Management believes that additional financing, if obtainable, will be sufficient to support planned operations only for a limited period. Management has implemented operating actions to reduce cash requirements. Any required additional funding may not be available on terms attractive to us, on a timely basis, or at all.

If we cannot obtain additional funds or achieve profitability, we may not be able to continue as a going concern.

Because we must obtain additional funds through financing transactions or through new collaborative arrangements in order to grow the revenues of our cervical cancer detection product line, there exists substantial doubt about our ability to continue as a going concern. Therefore, it will be necessary to raise additional funds. There can be no assurance that we will be able to raise these additional funds. If we do not secure additional funding when needed, we will be unable to conduct all of our product development efforts as planned, which may cause us to alter our business plan in relation to the development of our products. Even if we obtain additional funding, we will need to achieve profitability thereafter.

Our independent registered public accountants’ report on our consolidated financial statements as of and for the year ended December 31, 2015,2017, indicated that there was substantial doubt about our ability to continue as a going concern because we had suffered recurring losses from operations and had an accumulated deficit of $122.6$137.5 million at December 31, 2015. At March 31, 2016, we had an accumulated deficit of 122.9 million,2018 summarized as follows:

Accumulated deficit, from inception to 12/31/20132015$103.0122.6 million
Preferred dividends$0.21.0 million
Net Loss for fiscal year 2014,2016, ended 12/31/20142016$9.94.0 million
Accumulated deficit, from inception to 12/31/20142016$113.1127.6 million
Preferred dividends and deemed dividends$2.60.2 million
Net Loss for fiscal year 2015,to date ended 12/31/20152017$6.910.9 million
Accumulated deficit, from inception to 12/31/20152017$138.5 million
Preferred dividends122.6$0.1 million
Net Income for yearquarter to date ended 3/31/20162018$0.1(1.1) million
Accumulated deficit, from inception to 3/31/20162018$122.9137.5 million


Our management has implemented reductions in operating expenditures and reductions in some development activities. We have determined to make cervical cancer detection the focus of our business. We are managing the development of our other programs only when funds are made available to us via grants or contracts with government entities or strategic partners. However, there can be no assurance that we will be able to successfully implement or continue these plans.

If we cannot obtain additional funds when needed, we will not be able to implement our business plan.

We require substantial additional capital to develop our products, including completing product testing and clinical trials, obtaining all required regulatory approvals and clearances, beginning and scaling up manufacturing, and marketing our products. We have historically financed our operations though the public and private sale of debt and equity, funding from collaborative arrangements, and grants. Any failure to achieve adequate funding in a timely fashion would delay our development programs and could lead to abandonment of our business plan. To the extent we cannot obtain additional funding, our ability to continue to manufacture and sell our current products, or develop and introduce new products to market, will be limited. Further, financing our operations through the public or private sale of debt or equity may involve restrictive covenants or other provisions that could limit how we conduct our business or finance our operations. Financing our operations through collaborative arrangements generally means that the obligations of the collaborative partner to fund our expenditures are largely discretionary and depend on a number of factors, including our ability to meet specified milestones in the development and testing of the relevant product. We may not be able to obtain an acceptable collaboration partner, and even if we do, we may not be able to meet these milestones, or the collaborative partner may not continue to fund our expenditures.

We do not have a long operating history, especially in the cancer detection field, which makes it difficult to evaluate our business.

Although we have been in existence since 1992, we have only recently begun to commercialize our cervical cancer detection technology. Because limited historical information is available on our revenue trends and manufacturing costs, it is difficult to evaluate our business. Our prospects must be considered in light of the substantial risks, expenses, uncertainties and difficulties encountered by entrants into the medical device industry, which is characterized by increasing intense competition and a high failure rate.

 6
 

We have a history of losses, and we expect losses to continue.

We have never been profitable and we have had operating losses since our inception. We expect our operating losses to continue as we continue to expend substantial resources to complete commercialization of our products, obtain regulatory clearances or approvals,approvals; build our marketing, sales, manufacturing and finance capabilities, and conduct further research and development. The further development and commercialization of our products will require substantial development, regulatory, sales and marketing, manufacturing and other expenditures. We have only generated limited revenues from product sales. Our accumulated deficit was approximately $122.9$137.5 million at March 31, 2016.

2018.

We are currently delinquent with our federal and applicable state tax returns filings. Some of the federal income tax returns are currently under examination by the U.S. Internal Revenue Service (“IRS”). Therefore, we may incur additional taxes and costs. At this time, we are not yet able to determine whether or not such additional taxes or costs would have a material adverse effect on the company or our net operating losses, as discussed below.
Although we have been experiencing recurring losses, we are obligated to file tax returns for compliance with IRS regulations and that of applicable state jurisdictions. At March 31, 2018 and December 31, 2017, the Company has approximately $82.9 million of net operating losses.. This net operating loss will be eligible to be carried forward for tax purposes at federal and applicable states level, but the use of such net operating losses may be subject to restrictions under applicable tax law. A full valuation allowance has been recorded related to the deferred tax assets generated from the net operating losses.
Our ability to sell our products is controlled by government regulations, and we may not be able to obtain any necessary clearances or approvals.

��
The design, manufacturing, labeling, distribution and marketing of medical device products are subject to extensive and rigorous government regulation in most of the markets in which we sell, or plan to sell, our products, which can be expensive and uncertain and can cause lengthy delays before we can begin selling our products in those markets.


In foreign countries, including European countries, we are subject to government regulation, which could delay or prevent our ability to sell our products in those jurisdictions.

In order for us to market our products in Europe and some other international jurisdictions, we and our distributors and agents must obtain required regulatory registrations or approvals. We must also comply with extensive regulations regarding safety, efficacy and quality in those jurisdictions. We may not be able to obtain the required regulatory registrations or approvals, or we may be required to incur significant costs in obtaining or maintaining any regulatory registrations or approvals we receive. Delays in obtaining any registrations or approvals required for marketing our products, failure to receive these registrations or approvals, or future loss of previously obtained registrations or approvals would limit our ability to sell our products internationally. For example, international regulatory bodies have adopted various regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. These regulations vary from country to country. In order to sell our products in Europe, in 2018 we must maintainundergo an inspection and re-file for ISO 13485:2003 certification and the CE mark certification,Mark, which is an international symbol of quality and compliance with applicable European medical device directives. Failure to maintain ISO 13485:2003 certification or CE mark certification or other international regulatory approvals would prevent us from selling in some countries in the European Union.

In the United States, we are subject to regulation by the U.S. FDA, which could prevent our ability to sellus from selling our products domestically.

In order for us to market our products in the United States, we must obtain clearance or approval from the U.S. Food and Drug Administration, or U.S. FDA. We cannot be sure that:

·we, or any collaborative partner, will make timely filings with the FDA;
·the FDA will act favorably or quickly on these submissions;
·we will not be required to submit additional information or perform additional clinical studies; or
·we will not face other significant difficulties and costs necessary to obtain FDA clearance or approval.

●
we, or any collaborative partner, will make timely filings with the U.S. FDA;
●
the U.S. FDA will act favorably or quickly on these submissions;
●
we will not be required to submit additional information or perform additional clinical studies; or
●
we will not face other significant difficulties and costs necessary to obtain U.S. FDA clearance or approval.
It can take several years from initial filing of a PMA application and require the submission of extensive supporting data and clinical information. The U.S. FDA may impose strict labeling or other requirements as a condition of its clearance or approval, any of which could limit our ability to market our products domestically. Further, if we wish to modify a product after U.S. FDA approval of a PMA application, including changes in indications or other modifications that could affect safety and efficacy, additional clearances or approvals will be required from the U.S. FDA. Any request by the U.S. FDA for additional data, or any requirement by the U.S. FDA that we conduct additional clinical studies, could result in a significant delay in bringing our products to market domestically and require substantial additional research and other expenditures. Similarly, any labeling or other conditions or restrictions imposed by the U.S. FDA could hinder our ability to effectively market our products domestically. Further, there may be new U.S. FDA policies or changes in U.S. FDA policies that could be adverse to us.

Even if we obtain clearance or approval to sell our products, we are subject to ongoing requirements and inspections that could lead to the restriction, suspension or revocation of our clearance.

We, as well as any potential collaborative partners, will be required to adhere to applicable regulations in the markets in which we operate and sell our products, regarding good manufacturing practice, which include testing, control, and documentation requirements. Ongoing compliance with good manufacturing practice and other applicable regulatory requirements will be strictly enforced applicable regulatory agencies. Failure to comply with these regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure to obtain premarket clearance or premarket approval for devices, withdrawal of approvals previously obtained, and criminal prosecution. The restriction, suspension or revocation of regulatory approvals or any other failure to comply with regulatory requirements would limit our ability to operate and could increase our costs.

 7
 

We depend on a limited number of customersdistributors and any reduction, delay or cancellation of an order from these customersdistributors or the loss of any of these customersdistributors could cause our revenue to decline.

Each year we have had one or a few customersdistributors that have accounted for substantially all of our limited revenues. As a result, the termination of a purchase order with any one of these customersdistributors may result in the loss of substantially all of our revenues. We are constantly working to develop new relationships with existing or new customers,distributors, but despite these efforts we may not be successful at generating new orders to maintain similar revenues as current purchase orders are filled. In addition, since a significant portion of our revenues is derived from a relatively few customers,distributors, any financial difficulties experienced by any one of these customers,distributors, or any delay in receiving payments from any one of these customers,distributors, could have a material adverse effect on our business, results of operations, financial condition and cash flows.


To successfully market and sell our products internationally, we must address many issues with which we have limited experience.

All of our sales of LuViva to date have been to customersdistributors outside of the United States. We expect that substantially all of our business will continue to come from sales in foreign markets, through increased penetration in countries where we currently sell LuViva, combined with expansion into new international markets. However, international sales are subject to a number of risks, including:

●
difficulties in staffing and managing international operations;

●
difficulties in penetrating markets in which our competitors’ products may be more established;

●
reduced or no protection for intellectual property rights in some countries;

●
export restrictions, trade regulations and foreign tax laws;

●
fluctuating foreign currency exchange rates;

●
foreign certification and regulatory clearance or approval requirements;

●
difficulties in developing effective marketing campaigns for unfamiliar, foreign countries;

●
customs clearance and shipping delays;

●
political and economic instability; and

●
preference for locally produced products.

If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the situation, and even if we are able to find a solution, our revenues may still decline.

To market and sell LuViva internationally, we depend on distributors and they may not be successful.

We currently depend almost exclusively on third-party distributors to sell and service LuViva internationally and to train our international customers,distributors, and if these distributors terminate their relationships with us or under-perform, we may be unable to maintain or increase our level of international revenue. We will also need to engage additional international distributors to grow our business and expand the territories in which we sell LuViva. Distributors may not commit the necessary resources to market, sell and service LuViva to the level of our expectations. If current or future distributors do not perform adequately, or if we are unable to engage distributors in particular geographic areas, our revenue from international operations will be adversely affected

Our success largely depends on our ability to maintain and protect the proprietary information on which we base our products.

Our success depends in large part upon our ability to maintain and protect the proprietary nature of our technology through the patent process, as well as our ability to license from others patents and patent applications necessary to develop our products. If any of our patents are successfully challenged, invalidated or circumvented, or our right or ability to manufacture our products was to be limited, our ability to continue to manufacture and market our products could be adversely affected. In addition to patents, we rely on trade secrets and proprietary know-how, which we seek to protect, in part, through confidentiality and proprietary information agreements. The other parties to these agreements may breach these provisions, and we may not have adequate remedies for any breach. Additionally, our trade secrets could otherwise become known to or be independently developed by competitors.

 8
 

As of March 31, 2016,2018, we have been issued, or have rights to, 24 U.S. patents (including those under license). In addition, we have filed for, or have rights to, six U.S. patents (including those under license) that are still pending. There are additional international patents and pending applications. One or more of the patents we hold directly or license from third parties, including those for our cervical cancer detection products, may be successfully challenged, invalidated or circumvented, or we may otherwise be unable to rely on these patents. These risks are also present for the process we use or will use for manufacturing our products. In addition, our competitors, many of whom have substantial resources and have made substantial investments in competing technologies, may apply for and obtain patents that prevent, limit or interfere with our ability to make, use and sell our products, either in the United States or in international markets.

The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. In addition, the U.S. Patent and Trademark Office, or USPTO, may institute interference proceedings. The defense and prosecution of intellectual property suits, USPTO proceedings and related legal and administrative proceedings are both costly and time consuming. Moreover, we may need to litigate to enforce our patents, to protect our trade secrets or know-how, or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceedings involving us may require us to incur substantial legal and other fees and expenses and may require some of our employees to devote all or a substantial portion of their time to the proceedings. An adverse determination in the proceedings could subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from selling our products in some or all markets. We may not be able to reach a satisfactory settlement of any dispute by licensing necessary patents or other intellectual property. Even if we reached a settlement, the settlement process may be expensive and time consuming, and the terms of the settlement may require us to pay substantial royalties. An adverse determination in a judicial or administrative proceeding or the failure to obtain a necessary license could prevent us from manufacturing and selling our products.


We may not be able to generate sufficient sales revenues to sustain our growth and strategy plans.

Our cervical cancer diagnostic activities have been financed to date through a combination of government grants, strategic partners and direct investment. Growing revenues for this product is the main focus of our business. In order to effectively market the cervical cancer detection product, additional capital will be needed.

Additional product lines involve the modification of the cervical cancer detection technology for use in other cancers. These product lines are only in the earliest stages of research and development and are currently not projected to reach market for several years. Our goal is to receive enough funding from government grants and contracts, as well as payments from strategic partners, to fund development of these product lines without diverting funds or other necessary resources from the cervical cancer program.

Because our products, which use different technology or apply technology in different ways than other medical devices, are or will be new to the market, we may not be successful in launching our products and our operations and growth would be adversely affected.

Our products are based on new methods of cancer detection. If our products do not achieve significant market acceptance, our sales will be limited and our financial condition may suffer. Physicians and individuals may not recommend or use our products unless they determine that these products are an attractive alternative to current tests that have a long history of safe and effective use. To date, our products have been used by only a limited number of people, and few independent studies regarding our products have been published. The lack of independent studies limits the ability of doctors or consumers to compare our products to conventional products.

If we are unable to compete effectively in the highly competitive medical device industry, our future growth and operating results will suffer.

The medical device industry in general and the markets in which we expect to offer products in particular, are intensely competitive. Many of our competitors have substantially greater financial, research, technical, manufacturing, marketing and distribution resources than we do and have greater name recognition and lengthier operating histories in the health care industry. We may not be able to effectively compete against these and other competitors. A number of competitors are currently marketing traditional laboratory-based tests for cervical cancer screening and diagnosis. These tests are widely accepted in the health care industry and have a long history of accurate and effective use. Further, if our products are not available at competitive prices, health care administrators who are subject to increasing pressures to reduce costs may not elect to purchase them. Also, a number of companies have announced that they are developing, or have introduced, products that permit non-invasive and less invasive cancer detection. Accordingly, competition in this area is expected to increase.

 9
 

Furthermore, our competitors may succeed in developing, either before or after the development and commercialization of our products, devices and technologies that permit more efficient, less expensive non-invasive and less invasive cancer detection. It is also possible that one or more pharmaceutical or other health care companies will develop therapeutic drugs, treatments or other products that will substantially reduce the prevalence of cancers or otherwise render our products obsolete.

We have limited manufacturing experience, which could limit our growth.

We do not have manufacturing experience that would enable us to make products in the volumes that would be necessary for us to achieve significant commercial sales, and we rely upon our suppliers. In addition, we may not be able to establish and maintain reliable, efficient, full scale manufacturing at commercially reasonable costs in a timely fashion. Difficulties we encounter in manufacturing scale-up, or our failure to implement and maintain our manufacturing facilities in accordance with good manufacturing practice regulations, international quality standards or other regulatory requirements, could result in a delay or termination of production. In the past, we have had substantial difficulties in establishing and maintaining manufacturing for our products and those difficulties impacted our ability to increase sales. Companies often encounter difficulties in scaling up production, including problems involving production yield, quality control and assurance, and shortages of qualified personnel.

Since we rely on sole source suppliers for several of the components used in our products, any failure of those suppliers to perform would hurt our operations.

Several of the components used in our products or planned products, are available from only one supplier, and substitutes for these components could not be obtained easily or would require substantial modifications to our products. Any significant problem experienced by one of our sole source suppliers may result in a delay or interruption in the supply of components to us until that supplier cures the problem or an alternative source of the component is located and qualified. Any delay or interruption would likely lead to a delay or interruption in our manufacturing operations. For our products that require premarket approval, the inclusion of substitute components could require us to qualify the new supplier with the appropriate government regulatory authorities. Alternatively, for our products that qualify for premarket notification, the substitute components must meet our product specifications.


Because we operate in an industry with significant product liability risk, and we have not specifically insured against this risk, we may be subject to substantial claims against our products.

The development, manufacture and sale of medical products entail significant risks of product liability claims. We currently have no product liability insurance coverage beyond that provided by our general liability insurance. Accordingly, we may not be adequately protected from any liabilities, including any adverse judgments or settlements, we might incur in connection with the development, clinical testing, manufacture and sale of our products. A successful product liability claim or series of claims brought against us that result in an adverse judgment against or settlement by us in excess of any insurance coverage could seriously harm our financial condition or reputation. In addition, product liability insurance is expensive and may not be available to us on acceptable terms, if at all.

The availability of third party reimbursement for our products is uncertain, which may limit consumer use and the market for our products.

In the United States and elsewhere, sales of medical products are dependent, in part, on the ability of consumers of these products to obtain reimbursement for all or a portion of their cost from third-party payors, such as government and private insurance plans. Any inability of patients, hospitals, physicians and other users of our products to obtain sufficient reimbursement from third-party payors for our products, or adverse changes in relevant governmental policies or the policies of private third-party payors regarding reimbursement for these products, could limit our ability to sell our products on a competitive basis. We are unable to predict what changes will be made in the reimbursement methods used by third-party health care payors. Moreover, third-party payors are increasingly challenging the prices charged for medical products and services, and some health care providers are gradually adopting a managed care system in which the providers contract to provide comprehensive health care services for a fixed cost per person. Patients, hospitals and physicians may not be able to justify the use of our products by the attendant cost savings and clinical benefits that we believe will be derived from the use of our products, and therefore may not be able to obtain third-party reimbursement.

Reimbursement and health care payment systems in international markets vary significantly by country and include both government-sponsored health care and private insurance. We may not be able to obtain approvals for reimbursement from these international third-party payors in a timely manner, if at all. Any failure to receive international reimbursement approvals could have an adverse effect on market acceptance of our products in the international markets in which approvals are sought.

 10
 

We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business.

Our outstanding indebtedness, includingwhich is considered ordinary course accounts payablepayables and accrued payroll liabilities, was $4.0$5.1 million at March 31, 2016. We currently are required to make approximately $21,000 in monthly payments of interest and, beginning August 2016, $239,583 in quarterly payments of principal on our outstanding senior secured convertible note. The outstanding principal and accrued interest on our secured promissory note is due on August 31, 2016. In connection with the Shenghuo license agreement, we have agreed to issue Shenghuo a convertible note in principal amount of $240,000, due upon consummation of any capital raising transaction by us within 90 days and with net cash proceeds of at least $1.0 million. Absent such a transaction, the payment will increase to $300,000 and will be payable by December 31, 2016.

2018.

The terms of our indebtedness could have negative consequences to us, such as:

·we may be unable to obtain additional financing to fund working capital, operating losses, capital expenditures or acquisitions on terms acceptable to us, or at all;
·the amount of our interest expense may increase if we are unable to make payments when due;
·our assets might be subject to foreclosure if we default on our secured debt (see “—We have outstanding debt that is collateralized by a general security interest in all of our assets, including our intellectual property. If we were to fail to repay the debt when due, the holders would have the right to foreclose on these assets.”);
·our vendors or employees may, and some have, instituted proceedings to collect on amounts owed them;
·we have to use a substantial portion of our cash flows from operations to repay our indebtedness, including ordinary course accounts payable and accrued payroll liabilities, which reduces the amount of money we have for future operations, working capital, inventory, expansion, or general corporate or other business activities; and
·we may be unable to refinance our indebtedness on terms acceptable to us, or at all.

●
we may be unable to obtain additional financing to fund working capital, operating losses, capital expenditures or acquisitions on terms acceptable to us, or at all;
●
the amount of our interest expense may increase if we are unable to make payments when due;
●
our assets might be subject to foreclosure if we default on our secured debt (see “—We have outstanding debt that is collateralized by a general security interest in all of our assets, including our intellectual property. If we were to fail to repay the debt when due, the holders would have the right to foreclose on these assets.”);
●
our vendors or employees may, and some have, instituted proceedings to collect on amounts owed them;
●
we have to use a substantial portion of our cash flows from operations to repay our indebtedness, including ordinary course accounts payable and accrued payroll liabilities, which reduces the amount of money we have for future operations, working capital, inventory, expansion, or general corporate or other business activities; and
●
we may be unable to refinance our indebtedness on terms acceptable to us, or at all.
Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will be unable to control many of these factors, such as economic conditions. We cannot be certain that our earnings will be sufficient to allow us to pay the principal and interest on our debt and meet any other obligations. If we do not have enough money to service our debt, we may be required, but unable, to refinance all or part of our existing debt, sell assets, borrow money or raise equity on terms acceptable to us, if at all.


We have outstanding debt that is collateralized by a general security interest in all of our assets, including our intellectual property. If we were to fail to repay the debt when due, the holders would have the right to foreclose on these assets.

At June 15, 2016,1, 2018, we had notes outstanding that are collateralized by a security interest in our current and future inventory and accounts receivable. We also had a note outstanding that is collateralized by a security interest in all of our assets, including our intellectual property. When the debt is repaid, the holders’ security interests on our assets will be extinguished. However, if an event of default occurs under the notes prior to their repayment, the holders may exercise their rights to foreclose on these secured assets for the payment of these obligations. Under “cross-default” provisions in each of the notes, an event of default under one note is automatically an event of default under the other notes. Any such default and resulting foreclosure would have a material adverse effect on our business, financial condition and results of operations.

We are subject to restrictive covenants under the terms of our outstanding secured debt. If we were to default under the terms of these covenants, the holders would have the right to foreclose on the assets that secure the debt.

The instruments governing our outstanding secured debt contain restrictive covenants. For example, our senior secured convertible note prohibits us from incurring additional indebtedness for borrowed money, repurchasing any outstanding shares of our common stock, or paying any dividends on our capital stock, in each case without the note holder's prior written consent, If we were to breach any of these covenants, the holder could declare an event of default on the note, and exercise its rights to foreclose on the assets securing the note.

Our success depends on our ability to attract and retain scientific, technical, managerial and finance personnel.

Our ability to operate successfully and manage our future growth depends in significant part upon the continued service of key scientific, technical, managerial and finance personnel, as well as our ability to attract and retain additional highly qualified personnel in these fields. We may not be able to attract and retain key employees when necessary, which would limit our operations and growth. Only our Chief Executive Officer and our Senior Vice President of Engineering have employment contracts with us, and none of our employees are covered by key person or similar insurance. In addition, if we are able to successfully develop and commercialize our products, we will need to hire additional scientific, technical, marketing, managerial and finance personnel. We face intense competition for qualified personnel in these areas, many of whom are often subject to competing employment offers.

 11
 

We are significantly influenced by our directors, executive officers and their affiliated entities.

Our directors, executive officers and entities affiliated with them controlled 15.31 %, of the voting power of our outstanding common stock as of June 15, 2016. These stockholders, acting together, would be able to exert significant influence on substantially all matters requiring approval by our stockholders, including the election of directors and the approval of mergers and other business combination transactions.

Certain provisions of our certificate of incorporation that authorize the issuance of additional shares of preferred stock may make it more difficult for a third party to effect a change in control.

Our certificate of incorporation authorizes our board of directors to issue up to 9.05.0 million shares of preferred stock. Our undesignated shares of preferred stock may be issued in one or more series, the terms of which may be determined by the board without further stockholder action. These terms may include, among other terms, voting rights, including the right to vote as a series on particular matters, preferences as to liquidation and dividends, repurchase rights, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell assets to a third party. The ability of our board to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.

Risks Related to Our Common Stock

Our board of directors has asked our stockholders to approve

On November 7, 2016, a proposal to authorize our board to effect a1:800 reverse stock split of all of our issued and outstanding common stock.stock was implemented. There are risks associated with a reverse stock split, if it is effected.

split.

On May 18,November 7, 2016, our board determined to recommend that at our 2016 annual stockholders’ meeting, our stockholders grant the board the authority, in its discretion, to effect a 1:800 reverse stock split byof all of our issued and outstanding common stock was implemented. As a ratioresult of not less than 1:10 and not more than 1:400, with no change in the number of authorizedreverse stock split, every 800 shares of ourissued and outstanding common stock and allwere converted into 1 share of common stock. All fractional shares created by the reverse stock split to bewere rounded to the nearest whole share. On May 26, 2016, our largest stockholder, John Imhoff, who is also oneThe number of our directors, agreed to vote hisauthorized shares of common stock in favor of the reverse stock split. As of the record date for the 2016 annual meeting, Dr. Imhoff held 10,361,179 shares, or 19.26%, of the outstanding shares of common stock.

We intend to effect the reverse stock split prior to the consummation of this offering; however, there are no assurances that the reverse stock split will be implemented. If the reverse stock split is effected, theredid not change.

There are certain risks associated with the reverse stock split, including the following:

·We would have additional authorized shares of common stock that the board could issue in future without stockholder approval, and such additional shares could be issued, among other purposes, in financing transactions or to resist or frustrate a third-party transaction that is favored by a majority of the independent stockholders. This could have an anti-takeover effect, in that additional shares could be issued, within the limits imposed by applicable law, in one or more transactions that could make a change in control or takeover of us more difficult.

·There can be no assurance that the reverse stock split, if completed, will achieve the benefits that we hope it will achieve. The total market capitalization of our common stock after the reverse stock split may be lower than the total market capitalization before the reverse stock split.

●
We have additional authorized shares of common stock that the board could issue in future without stockholder approval, and such additional shares could be issued, among other purposes, in financing transactions or to resist or frustrate a third-party transaction that is favored by a majority of the independent stockholders. This could have an anti-takeover effect, in that additional shares could be issued, within the limits imposed by applicable law, in one or more transactions that could make a change in control or takeover of us more difficult.
●
There can be no assurance that the reverse stock split will achieve the benefits that we hope it will achieve. The total market capitalization of our common stock after the reverse stock split may be lower than the total market capitalization before the reverse stock split.

The reverse stock split may decrease the liquidity of the shares of our common stock.

The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that will bewere outstanding immediately following the reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split. In addition, the reverse stock split may increasehave increased the number of stockholders who own odd lots of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.

 12
 

Following the reverse stock split, the resulting market price of our common stock may not attract new investors, including institutional investors, and may not satisfy the investing requirements of those investors. Consequently, the trading liquidity of our common stock may not improve.

Although we believe that a higher market price of our common stock may help generate greater or broader investor interest, there can be no assurance that the reverse stock split will result in a share price that will attract new investors, including institutional investors. In addition, there can be no assurance that the market price of our common stock will satisfy the investing requirements of those investors. As a result, the trading liquidity of our common stock may not necessarily improve.

The number of shares of our common stock issuable upon the conversion of our outstanding convertible debt and preferred stock or exercise of outstanding warrants and options (excluding the convertible stock or warrants in this offering) is substantial.

As of June 15, 2016,1, 2018, our outstanding convertible debt was convertible into an aggregate of 151,583,8431,240,341,381 shares of our common stock, and the outstanding shares of our Series C and Series C1 preferred stock were convertible into an aggregate of 433,385,611747,804,361 shares of common stock. Also, as of that date we had warrants outstanding that were exercisable for an aggregate of 233,615,051667,513,881 shares, contractual obligations to issue 5,205,1012,132 shares, and outstanding options to purchase 104,356116 shares. The shares of common stock issuable upon conversion or exercise of these securities would have constituted approximately 91.8 %92.6% of the total number of shares of common stock then issued and outstanding.

However, please refer to Footnote 11 - CONVERTIBLE DEBT IN DEFAULT in the paragraph: Debt Restructuring for more information regarding our warrants.

Further, under the terms of our convertible debt and preferred stock, as well as certain of our outstanding warrants, the conversion price or exercise price, as the case may be, could be adjusted downward, causing substantial dilution. See “—Adjustments to the conversion price for our convertible debt and preferred stock, and the exercise price for certain of our warrants, (including the convertible stock and warrants in this offering), will dilute the ownership interests of our existing stockholders.”

Adjustments to the conversion price for a portion of our convertible debt orand preferred stock, and the exercise price for certain of our Series C preferred stockwarrants, will dilute the ownership interests of our existing stockholders.

Under the terms of a portion of our convertible debt, the conversion price fluctuates with the market price of our common stock. Additionally, under the terms of our Series C preferred stock, and the preferred stock part of this offering, any dividends we choose to pay in shares of our common stock will be calculated based on the then-current market price of our common stock. Accordingly, if the market price of our common stock decreases, the number of shares of our common stock issuable upon conversion of the convertible debt or upon payment of dividends on our outstanding Series C preferred stock and preferred stock part of this offering will increase, and may result in the issuance of a significant number of additional shares of our common stock.

Under the terms of our preferred stock (including the preferred stock part of this offering) and certain of our convertible notes and outstanding warrants, the conversion price or exercise price will be lowered if we issue common stock at a per share price below the then conversionthen-conversion price or then-exercise price for those securities. Reductions in the conversion price or exercise price would result in the issuance of a significant number of additional shares of our common stock upon conversion or exercise, which would result in dilution in the value of the shares of our outstanding common stock and the voting power represented thereby.

Our stock is thinly traded, so you may be unable to sell at or near ask prices or at all.

The shares of our common stock are dually quoted on the OTCBB and the OTCQB. Shares of our common stock are thinly traded, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including:

·we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume; and
·stock analysts, stock brokers and institutional investors may be risk-averse and be reluctant to follow a company such as ours that faces substantial doubt about its ability to continue as a going concern or to purchase or recommend the purchase of our shares until such time as we became more viable.

●
we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume; and
●
stock analysts, stock brokers and institutional investors may be risk-averse and be reluctant to follow a company such as ours that faces substantial doubt about its ability to continue as a going concern or to purchase or recommend the purchase of our shares until such time as we became more viable.

As a consequence, our stock price may not reflect an actual or perceived value. Also, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. A broader or more active public trading market for our common shares may not develop or if developed, may not be sustained. Due to these conditions, you may not be able to sell your shares at or near ask prices or at all if you need money or otherwise desire to liquidate your shares.

 13
 

Trading in our common stock is subject to special sales practices and may be difficult to sell.

Our common stock is subject to the Securities and Exchange Commission’s “penny stock” rule, which imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customersdistributors or accredited investors. Penny stocks are generally defined to be an equity security that has a market price of less than $5.00 per share. For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities and also may affect the ability of our stockholders to sell their securities in any market that might develop.

Stockholders should be aware that, according to Securities and Exchange Commission, the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:

·control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
·manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
·“boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons;
·excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
·the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.

●
control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
●
manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
●
“boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons;
●
excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
●
the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.
Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our common stock.

Our need to raise additional capital in the near future or to use our equity securities for payments could have a dilutive effect on your investment.

In order to continue operations, we will need to raise additional capital. We may attempt to raise capital through the public or private sale of our common stock or securities convertible into or exercisable for our common stock. In addition, from time to time we have issued our common stock or warrants in lieu of cash payments. If we sell additional shares of our common stock or other equity securities, or issue such securities in respect of other claims or indebtedness, such sales or issuances will further dilute the percentage of our equity that you own. Depending upon the price per share of securities that we sell or issue in the future, if any, your interest in us could be further diluted by any adjustments to the number of shares and the applicable exercise price required pursuant to the terms of the agreements under which we previously issued convertible securities.

 14
 

Risks Related to the Offering
Our existing stockholders may experience significant dilution from the sale of our common stock pursuant to the GHS Financing Agreement.
The sale of our common stock to GHS Investments LLC in accordance with the Financing Agreement may have a dilutive impact on our shareholders. As a result, the market price of our common stock could decline. In addition, the lower our stock price is at the time we exercise our put options, the more shares of our common stock we will have to issue to GHS in order to exercise a put under the Financing Agreement. If our stock price decreases, then our existing shareholders would experience greater dilution for any given dollar amount raised through the offering.
The perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.

The issuance of shares pursuant to the GHS Financing Agreement may have a significant dilutive effect.
Depending on the number of shares we issue pursuant to the GHS Financing Agreement, it could have a significant dilutive effect upon our existing shareholders. Although the number of shares that we may issue pursuant to the Financing Agreement will vary based on our stock price (the higher our stock price, the less shares we have to issue), there may be a potential dilutive effect to our shareholders, based on different potential future stock prices, if the full amount of the Financing Agreement is realized. Dilution is based upon common stock put to GHS and the stock price discounted to GHS’s purchase price of 80% of the lowest trading price during the pricing period.
GHS Investments LLC will pay less than the then-prevailing market price of our common stock which could cause the price of our common stock to decline.
Our common stock to be issued under the GHS Financing Agreement will be purchased at a twenty percent (20%) discount, or eighty percent (80%) of the average of the lowest two (2) volume weighted average prices during the fifteen (15) consecutive trading days immediately preceding our notice to GHS of our election to exercise our "put" right.
GHS has a financial incentive to sell our shares immediately upon receiving them to realize the profit between the discounted price and the market price. If GHS sells our shares, the price of our common stock may decrease. If our stock price decreases, GHS may have further incentive to sell such shares. Accordingly, the discounted sales price in the Financing Agreement may cause the price of our common stock to decline.
We may not have access to the full amount under the Financing Agreement.
The lowest traded price of the Company’s common stock during the fifteen (15) consecutive trading day period immediately preceding the filing of this Registration Statement was approximately $0.0055. At that price we would be able to sell shares to GHS under the Financing Agreement at the discounted price of $0.0044. At that discounted price, the 70,000,000 shares would only represent $308,000, which is far below the full amount of the Financing Agreement.

Item 4. USE OF PROCEEDS

We estimate that

The Company will use the net cash proceeds to us from the sale of the securities offered by this prospectus, excludingShares for general corporate and working capital purposes and acquisitions or assets, businesses or operations or for other purposes that the proceeds, if any, fromBoard of Directors, in good faith deem to be in the exercisebest interest of the warrants included in the offering, will be approximately $4.26 million, assuming the sale by us of 5,000 shares of Series D preferred stock and warrants atCompany.
Item 5. DETERMINATION OF OFFERING PRICE
We have not set an assumed public offering price of $1,000 per share and after deductingfor the estimated placement agent fees and estimated offering expenses payable by us. However, this is a best efforts offering with no minimum, and weshares registered hereunder, as the only shares being registered are those sold pursuant to the GHS Financing Agreement. GHS may not sell all or anya portion of the securities; as a result, weshares being offered pursuant to this prospectus at fixed prices and prevailing market prices at the time of sale, at varying prices or at negotiated prices.
Item 6. DILUTION
Not applicable. The shares registered under this registration statement are not being offered for purchase. The shares are being registered on behalf of our selling shareholders pursuant to the GHS Financing Agreement.
Item 7. SELLING SECURITY HOLDER
The selling stockholder identified in this prospectus may receive significantly less in net cash proceeds,offer and the net cash proceeds received may not be sufficient to continue to operate our business. In addition, expected net proceeds include a non-cash benefit for the extinguishment ofsell up to $175,000 in outstanding principal and interest on simple interest notes from certain70,000,000 shares of our investors.

common stock, which consists of shares of common stock to be sold by GHS pursuant to the Financing Agreement. If issued presently, the shares of common stock registered for resale by GHS would represent 24.89% of our issued and outstanding shares of common stock as of June 1, 2018.

We intendmay require the selling stockholder to apply any proceeds received in connection withsuspend the offering to increase inventory of LuViva to meet current demand for the product, and to support general working capital and operations. However, we will retain broad discretion over the usesales of the net proceeds and may useshares of our common stock being offered pursuant to this prospectus upon the money for other corporate purposes.

The following table summarizes our currently estimated and intended useoccurrence of net cash proceeds if we receive the maximum amount of proceeds to be potentially obtainedany event that makes any statement in this offering, which we expect would provide funding for our operations for approximately 24 months. prospectus or the related registration statement untrue in any material respect or that requires the changing of statements in those documents in order to make statements in those documents not misleading.

The dataselling stockholder identified in the table set forth below excludesmay from time to time offer and sell under this prospectus any proceeds we could receive from the exerciseor all of the warrantsshares of common stock described under the column “Shares of Common Stock Being Offered” in the table below.
GHS will be deemed to be issued in this offering.

Expected Use for Net Cash ProceedsExpected Amount of Net Cash Proceeds
($ in 000s)		 

Expected % of

Net Cash Proceeds

Increase inventory of LuViva advanced cervical device $1,750,000 41%
General working capital and operations 2,510,000 59%
Total $4,260,000 100%

Ifan underwriter within the net cash proceeds of this offering are less than the maximum, we except to divide the proceeds for purposes listed above on a similar percentage basis.

If a warrant holder elects to exercise the warrants issued in this offering, we may also receive proceeds from the exercisemeaning of the warrants.Securities Act. Any profits realized by such selling stockholder may be deemed to be underwriting commissions.

Information concerning the selling stockholder may change from time to time and, if necessary, we will amend or supplement this prospectus accordingly. We cannot predict when or ifgive an estimate as to the warrants will be exercised. It is possible that the warrants may expire and may never be exercised.

DILUTION

Our net tangible book value deficiency as of March 31, 2016 was approximately $7.3 million, or $1.37 per share of common stock. “Net tangible book value” represents total tangible assets less total liabilities. “Net tangible book value per share” represents net tangible book value divided by the total number of shares of common stock outstanding.

After giving effect tothat will actually be held by the assumed saleselling stockholder upon termination of 5,000this offering, because the selling stockholders may offer some or all of the common stock under the offering contemplated by this prospectus or acquire additional shares of Series D preferred stock and accompanying warrantscommon stock. The total number of shares that may be sold, hereunder, will not exceed the number of shares offered, hereby. Please read the section entitled “Plan of Distribution” in this offering at a public offering price of $1,000 per share, and assumingprospectus.

The manner in which the conversion of all theselling stockholder acquired or will acquire shares of Series D preferred stock sold in the offering at an assumed conversion price of $0.01, which was the last reported sale price of our common stock on June 15, 2016 (and excluding shares of common stock issuable upon exercise of warrants), and after deducting estimated placement agent fees and estimated offering expenses payable by us, our pro forma net tangible book value deficiency as of March 31, 2016 would have been approximately $5.8 million, or $0.01 per share of common stock. This represents an immediate increase in net tangible book value of $1.36 per share to our existing stockholders and an immediate dilution in net tangible book value of $(0.02) per share to investors participating in this offering. is discussed below under “The Offering.”
The following table illustrates this dilution per share to investors participating in this offering:

Assumed Series D Conversion Price $0.01 
Net tangible book value per share as of March 31, 2016 $(1.37)
Increase in net tangible book value per share attributable to this offering $1.36 
Pro forma net tangible book value per share after giving effect to the offering $(0.01)
Dilution per share to new investors in this offering $0.02 

The above discussion and table are based on 5,322,003 sharessets forth the name of common stock outstanding as of March 31, 2016, which does not include the following, all as of June 15, 2016:

 15

·104,356 shares of common stock reserved for future issuance under our 1995 Stock Plan;
·433,385,611 shares of common stock reserved for issuance upon conversion of, or issuance as dividends on, our Series C and Series C1 convertible preferred stock, which we assume will be exchanged for shares of Series D preferred stock and warrants as part of this offering;
·151,583,843 shares reserved for issuance upon conversion of our outstanding convertible debt;
·233,615,051 shares of common stock issuable upon the exercise of outstanding warrants or warrants to be exchanged for outstanding warrants
·5,205,101 shares reserved for issuance pursuant to contractual obligations; and
·up to ______ shares of common stock issuable upon exercise of warrants sold as part of this offering, including up to ______ shares of common stock issuable upon exercise of warrants to be issued to the placement agent

A $0.001 increase (decrease) in the assumed Series D preferred stock conversion price of $0.01 per share would not change the pro forma as adjusted net tangible book value deficiency resulting from the offering ($5.8 million), and our as adjusted net tangible book value deficiency per share by approximately $0.01, but would increase (decrease) the dilution per share to new investors by approximately $0.001, assuming the assumed number of shares of Series D preferred stock sold remains the same. A 10% increase (decrease) in the number of shares sold would would not change the pro forma as adjusted net tangible book value deficiency resulting from the offering ($5.8 million), and our as adjusted net tangible book value deficiency per share by approximately $0.01, but would increase (decrease) the dilution per share to new investors by approximately $0.001, assuming the assumed number of shares of Series D preferred stock sold remains the same.

Certain of our outstanding indebtedness and our outstanding warrants are subject to customary “downside price protection” provisions in the event we sell any common stock at a price lower than the then-conversion price of these securities. The Series D preferred stock offered pursuant to this prospectus will also be subject to similar adjustment. These provisions are further described under the captions “Description of Securities” and “Description of Securities We Are Offering.”

 16

CAPITALIZATION

The following table shows our cash and cash equivalents and our capitalization as of March 31, 2016:

·on an actual basis;
·as adjusted to give effect to transactions described in “Summary—Recent Developments”; and
·as further adjusted to give effect to this offering.

You should read this table together with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited annual consolidated financial statements and the related notes and other financial information incorporated by reference into this prospectus from our annual report on Form 10-K for the fiscal year ended December 31, 2015 and our quarterly report on Form 10-Q for the quarterly period ended March 31, 2016.

  As of March 31, 2016
  Actual As Adjusted(a) As Further Adjusted(b)
  (in thousands)
Cash and cash equivalents $56   431   4,691 
             
Short-term debt  259   434   434 
Short-term convertible note  591   677   86 
Convertible notes payable – current portion  479   479   479 
Long-term convertible notes payable, net  197   197   197 
Outstanding warrants, at fair value  1,588   1,310   185 
             
Total liabilities  3,114   3,097   1,381 
             
Series C preferred stock  1,817   1,116   —   
Series C1 preferred stock  —     701   —   
Series D preferred stock  —     —     6,668 
Common stock  297   329   329 
Additional paid-in capital  115,471   115,831   116,956 
Treasury stock, at cost  (132)  (132)  (132)
Accumulated deficit  (122,903)  (122,903)  (122,903)
             
Total stockholders’ surplus (deficit)  (5,450)  (5,058)  918 
             
Total capitalization $(8,564)  (8,155)  (463)
             

(a)Reflects the following, each further described under “Summary—Recent Developments”:
·the April-May 2016 issuances of an aggregate 4,311 shares of Series C1 preferred stock and 18,396,800 shares common stock in exchange for 1,916 then-outstanding shares of Series C preferred stock;
·the cancelation of warrants held by Aquarius Opportunity Fund that were exercisable for an aggregate of 7,148,813 shares of common stock;
·the May 2016 cash advances of $175,000 by Aquarius Opportunity Fund and GPB Debt Holdings II LLC;
·the June 2016 obligation to issue a convertible note and warrant in connection with the Shenghuo license agreement; and
·the June 2016 issuances of an aggregate of 13,517,342 shares of common stock and rights, which includes 8,312,241 common stock shares that were issued and 5,205,101 rights, in exchange for warrants previously exercisable for 8,142,977 shares of common stock.
(b)Assumes sale of all of the securities offered, except (i) shares of common stock that could be issued upon conversion of the Series D preferred stock or upon exercise of the warrants sold (or issued to the placement agent) as part of this offering. Reflects receipt of the net cash proceeds from this offering prior to the application thereof. Also reflects the following, each of which is contingent upon consummation of the offering, as further described under “Summary—Recent Developments”:
·the extinguishment of indebtedness represented by the May 2016 short-term cash advances as a result of the participation by Aquarius Opportunity Fund and GPB Debt Holdings II LLC in this offering at least to the extent of the principal and interest on the cash advances;
·the exchange, on a dollar-for-dollar basis, of all outstanding shares Series C and Series C1 preferred stock, as well as any remaining principal and accrued interest on our convertible promissory note held by Aquarius Opportunity Fund, for shares of Series D preferred stock and warrants;
·the exchange of certain warrants, exercisable for 115,237,788 shares of common stock, for new warrants, exercisable for 214,189,622 shares of common stock.

 17

PLAN OF DISTRIBUTION

We are offering up to 5,000 shares of our Series D convertible preferred stock, together with warrants to purchase __________ shares of common stock, at a purchase price of $1,000 (and the shares issuable from time to time upon conversion of the Series D preferred stock and the exercise of the warrants) pursuant to this prospectus. The shares of Series D preferred stock and warrants are immediately separable and will be separately issued. There is no minimum offering amount required as a condition to closing and we may sell significantly fewer securities in the offering. The offering will terminate on ___________, unless the offering is fully subscribed before that date or we decide to terminate the offering prior to that date.

In determining the offering price of the securities offered hereby, we will consider a number of factors including, but not limited to, the current market price of our common stock, trading prices of our common stock over time, the illiquidity and volatility of our common stock, our current financial condition and the prospects for our future cash flows and earnings, and market and economic conditions at the time of the offering. Once the offering price is determined, the offering price for the securities will remain fixed for the duration of the offering.

Ladenburg Thalmann & Co. Inc. has agreed to act as our exclusive placement agent in connection with this offering, subject to the terms and conditions of the placement agent agreement dated _______________. Ladenburg is not purchasing or selling any securities offered by this prospectus, nor is it required to arrange the purchase or sale of any specific number or dollar amount of securities, but has agreed to use its best efforts to arrange for the sale of all of the shares of Series D preferred stock and warrants offered hereby. Therefore, we will enter into purchase agreements directly with investors in connection with this offering. Ladenburg may retain other brokers or dealers to act as sub-agents or selected-dealers on its behalf in connection with the offering. Offers will only be made to, and subscriptions accepted from, institutional investors within the meaning of state securities laws of the state in which such investor is domiciled.

All cash funds received in payment for securities sold in this offering will be required to be submitted by subscribers to a non-interest bearing escrow account, and will be held by the escrow agent for such account until we and the placement agent notify the escrow agent that the offering has closed. The closing will occur, as to all subscriptions duly received and accepted by us, in one closing; we do not intend to hold multiple closings in the offering. In the event we do not accept the subscriptions and do not close the offering, escrowed funds will be promptly returned to subscribers without interest or offset.

We have agreed to pay Ladenburg a placement agent’s fee of 9% of the aggregate cash purchase price of the securities sold in this offering. We will also reimburse Ladenburg for its reasonable out-of-pocket expenses, including, without limitation, fees and expenses of its counsel.

The following table shows the per share and total placement agent’s fees that we will pay to Ladenburg in connection with the sale of the securities offered pursuant to this prospectus, assuming the purchase of all of the shares of Series D preferred stock and accompanying warrants offered hereby.

Per share placement agent’s fees . . . . .$90
Maximum offering total placement agent’s fees . . . . .$450,000

Because there is no minimum amount required as a condition to the closing in this offering, the actual total offering commissions, if any, are not presently determinable and may be substantially less than the maximum amount set forth above.

We have also agreed to issue warrants to Ladenburg or it designees (as permitted by FINRA Rule 5110(g)) to purchasestockholder, the number of shares of our common stock equivalentbeneficially owned by such stockholder before this offering, the number of shares to 5%be offered for such stockholder’s account and the number and (if one percent or more) the percentage of the class to be beneficially owned by such stockholder after completion of the offering. The number of shares owned are those beneficially owned, as determined under the rules of the SEC, and such information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares of our common stock as to which a person has sole or shared voting power or investment power and any shares of common stock which the person has the right to acquire within 60 days, through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement, and such shares are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the person holding such options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other person. Beneficial ownership percentages are calculated based on 211,291,990 shares of our common stock outstanding as of June 1, 2018.


Unless otherwise set forth below, (a) the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the selling stockholder’s name, subject to community property laws, where applicable, and (b) no selling stockholder had any position, office or other material relationship within the past three years, with us or with any of our predecessors or affiliates. The number of shares of common stock issuable upon conversionshown as beneficially owned before the offering is based on information furnished to us or otherwise based on information available to us at the timing of the Series D preferred stock (subject to reduction if required by FINRA Rule 5110), at an exercise price equal to 125% of the conversion price per share at the offering. The placement agent warrants will contain a cashless exercise provision, and a piggyback registration rights provision for the life of the warrants, but shall not contain any price-based anti-dilution provisions. The placement agent warrants will have a term expiring five years from the effective datefiling of the registration statement of which this prospectus forms a part. Pursuant
 
 
Shares
Owned by
the Selling
Stockholders
 
 
Shares of
Common
Stock
 
 
Number of Shares to
be Owned by Selling
Stockholder After the
Offering and Percent
of Total Issued and
Outstanding Shares
 
Name of Selling Stockholder
 
before the
Offering (1)
 
 
Being
Offered
 
 
# of
Shares (2)
 
 
% of
Class (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GHS Investments LLC (3)
  0 
  70,000,000(4)
  0 
  0%
Notes:
(1) 
Beneficial ownership is determined in accordance with Securities and Exchange Commission rules and generally includes voting or investment power with respect to FINRA Rule 5110(g), the placement agentshares of common stock. Shares of common stock subject to options, warrants and anyconvertible debentures currently exercisable or convertible, or exercisable or convertible within 60 days, are counted as outstanding. The actual number of shares issuedof common stock issuable upon exercisethe conversion of the placement agent warrantsconvertible debentures is subject to adjustment depending on, among other factors, the future market price of our common stock, and could be materially less or more than the number estimated in the table.
(2) 
Because the selling stockholders may offer and sell all or only some portion of the 70,000,000 shares of our common stock being offered pursuant to this prospectus and may acquire additional shares of our common stock in the future, we can only estimate the number and percentage of shares of our common stock that any of the selling stockholders will hold upon termination of the offering.
(3) Mark Grober exercises voting and dispositive power with respect to the shares of our common stock that are beneficially owned by GHS Investments LLC.
(4) 
Consists of up to 70,000,000 shares of common stock to be sold by GHS pursuant to the Financing Agreement.
THE OFFERING
On March 1, 2018, we entered into an Equity Financing Agreement (the “Financing Agreement”) with GHS Investments LLC (“GHS”). Although we are not mandated to sell shares under the Financing Agreement, the Financing Agreement gives us the option to sell to GHS, up to $10,000,000 worth of our common stock over the period ending twenty-four (24) months after the date this Registration Statement is deemed effective. The $10,000,000 was stated as the total amount of available funding in the Financing Agreement because this was the maximum amount that GHS agreed to offer us in funding. There is no assurance the market price of our common stock will increase in the future. The number of common shares that remain issuable may not be sold, transferred, assigned, pledged, or hypothecated, orsufficient, dependent upon the share price, to allow us to access the full amount contemplated under the Financing Agreement. If the bid/ask spread remains the same we will not be able to place a put for the subject of any hedging, short sale, derivative, put, or call transaction that would result infull commitment under the effective economic dispositionFinancing Agreement. Based on the average of the securities by any person for atwo (2) lowest volume weighted average prices of our common stock during the fifteen (15) consecutive trading day period preceding June 1, 2018 of 180 daysapproximately $0.0056, the registration statement covers the offer and possible sale of $392,000 worth of our shares.
The purchase price of the common stock will be set at eighty percent (80%) of the lowest trading price of the common stock during the fifteen (15) consecutive trading day period immediately followingpreceding the date on which the Company delivers a put notice to GHS. In addition, there is an ownership limit for GHS of effectiveness or commencement9.99%.
GHS is not permitted to engage in short sales involving our common stock during the term of the commitment period. In accordance with Regulation SHO, however, sales of this offering, except the transferour common stock by GHS after delivery of any security:

·by operation of law or by reason of our reorganization;
·to any FINRA member firm participating in the offering and the officers or partners thereof, as long as all securities so transferred remain subject to the lock-up restriction set forth above for the remainder of the time period;

 18
a put notice of such number of shares reasonably expected to be purchased by GHS under a put will not be deemed a short sale.
 

·if the aggregate amount of our securities held by the holder of the placement agent warrants or related persons do not exceed 1% of the securities being offered;
·that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the equity in the fund; or
·the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction set forth above for the remainder of the time period.


In addition, we have granted a right of first refusalmust deliver the other required documents, instruments and writings required. GHS is not required to purchase the put shares unless:
●
Our registration statement with respect to the placementresale of the shares of common stock delivered in connection with the applicable put shall have been declared effective;
●
we shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the registrable securities; and
●
we shall have filed all requisite reports, notices, and other documents with the SEC in a timely manner.
As we draw down on the equity line of credit, shares of our common stock will be sold into the market by GHS. The sale of these shares could cause our stock price to decline. In turn, if our stock price declines and we issue more puts, more shares will come into the market, which could cause a further drop in our stock price. You should be aware that there is an inverse relationship between the market price of our common stock and the number of shares to be issued under the equity line of credit. If our stock price declines, we will be required to issue a greater number of shares under the equity line of credit. We have no obligation to utilize the full amount available under the equity line of credit.
Neither the Financing Agreement nor any of our rights or GHS’s rights thereunder may be assigned to any other person.
Item 8. PLAN OF DISTRIBUTION
Each of the selling stockholders named above and any of their pledgees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on OTC Markets or any other stock exchange, market or trading facility on which the shares of our common stock are traded or in private transactions. These sales may be at fixed prices and prevailing market prices at the time of sale, at varying prices or at negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:
●
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
●
block trades in which the broker-dealer will attempt to sell the shares as agent pursuantbut may position and resell a portion of the block as principal to which it hasfacilitate the righttransaction;
●
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
●
privately negotiated transactions;
●
broker-dealers may agree with the selling stockholders to act assell a specified number of such shares at a stipulated price per share;
●
a combination of any such methods of sale; or
Broker-dealers engaged by the lead managerselling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or underwriter or agent, as applicable, if we or our subsidiary raise capital through a public or private offering of equity or debt securities at any time prior to eighteen monthsdiscounts from the dateselling stockholders (or, if any broker-dealer acts as agent for the purchaser of closing of this offering.

Our obligationsshares, from the purchaser) in amounts to issue and sell securities to the purchasers is subject to the conditionsbe negotiated, but, except as set forth in the securities purchase agreement, which may be waived by us at our discretion. A purchaser’s obligationa supplement to purchase securities is subject to the conditions set forththis prospectus, in the securities purchase agreement as well, which may also be waived bycase of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the purchasercase of a principal transaction a markup or markdown in its discretion.

We estimate the total offering expenses in this offering that will be payable by us, excluding the placement agent’s fees, will be approximately $290,000, which includes legal, accounting and printing costs, various other fees and reimbursement of the placement agent’s expenses.

We have also agreed to indemnify the placement agent for certain liabilities under the Securities Act.

The foregoing does not purport to be a complete statement of the terms and conditions of the placement agent agreement or the securities purchase agreement. A copy of the placement agent agreement and the form of securities purchase agreementcompliance with investors are included as exhibits to the registration statement of which this prospectus forms a part.

LadenburgFINRA IM-2440.

GHS is an underwriter within the meaning of Section 2(a)(11)the Securities Act of 1933 and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act andof 1933 in connection with such sales. In such event, any commissions received by itsuch broker-dealers or agents and any profit realized on the resale of the securities soldshares purchased by it while acting as principal mightthem may be deemed to be underwriting discountscommissions or commissionsdiscounts under the Securities Act. As an underwriter, Ladenburg is requiredAct of 1933. GHS has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to comply withdistribute the common stock of our company. Pursuant to a requirement by FINRA, the maximum commission or discount to be received by any FINRA member or independent broker-dealer may not be greater than 8% of the gross proceeds received by us for the sale of any securities being registered pursuant to Rule 415 promulgated under the Securities Act of 1933.
Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the selling stockholder. The selling stockholder may agree to indemnify any agent, dealer, or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act of 1933.
We are required to pay certain fees and expenses incurred by us incident to the registration of the shares covered by this prospectus. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act of 1933. We will not receive any proceeds from the resale of any of the shares of our common stock by the selling stockholders. We may, however, receive proceeds from the sale of our common stock under the Financing Agreement with GHS. Neither the Financing Agreement with GHS nor any rights of the parties under the Financing Agreement with GHS may be assigned or delegated to any other person.

We have entered into an agreement with GHS to keep this prospectus effective until GHS has sold all of the common shares purchased by it under the Financing Agreement and has no right to acquire any additional shares of common stock under the Financing Agreement.
The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities Exchange Act of 1934, including Rule 10b-5 andany person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, underprior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Securities Exchange Act. TheseAct of 1934 and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of our securitiesshares of the common stock by Ladenburg acting as principal. Under these rules and regulations, Ladenburg:

·may not engage in any stabilization activity in connection with our securities; and
·may not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other than as permitted under the Exchange Act, until it has completed its participation in the distribution.

Pursuantthe selling stockholders or any other person. We will make copies of this prospectus available to the purchase agreement to be entered into in connection with this offering, we will be prohibited from issuing, entering into any agreementselling stockholders.

Item 9. DESCRIPTION OF SECURITIES TO BE REGISTERED
General
We are authorized to issue or announcing the issuance or proposed issuancean aggregate of anyone billion (1,000,000,000) shares of common stock, or common stock equivalents (subject to certain exceptions) for a period of 90 days from the closing of this offering.

 19

DESCRIPTION OF SECURITIES WE ARE OFFERING

We are offering up to 5,000 shares of our Series D convertible preferred stock, convertible into an aggregate of _________ shares of our common stock, and five-year warrants exercisable for an aggregate of ____________ shares of our common stock. Each share of Series D preferred stock we sell in the offering will be accompanied by a warrant to purchase _____ of a share of common stock, and will be sold at a combined price of $1,000.

The shares of Series D preferred stock and the warrants are immediately separable and will be issued separately. Subject to certain ownership limitations, the Series D preferred stock is convertible at any time at the holder’s option into shares of our common stock at an initial conversion price of $0.01 per share, and the warrants are immediately exercisable at an initial exercise price of $_____ per share. This prospectus also covers the shares of common stock issuable upon conversion of the Series D preferred stock and upon exercise of the warrants. The material terms and provisions of our common stock, which underlies the Series D preferred stock and the warrants, and each other class of securities which qualifies or limits the foregoing, are described under the caption “Description of Securities.”

Series D Preferred Stock

The material terms and provisions of the Series D preferred stock being offered pursuant to this prospectus are described below. The following description is qualified in its entirety by reference to the form of certificate of designation filed as an exhibit to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions of the form of the certificate of designation for a complete description of the terms and conditions of the Series D preferred stock.

Our Board has designated 5,000 shares of preferred stock as Series D Convertible Preferred Stock,$0.001 par value $0.001 per share. As of June 15, 2016, there were no shares of Series D preferred stock outstanding.

Voting Rights.Except as required by law, holders of the Series D preferred stock do not have rights to vote on any matters, questions or proceedings, including the election of directors. However, as long as any shares of Series D preferred stock are outstanding,1, 2018, we will not, without the affirmative vote of the holders of a majority of the then-outstanding shares of the Series D preferred stock, (1) alter or change adversely the powers, preferences or rights given to the Series D preferred stock or alter or amend the certificate of designation, (2) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon liquidation senior to, or otherwise pari passu with, the Series D preferred stock, (3) amend our certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Series D preferred stock, (4) increase the number of authorized shares of Series D preferred stock, or (5) enter into any agreement with respect to any of the foregoing.

Liquidation Preference.The Series D preferred stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (1) senior to common stock, (2) senior to any series of preferred stock ranked junior to the Series D preferred stock, (3) junior to our Series C preferred stock, and (4) junior to all of our existing and future indebtedness.

Redemption.We have the right to redeem the Series D preferred stock for a cash payment equal to 120% of the stated value of the Series D preferred stock. Holders of Series D preferred stock will receive 20 trading days prior notice of any redemption and will have the ability to convert the Series D preferred stock into common stock during this notice period.

Conversion; Beneficial Ownership Limitation.Subject to certain ownership limitations as described below, the Series D preferred stock is convertible at any time at the option of the holder into shares of our common stock at a conversion ratio determined by dividing the $1,000 stated value of the Series D preferred stock by a conversion price of $____ per share. The conversion price is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. In addition, until our common stock is listed on a national securities exchange, if we sell or grant any right to purchase or sell any common stock or common stock equivalents entitling any person to acquirehad 211,291,990 shares of common stock (subject to exceptions for certain exempt issuances, including issuances pursuant to equity compensation plans, certain issuances to consultants, issuances in connection with exercise or exchangeoutstanding.

Each share of common stock equivalents already outstanding and issuances pursuant to acquisitions or strategic transactions or arrangements) at an effective priceshall have one (1) vote per share that is lower than the then-conversion price of the Series D preferred stock, then the conversion price will be further reduced to equal such lower price per share.

Subject to limited exceptions, a holder of shares of Series D preferred stock will not have the right to convert any portion of its Series D preferred stock if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our Our common stock outstanding immediately after giving effect to its conversion; provided, however, that upon 61 days’ prior notice to us, the holder may increase such percentage to 9.99%. We have the right to force thedoes not provide a preemptive, subscription or conversion of the Series D preferred stock if our common stock meets certain minimum price and trading volume thresholds.

 20

Dividends.The Series D preferred stock is entitled to receive dividends (on an “as converted to common stock” basis) upon and in the same form as dividends actually paid on shares of our common stock. No other dividends will be paid on shares of Series D preferred stock.

Liquidation. Upon our liquidation, dissolution or winding up after payment or provision for payment of our debts and other liabilities, but before any distribution or payment is made to the holders of any junior securities, the holders of Series D preferred stock will be entitled to be paid out of our assets available for distribution to our stockholders in an amount equal to $1,000 per share, after which any of our remaining assets will be distributed among the holders of junior classes of our capital stock in accordance with our certificate of incorporation.

Warrants

The material terms and provisions of the warrants being offered pursuant to this prospectus are described below. The following description is qualified in its entirety by reference to the form of warrant filed as an exhibit to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions of the form of the warrant for a complete description of the terms and conditions of the warrants.

Duration and Exercise Price.The warrants offered hereby (including those to be issued to the placement agent, which have substantially similar terms except as indicated below, but also have certain provisions required by FINRA and an exercise price of 125% of the combined public offering price per share and warrant) will entitle the holders thereof to purchase up to an aggregate of ____________ shares of our common stock at an exercise price of $____ per share (assuming we offer ____________ shares of Series D preferred stock at an assumed conversion price of $____ per share), commencing immediately on the issuance date and will expire five years following the issuance date. The warrants will be issued separately from the Series D preferred stock offered, and may be transferred separately immediately thereafter. No warrants exercisable for a fractional amount of shares of common stock will be issued. If an investor would otherwise be entitled to receive a fractional warrant, the number of shares issuable upon exercise of the warrant will be rounded up to the nearest whole warrant. The warrant holders must pay the exercise price in cash upon exercise of the warrants. After the close of business on the expiration date, unexercised warrants will become void.

Anti-Dilution Protection.The exercise price of the warrants is subject to appropriate adjustment in the event of stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our common stock, and also upon any distributions of assets, including cash, stock or other property to our stockholders.

Fundamental Transactions. In the event of any fundamental transaction, as described in the warrants and generally including any merger with another entity, the sale, transfer or other disposition of all or substantially all of our assets to another entity, or the acquisition by a person of more than 50% of our common stock, then, subject to the agreement of the counterparty to the fundamental transaction, the holders of the warrants will thereafter have the right to receive upon exercise of the warrants such shares of stock, securities or assets as would have been issuable or payable with respect to or in exchange for a number of shares of our common stock equal to the number of shares of our common stock issuable upon exercise of the warrants immediately prior to the fundamental transaction, had the fundamental transaction not taken place, and appropriate provision will be made so that the provisions of the warrants (including, for example, provisions relating to the adjustment of the exercise price) will thereafter be applicable, as nearly equivalent as may be practicable in relation to any share of stock, securities or assets deliverable upon the exercise of the warrants after the fundamental transaction.

Transferability. The warrants may be transferred at the option of the holder upon surrender of the warrants with the appropriate instruments of transfer.

Right as a Stockholder. Except by virtue of a holder’s ownership of shares of our common stock, the holders of the warrants do not have the rights or privileges of holders of our common stock, including any voting rights, until they exercise their warrants.

Exercisability.The warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise. Subject to limited exceptions, a holder of will not have the right to exercise any portion of its warrant if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to its exercise; provided, however, that upon 61 days’ prior notice to us, the holder may increase such percentage to 9.99%.

 21

Waivers and Amendments.Subject to certain exceptions, any term of the warrants may be amended or waived with our written consent and the written consent of each holder of the then-outstanding warrants.

DESCRIPTION OF SECURITIES

We are authorized to issue 1,005,000,000 shares of stock, in two classes: 1,000,000 shares of common stock, par value $.001 per share, and 5,000,000 million shares of preferred stock. As of June 15, 2016, there were 67,901,547 shares of common stock outstanding, which were held of record by 209 stockholders, and 6,679 shares of preferred stock outstanding, consisting of 2,368 shares of Series C preferred stock, which were held of record by 3 stockholders, and 4,311 shares of Series C1 preferred stock, which were held of record by 6 stockholders. Upon consummation of the offering, all outstanding shares of Series C and Series C1 preferred stock will be exchanged for shares of the Series D preferred stock and warrants as part of this offering.

Common Stock

The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the board out of funds legally available therefor and in liquidation proceedings. Holders of common stock have no preemptive or subscription rights and there are no redemption rightsor sinking fund provisions or rights. Our common stock holders are not entitled to cumulative voting for election of Board of Directors.

Dividends
We have not paid any dividends on our common stock since our inception and do not intend to pay any dividends in the foreseeable future.
The declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
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.
Options
As of March 31, 2018, the Company has issued and outstanding options to purchase a total of 116 shares of common stock pursuant to the Plan, at a weighted average exercise price of $37,090 per share.
Securities Authorized For Issuance Under Equity Compensation Plans
The Company’s 1995 Stock Plan (the “Plan”) has expired pursuant to its terms, so zero shares remained available for issuance at March 31, 2018 and December 31, 2017. The Plan allowed for the issuance of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price of options was determined by the Company’s board of directors, but incentive stock options were granted at an exercise price equal to the fair market value of the Company’s common stock as of the grant date. Options historically granted have generally become exercisable over four years and expire ten years from the date of grant.

Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock with respect to such shares.

Preferred Stock

Oura $.001 par value. The board is authorized, without further stockholder action,of directors has the authority to issue preferred stock in one or more seriesthese shares and to fix theset dividends, voting rights, liquidation preferences, dividend rights, repurchase rights,and conversion rights, redemption rightsprovisions, liquidation preferences, and terms, including sinking fund provisions, and certain other rights and preferences,restrictions. The board of the preferred stock. Our boarddirectors designated 525,000 shares of preferred stock as redeemable convertible preferred stock, none of which remain outstanding; 3,00033,000 shares of preferred stock as Series B Convertible Preferred Stock, none of which remain outstanding;remained outstanding, 9,000 shares of preferred stock as Series C Convertible Preferred Stock, of which 2,368970 and 1,643 were issued and outstanding as of June 15, 2016;at December 31, 2017 and 2016, respectively, and 20,250 shares of preferred stock as Series C1 Convertible Preferred Stock, of which 4,311686 and 970 were issued and outstanding as of June 15, 2016;at March 31, 2018 and 5,000December 31, 2017, respectively, and 20,250 shares of preferred stock as Series DC1 Convertible Preferred Stock, none of which 4,312 were issued and outstanding asat March 31, 2018 and December 31, 2017.

Delaware Anti-Takeover Laws
As a Delaware corporation, we are subject to certain anti-takeover provisions that apply to public corporations under Delaware law. Pursuant to Section 203 of June 15, 2016. The material terms and provisionsthe Delaware General Corporation Law, a publicly held Delaware corporation may not engage in a broad range of our Series D preferred stock are described underbusiness combinations or other extraordinary corporate transactions with an interested shareholder without the caption “Description of Securities We Are Offering.”

Although there is no current intention to do so, our board may, without stockholder approval issue additional shares of preferred stock with voting and conversion rights that could adversely affect the voting power or dividend rights of the holders of commontwo-thirds of the voting shares of the corporation (excluding shares held by the interested shareholder), unless:

●
the transaction is approved by an affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder;
●
the interested shareholder has owned shares for at least three years preceding the announcement date of any such business combination;
●
the interested shareholder is the beneficial owner of at least 85% of the outstanding voting shares of the corporation, exclusive of shares owned by persons who are directors and mayalso officers; and acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors; and
●
employee stock plans in which employee participants do not have the effectright to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer
An interested shareholder is defined as a person who, together with affiliates and associates, beneficially owns more than 15% of delaying, deferringa corporation’s outstanding voting shares. We have not made an election in our amended Articles of Incorporation to opt out of Section 203.
Penny Stock Considerations
Our shares will be "penny stocks" as that term is generally defined in the Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00 per share. Thus, our shares will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock. Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer must make a special suitability determination regarding the purchaser and must receive the purchaser's written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt.
In addition, under the penny stock regulations, the broker-dealer is required to:
●
Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or preventingthe transaction is otherwise exempt;
●
Disclose commissions payable to the broker-dealer and our registered representatives and current bid and offer quotations for the securities;
●
Send monthly statements disclosing recent price information pertaining to the penny stock held in a changecustomer’s account, the account’s value, and information regarding the limited market in control.

Series C Convertible Preferred Stock

Dividends. Frompenny stocks; and

●
Make a special written determination that the original issue date until 42 months thereafter,penny stock is a suitable investment for the holderspurchaser and receive the purchaser’s written agreement to the transaction, prior to conducting any penny stock transaction in the customer’s account.
Because of Series C preferred stock are entitledthese regulations, broker-dealers may encounter difficulties in their attempt to receive quarterly cumulative dividends at a rate per share (as a percentage of stated value per share) of 12% per year per share payable quarterly on each January 1, April 1, July 1 and October 1 during such period (beginning October 1, 2015) insell shares of our common stock, (subjectwhich may affect the ability of selling shareholders or other holders to certain conditions) or, atsell their shares in the secondary market, and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our option, in cash.securities, if our securities become publicly traded. In addition, upon the conversion ofliquidity for our securities may be decreased, with a corresponding decrease in the Series C preferred stock (other than a forced conversion, described below) during the such period, we must pay the converting holder a “make-whole payment” in cash or, at our option (subject to certain conditions), shares of our common stock with respect to the converted shares of Series C preferred stock in an amount equal to $420 per $1,000 of stated value, less the amount of any dividends already paid on such shares of Series C preferred stock. To the extent we choose to pay any dividends or make-whole payments in shares of our common stock, such shares will be valued at 80% of then-current market price (calculated as the average daily volume weighted average price of our commonsecurities. Our shares in all probability will be subject to such penny stock rules and our shareholders will, in all likelihood, find it difficult to sell their securities.

Item 10. INTERESTS OF NAMED EXPERTS AND COUNSEL
The consolidated financial statements for the five consecutive trading days priorCompany as of December 31, 2017 and 2016 and for the years then ended included in this prospectus have been audited by UHY LLP, an independent registered public accounting firm, to payment). After the dividend payment period, holdersextent and for the periods set forth in our report and are incorporated herein in reliance upon such report given upon the authority of Series C preferred stock are only entitled to receive dividends on an as-if-converted basis) with holder of our common stock (other than dividends paidsaid firm as experts in additional shares of common stock).

Voting. Except as otherwise proved by law or in the Series C designations, the Series C preferred stock has no voting rights. We may not, without the consent of the holders of a majorityauditing and accounting.

The legality of the shares of Series C preferred stock then outstanding, alter or change adversely the powers, preferences or rights given to the Series C preferred stock or alter or amend the Series C designations, create any class of stock with a liquidation preference equal or senior to the Series C preferred stock, amend our charter in any manner that adversely affects any rights of the holders of Series C preferred stock, increase the number of authorized shares of Series C preferred stock, or enter into any agreement with respect to any of the foregoing.

 22
offered under this registration statement is being passed upon by Brunson Chandler, & Jones, PLLC.  
 

Liquidation. In the event of our liquidation, dissolution or winding-up, whether voluntary or involuntary, the holders of our Series C preferred stock will be entitled to receive out of our assets an amount equal to the stated value of their shares, plus any other fees, liquidated damages or dividends then due and owing on their shares, before any distribution or payment to the holders of any junior securities.

Conversion. The Series C preferred stock is convertible at any time, at the option of the holder. In addition, if the market price of our common stock for each trading day for 20 of any 30 consecutive trading-day period exceeds 250% of the highest conversion price in effect during such period, we may force each holder to convert all or part of such holder’s shares into shares of common stock.

Each share of Series C preferred stock is convertible into the number of shares of common stock equal to the quotient obtained by dividing (1) the sum of the stated value plus all accrued but unpaid dividends on such share, by (2) the per share conversion price. The initial per share conversion price was $0.095 (pre-stock split), but has been reset pursuant to the Series C designations to $0.017824 as of June 15, 2016. The conversion price will automatically adjust downward to 80% of the then-current market price of our common stock 15 trading days after any subsequent reverse stock split of the common stock, and 5 trading days after any conversions of our outstanding convertible debt. The conversion price is subject to further adjustment under certain circumstances to protect the holders of Series C preferred stock from dilution relative to certain issuances of common stock, or securities convertible into or exercisable for shares of common stock. Subject to certain exceptions, if we issue shares of common stock, or such other securities, at a price per share less than the then-effective conversion price, the conversion price will be adjusted to equal such lower per share consideration.

Series C1 Convertible Preferred Stock

The Series C1 preferred stock has terms that are substantially the same as the Series C preferred stock, except that the Series C1 preferred stock does not pay dividends (unless and to the extent declared on the common stock) or at-the-market “make-whole payments.”

Secured Promissory Note

As of June 15, 2016, we have issued and outstanding $507,614 in aggregate principal amount of secured promissory notes that, as amended, provide the holders the right to convert the outstanding balance into shares of our common stock at a conversion price per share equal to the lower of (1) $25.00 and (2) 75% of the lowest daily volume weighted average price per share of our common stock during the five business days prior to conversion. If the conversion price at the time of any conversion request would be lower than $15.00 per share, we have the option of delivering the conversion amount in cash in lieu of shares of our common stock. The note is secured by a lien on our inventory and accounts receivables.

Senior Secured Convertible Note

As of June 15, 2016, we have issued and outstanding $1,525,000 million in aggregate principal amount of a senior secured convertible note that is convertible at any time, in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price equal to $0.014224 per share, subject to certain customary adjustments and anti-dilution provisions. The note is secured by a lien on all of our assets.

Convertible Note

As of June 15, 2016, we have issued and outstanding $240,000 in aggregate principal amount of a convertible note that is convertible at any time, in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price equal to $0.017402 per share, subject to certain customary adjustments and anti-dilution provisions.

Warrants and Options

We have issued warrants to purchase our common stock from time to time in connection with certain financing arrangements. As of June 15, 2016, there are warrants exercisable for an aggregate of 191,815,878 shares of common stock outstanding, as follows:

 23
Item 11. INFORMATION WITH RESPECT TO THE REGISTRANT
 

Warrants
(Underlying Shares)

Exercise Price Per Share

Expiration Date

2,852(1)$105.00November 20, 2016
18,581(2)$10.46May 23, 2018
12,066,450(3)$0.09375May 23, 2018
2,000(4)$50.00April 23, 2019
5,618(5)$45.00May 22, 2019
1,842(5)$38.00September 10, 2019
3,255(6)$46.081September 27, 2019
7,553(7)$28.13December 2, 2019
83,927(8)$9.00December 2, 2020
83,927(8)$11.00December 2, 2020
20,000(9)$25.50March 30, 2018
17,547(10)$11.88June 29, 2020
120,000(11)$1.03June 29, 2020
115,789(12)$1.03September 4, 2020
131,842(13)$1.03September 21, 2020
5,163(14)$11.88September 4, 2020
157,895(15)$1.03October 23, 2020
5,163(16)$11.88October 23, 2020
202,123,172(17)$0.01422June 6, 2021
4,850,956(18)$0.01422February 12, 2021
13,791,518(19)$0.017402June 6, 2021
233,615,051   

(1)Issued as part of a November 2011 private placement.
(2)Issued in June 2015 in exchange for warrants originally issued in a May 2013 private placement.
(3)Issued in June 2015 in exchange for warrants originally issued in a May 2013 private placement.
(4)Issued to a placement agent in conjunction with an April 2014 private placement.
(5)Issued to a placement agent in conjunction with a September 2014 private placement.
(6)Issued as part of a September 2014 Regulation S offering.
(7)Issued to a placement agent in conjunction with a 2014 public offering.
(8)Issued in June 2015 in exchange for warrants originally issued as part of a 2014 public offering.
(9)Issued as part of a March 2015 private placement.
(10)Issued to a placement agent in conjunction with a June 2015 private placement.
(11)Issued as part of a June 2015 private placement.
(12)Issued as part of a June 2015 private placement.
(13)Issued as part of a June 2015 private placement.
(14)  Issued to a placement agent in conjunction with a June 2015 private placement.
(15)Issued as part of a June 2015 private placement.
(16)Issued to a placement agent in conjunction with a June 2015 private placement.
(17)Issued as part of a February 2016 private placement.
(18)Issued to a placement agent in conjunction with a February 2016 private placement.
(19)Contractually obligated to be issued pursuant to a strategic license agreement.

All outstanding warrant agreements provide for anti-dilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations, stock dividends, stock splits or other changes in our corporate structure. In addition, warrants subject to footnotes (3) and (11)-(19) in the table above are subject to “lower price issuance” anti-dilution provisions that automatically reduce the exercise price of the warrants (and, in the cases of warrants subject to footnote (3) in the table above and footnote (17), increase the number of shares of common stock issuable upon exercise), to the offering price in a subsequent issuance of our common stock, unless such subsequent issuance is exempt under the terms of the warrants.

The warrants subject to footnote (3) are subject to a mandatory exercise provision. This provision permits us, subject to certain limitations, to require exercise of such warrants at any time following (a) the date that is the 30th day after the later of our receipt of an approvable letter from the FDA for LuViva and the date on which the common stock achieves an average market price for 20 consecutive trading days of at least $1.30 with an average daily trading volume during such 20 consecutive trading days of at least 250 shares, or (b) the date on which the average market price of the common stock for 20 consecutive trading days immediately prior to the date we deliver a notice demanding exercise is at least $162.00 and the average daily trading volume of the common stock exceeds 250 shares for such 20 consecutive trading days. If these warrants are not timely exercised upon demand, they will expire. Upon the occurrence of certain events, we also may be required to repurchase these warrants, as well as the warrants subject to footnote (2) in the table above.

 24
Overview
 

The warrants subject to footnote (6) in the table above are also subject to a mandatory exercise provision. This provision permits us, subject to certain limitations, to require the exercise of such warrants should the average trading price of our common stock over any 30 consecutive day trading period exceed $92.16.

The warrants subject to footnote (8) in the table above are also subject to a mandatory exercise provision. This provision permits us, subject to certain limitations, to require exercise of 50% of the then-outstanding warrants if the trading price of our common stock is at least two times the initial warrant exercise price for any 20-day trading period. Further, in the event that the trading price of our common stock is at least 2.5 times the initial warrant exercise price for any 20-day trading period, we will have the right to require the immediate exercise of 50% of the then-outstanding warrants. Any warrants not exercised within the prescribed time periods will be canceled to the extent of the number of shares subject to mandatory exercise.

The holders of the warrants subject to footnote (3) in the table above have agreed to surrender the warrants upon consummation of this offering for new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered warrants.

As of June 15, 2016, we have issued options to purchase a total of 104,356 shares of our common stock pursuant to our equity incentive plan, at a weighted average exercise price of $45.46 per share. Recommendations for option grants under our equity incentive plans are made by the compensation committee of our board, subject to ratification by the full board. The compensation committee may issue options with varying vesting schedules, but all options granted pursuant to our equity incentive plans must be exercised within ten years from the date of grant.

 25

OUR BUSINESS

We are a medical technology company focused on developing innovative medical devices that have the potential to improve healthcare. Our primary focus is the sales and marketing of our LuViva® Advanced Cervical Scan non-invasive cervical cancer detection device. The underlying technology of LuViva primarily relates to the use of biophotonics for the non-invasive detection of cancers. LuViva is designed to identify cervical cancers and precancers painlessly, non-invasively and at the point of care by scanning the cervix with light, then analyzing the reflected and fluorescent light.

LuViva provides a less invasive and painless alternative to conventional tests for cervical cancer screening and detection. Additionally, LuViva improves patient well-being not only because it eliminates pain, but also because it is convenient to use and provides rapid results at the point of care. We focus on two primary applications for LuViva: first, as a cancer screening tool in the developing world, where infrastructure to support traditional cancer-screening methods is limited or non-existent, and second, as a triage following traditional screening in the developed world, where a high number of false positive results cause a high rate of unnecessary and ultimately costly follow-up tests.

Screening for cervical cancer represents one of the most significant demands on the practice of diagnostic medicine. As cervical cancer is linked to a sexually transmitted disease—the human pampillomaviruspapillomavirus (HPV)—every woman essentially becomes “at risk” for cervical cancer simply after becoming sexually active. In the developing world, there are approximately 2.0 billion women aged 15 and older who are potentially eligible for screening with LuViva. Guidelines for screening intervals vary across the world, but U.S. guidelines call for screening every three years. Traditionally, the Pap smear screening test, or Pap test, is the primary cervical cancer screening methodology in the developed world. However, in developing countries, cancer screening using Pap tests is expensive and requires infrastructure and skill not currently existing, and not likely to be developed in the near future, in these countries.

We believe LuViva is the answer to the developing world’s cervical cancer screening needs. Screening for cervical cancer in the developing world often requires working directly with foreign governments or non-governmental agencies (NGOs). By partnering with governments or NGOs, we are able tocan provide immediate access to cervical cancer detection to large segments of a nation’s population as part of national or regional governmental healthcare programs, eliminating the need to develop expensive and resource-intensive infrastructures.

 26
 

Manufacturing, Sales Marketing and Distribution

We manufacture LuViva at our Norcross, Georgia facility. Most of the components of LuViva are custom made for us by third-party manufacturers. We adhere to ISO 13485:2003 quality standards in our manufacturing processes.

Research, Development and Engineering

We have been engaged primarily in the research, development and testing of our LuViva non-invasive cervical cancer detection product and our core biophotonic technology. Since 2013, we have incurred about $7.0 million in research and development expenses, net of about $927,000 reimbursed through collaborative arrangements and government grants. Research and development costs were approximately $1.5 million and $2.8 million in 2015 and 2014, respectively

Patents

We have pursued a course of developing and acquiring patents and patent rights and licensing technology. Our success depends in large part on our ability to establish and maintain the proprietary nature of our technology through the patent process and to license from others patents and patent applications necessary to develop our products. As of December 31, 2015, we have 24 granted U.S. patents relating to our biophotonic cancer detection technology and six pending U.S. patent applications. We also have three granted patents that apply to our interstitial fluid analysis system.

The Need for LuViva

In the developed world, we believe LuViva offers a more accurate and ultimately cost-effective triage medical device, to be used once a traditional Pap test or HPV test indicates the possibility of cervical cancer. Due to the high number of false positive results from Pap tests, traditional follow-on tests entail increased medical treatment costs. We believe these costs can be minimized by utilizing LuViva as a triage to determine whether follow-on tests are actually warranted.

We believe our non-invasive cervical cancer detection technology can be applied to the early detection of other cancers as well. In 2013, we announced a license agreement with Konica Minolta, Inc. allowing us to manufacture and develop a non-invasive esophageal cancer detection product from Konica Minolta based on our biophotonic technology platform.platform. Early market analyses of our biophotonic technology indicated that skin cancer detection was also promising, but currently we are focused primarily on the large-scale commercialization of LuViva.

 27
 

Cancer

Cancer is a group of many related diseases. All forms of cancer involve the out-of-control growth and spread of abnormal cells. Normal cells grow, divide, and die in an orderly fashion. Cancer cells, however, continue to grow and divide and can spread to other parts of the body. In America, half of all men and one-third of all women will develop some form of cancer during their lifetimes. According to the American Cancer Society, the sooner a cancer is found and treatment begins, the better a patient’s chances are of being cured. We began investigating the applications of our biophotonic technology to cancer detection before 1997, when we initiated a preliminary market analysis. We concluded that our biophotonic technology had applications for the detection of a variety of cancers through the exposure of tissue to light. We selected detection of cervical cancer and skin cancer from a list of the ten most promising applications to pursue initially, and ultimately focused primarily on our LuViva cervical cancer detection device.


Cervical cancer is a cancer that begins in the lining of the cervix (which is located in the lower part of the uterus). Cervical cancer forms over time and may spread to other parts of the body if left untreated. There is generally a gradual change from a normal cervix to a cervix with precancerous cells to cervical cancer. For some women, precancerous changes may go away without any treatment. While the majority of precancerous changes in the cervix do not advance to cancer, if precancers are treated, the risk that they will become cancers can be greatly reduced.

The Developing World

According to the most recent data published by the World Health Organization (WHO), cervical cancer is the fourth most frequent cancer in women worldwide, with an estimated 530,000 new cases in 2012. For women living in less developed regions, however, cervical cancer is the second most common cancer, with an estimated 445,000 new cases in 2012 (84% of the new cases worldwide). In 2012, approximately 270 000270,000 women died from cervical cancer; more than 85% of these deaths occurring in low- and middle-income countries.

 28
 

As noted by the WHO, in developed countries, programs are in placesplace that enable women to get screened, making most pre-cancerous lesions identifiable at stages when they can easily be treated. Early treatment prevents up to 80% of cervical cancers in these countries. In developing countries, however, limited access to effective screening means that the disease is often not identified until it is further advanced and symptoms develop. In addition, prospects for treatment of such late-stage disease may be poor, resulting in a higher rate of death from cervical cancer in these countries.

We believe that the greatest need and market opportunity for LuViva lies in screening for cervical cancer in developing countries where the infrastructure for traditional screening may be limited or non-existent.

We are actively working with distributors in the following countries to implement government-sponsored screening programs: Turkey, Bangladesh, Indonesia, Kenya and Nigeria. The number of screening candidates in those countries is approximately 246131 million and represents 3Indonesia and Nigeria represent 2 of the 10 most populous countries in the world.

The Developed World

The Pap test, which involves a sample of cervical tissue being placed on a slide and observed in a laboratory, is currently the most common form of cervical cancer screening. Since the introduction of screening and diagnostic methods, the number of cervical cancer deaths in the developed world has declined dramatically, due mainly to the increased use of the Pap test. However, the Pap test has a wide variation in sensitivity, which is the ability to detect the disease, and specificity, which is the ability to exclude false positives. A study by Duke University for the U.S. Agency for Health Care Policy and Research published in 1999 showed Pap test performance ranging from a 22%-95% sensitivity and 78%-10% specificity, although new technologies improving the sensitivity and specificity of the Pap test have recently been introduced and are finding acceptance in the marketplace. About 60 million Pap tests are given annually in the United States, at an average price of approximately $26 per test.

 29
 

After a Pap test returns a positive result for cervical cancer, accepted protocol calls for a visual examination of the cervix using a colposcope, usually followed by a biopsy, or tissue sampling, at one or more locations inon the cervix. This method looks for visual changes attributable to cancer. There are about two million colposcope examinations annually in the United States and Europe. In 2003, the average cost of a stand-alone colposcope examination in the United States was $185 and the average cost of a colposcopy with biopsy was $277.

Given this landscape, we believe that there is a material need and market opportunity for LuViva as a triage device in the developed world where LuViva represents a more cost-effective method of verifying a positive Pap test than the alternatives.

The LuViva Advanced Cervical Scan

LuViva is designed to identify cervical cancers and precancers painlessly, non-invasively and at the point of care by scanning the cervix with light, then analyzing the light reflected from the cervix. The information presented by the light would be used to indicate the likelihood of cervical cancer or precancers. Our product, in addition to detecting the structural changes attributed to cervical cancer, is also designed to detect the biochemical changes that precede the development of visual lesions. In this way, cervical cancer may be detected earlier in its development, which should increase the chances of effective treatment. In addition to the device itself, operation of LuViva requires employment of our single-use, disposable calibration and alignment cervical guide.

To date, thousands of women in multiple international clinical settings have been tested with LuViva. As a result, more than 25 papers and presentations have been published regarding LuViva in a clinical setting, the most recent being presentedincluding at the International Federation of GynaecologyGynecology and Obstetrics Congress in 2015.

London in 2015 and at the Indonesian National Obstetrics and Gynecology (POGI) Meeting in Solo in 2016.


Internationally, we contract with country-specific or regional distributors. We believe that the international market will be significantly larger than the U.S. market due to the international demand for cervical cancer screening. We have formal distribution agreements in place covering 54 countries and plan on adding additional countries in 2016.

2018.

We have previously obtained regulatory approval to sell LuViva in Europe under our Edition 3 CE Mark. Additionally, LuViva has also obtained marketing approval from Health Canada, COFEPRIS in Mexico, Ministry of Health in Kenya and the Singapore Health Sciences Authority. We currently are seeking regulatory approval to market LuViva in the United States, but have not yet received approval from the U.S. Food and Drug Administration (FDA). As of March 7, 2016,31, 2018, we have sold 93138 LuViva devices and approximately 35,00072,000 single-use-disposable cervical guides to international distributors.

We believe our non-invasive cervical cancer detection technology can be applied to the early detection of other cancers as well. From 2008 to early 2013, we worked with Konica Minolta to explore the feasibility of adapting our microporation and biophotonic cancer detection technology to other areas of medicine and to determine potential markets for these products in anticipation of a development agreement. In February 2013, we replaced our existing agreements with Konica Minolta with a new agreement, pursuant to which, subject to the payment of a nominal license fee due upon FDA approval, Konica Minolta has granted us a five-year, world-wide, non-transferable and non-exclusive right and license to manufacture and to develop a non-invasive esophageal cancer detection product from Konica Minolta and based on our biophotonic technology platform. The license permits us to use certain related intellectual property of Konica Minolta. In return for the license, we have agreed to pay Konica Minolta a royalty for each licensed product we sell. We continue to seek new collaborative partners to further develop our biophotonic technology.

Manufacturing, Sales Marketing and Distribution

We manufacture LuViva at our Norcross, Georgia facility. Most of the components of LuViva are custom made for us by third-party manufacturers. We adhere to ISO 13485:2003 quality standards in our manufacturing processes. Our single-use cervical guides are manufactured by a vendor that specializes in injection molding of plastic medical products.

On January 22, 2017, we entered into a license agreement with Shandong Yaohua Medical Instrument Corporation (“SMI”) pursuant to which we granted SMI an exclusive global license to manufacture the LuViva device and related disposables (subject to a carve-out for manufacture in Turkey).

We rely on distributors to sell our products. Distributors can be country exclusive or cover multiple countries in a region. We manage these distributors, provide them marketing materials and train them to demonstrate and operate LuViva. We seek distributors that have experience in gynecology and in introducing new technology into their assigned territories.

We have only limited experience in the production planning, quality system management, facility development, and production scaling that will be needed to bring production to increased sustained commercial levels. We will likely need to develop additional expertise in order to successfully manufacture, market, and distribute any future products.

 30
 

Research, Development and Engineering

We have been engaged primarily in the research, development and testing of our LuViva non-invasive cervical cancer detection product and our core biophotonic technology. Since 2013, we have incurred about $7.0$7.5 million in research and development expenses, net of about $927,000 reimbursed through collaborative arrangements and government grants. Research and development costs were approximately $1.5 million$0.3 and $2.8$0.7 million in 20152017 and 2014,2016, respectively.

Since 2013, we have focused our research and development and our engineering resources almost exclusively on development of our biophotonic technology, with only limited support of other programs funded through government contracts or third partythird-party funding. Because our research and clinical development programs for other cancers are at a very early stage, substantial additional research and development and clinical trials will be necessary before we can produce commercial prototypes of other cancer detection products.

Several of the components used in LuViva currently are available from only one supplier, and substitutes for these components could not be obtained easily or would require substantial modifications to our products.

Patents

We have pursued a course of developing and acquiring patents and patent rights and licensing technology. Our success depends in large part on our ability to establish and maintain the proprietary nature of our technology through the patent process and to license from othersother’s patents and patent applications necessary to develop our products. As of DecemberMarch 31, 2015,2018, we have 24 granted U.S. patents relating to our biophotonic cancer detection technology and six pending U.S. patent applications. We also have three granted patents that apply to our interstitial fluid analysis system.


Competition

The medical device industry in general and the markets for cervical cancer detection in particular, are intensely competitive. If successful in our product development, we will compete with other providers of cervical cancer detection and prevention products.

Current cervical cancer screening and diagnostic tests, primarily the Pap test, HPV test, and colposcopy, are well established and pervasive. Improvements and new technologies for cervical cancer detection and prevention, such as Thin-Prep from Hologic and HPV testing from Qiagen, have led to other new competitors. In addition, there are other companies attempting to develop products using forms of biophotonic technologies in cervical cancer detection, such as Spectrascience, which has a very limited U.S. FDA approval to market its device for detection of cervical cancers, but has not yet entered the market. The approval limits use of the Spectrascience device only after a colposcopy, as an adjunct. In addition to the Spectrascience device, there are other technologies that are seeking to enter the market as adjuncts to colposcopy, including devices from Dysis and Zedco. While these technologies are not direct competitors to LuViva, modifications to them or other new technologies will require us to develop devices that are more accurate, easier to use or less costly to administer so that our products have a competitive advantage.

In April 2014, the U.S. FDA approved the use of the Roche cobas HPV test as a primary screener for cervical cancer. Using a sample of cervical cells, the cobas HPV test detects DNA from 14 high-risk HPV types. The test specifically identifies HPV 16 and HPV 18, while concurrently detecting 12 other types of high-risk HPVs. This could make HPV testing a competitor to the Pap test. However, due to its lower specificity, we believe that screening with HPV will increase the number of false positive results if widely adopted.

In June 2006, the U.S. FDA approved the HPV vaccine Gardasil from drug maker Merck. Gardasil is a prophylactic HPV vaccine, meaning that it is designed to prevent the initial establishment of HPV infections. For maximum efficacy, it is recommended that girls receive the vaccine prior to becoming sexually active. Since Gardasil will not block infection with all of the HPV types that can cause cervical cancer, the vaccine should not be considered a substitute for routine Pap tests. On October 16, 2009, GlaxoSmithKline PLC was granted approval in the United States for a similar preventive HPV vaccine, known as Cervarix. Due to the limited availability and lack of 100% protection against all potentially cancer-causing strains of HPV, we believe that the vaccines will have a limited impact on the cervical cancer screening and diagnostic market for many years.

Legal Proceedings
We are subject to claims and legal actions that arise in the ordinary course of business. However, we are not currently subject to any claims or actions that we believe would have a material adverse effect on our financial position or results of operations.
Government Regulation

The medical devices that we manufacture are subject to regulation by numerous regulatory bodies, including the CFDA, the U.S. FDA, and comparable international regulatory agencies. These agencies require manufacturers of medical devices to comply with applicable laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of medical devices. Devices are generally subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation program be conducted before a device receives approval for commercial distribution.

 31
 

In the European Union, medical devices are required to comply with the Medical Devices Directive and obtain CE Mark certification in order to market medical devices. The CE Mark certification, granted following approval from an independent “Notified Body,” is an international symbol of adherence to quality assurance standards and compliance with applicable European Medical Devices Directives. WeDuring 2017 we were unable to pay the annual registration fees to maintain our ISO 13485:2003 certification which since 2014and our CE Mark. Once our financing is completed, we will make the required payments and reobtain both certifications.
China has allowed usa regulatory regime similar to issue our Edition 3 CE Mark and sell LuViva inthat of the European Union, but due to interaction with the U.S. regulatory regime, the CFDA also shares some similarities with its U.S. counterpart. Devices are classified by the CFDA’s Center for Medical Device Evaluation (CMDE) into three categories based on medical risk, with the level of regulatory oversight determined by degree of risk and other markets.

Distributorsinvasiveness. CMDE’s device classifications and definitions are as follows:

●
Class I device: The safety and effectiveness of the device can be ensured through routine administration.
●
Class II device: Further control is required to ensure the safety and effectiveness of the device.
●
Class III device: The device is implanted into the human body; used for life support or sustenance; or poses potential risk to the human body, and thus must be strictly controlled in respect to safety and effectiveness.

Based on the above definitions and several discussions with regulatory consultants and potential partners, we believe that LuViva is most likely to be classified as a Class II device, however, this is not certain and the CFDA may determine that LuViva requires a Class III registration. Class III registrations are granted by the national CFDA office while Class I and II registrations occur at the provincial level. Typically, registration granted at the provincial level allows a medical device to be marketed in all of China’s provinces.
While Class I devices usually do not require clinical trial data from Chinese patients and Class III devices almost always do, Class II medical devices sometimes do and sometimes do not require Chinese clinical trials, and this determination may depend on the claim for the device and quality of clinical trials conducted outside of China. If clinical trials conducted in China are required, they usually are less burdensome for Class II devices than Class III devices.
CFDA labs also beconduct electrical, mechanical and electromagnetic emission safety testing for medical devices similar to those required tofor the CE Mark. As is the case with the U.S. FDA, manufacturers in China undergo periodic inspections and must comply with other foreign regulatory agencies, and we orinternational quality standards such as ISO 13485 for medical devices. As part of our distributors currently have marketingagreement with SMI, SMI will underwrite the cost of securing approval forof LuViva from Health Canada, COFEPRIS in Mexico,with the Ministry of Health in Kenya, and the Singapore Health Sciences Authority. The time required to obtain these foreign approvals to market our products may be longer or shorter than that required in the United States, and requirements for those approvals may differ from those required by the FDA.

CFDA.

In the United States, permission to distribute a new device generally can be met in one of two ways. The first process requires that a pre-market notification (510(k) Submission) be made to the U.S. FDA to demonstrate that the device is as safe and effective as, or substantially equivalent to, a legally marketed device that is not subject to premarket approval (PMA). A legally marketed device is a device that (1) was legally marketed prior to May 28, 1976, (2) has been reclassified from Class III to Class II or I, or (3) has been found to be substantially equivalent to another legally marketed device following a 510(k) Submission. The legally marketed device to which equivalence is drawn is known as the “predicate” device. Applicants must submit descriptive data and, when necessary, performance data to establish that the device is substantially equivalent to a predicate device. In some instances, data from human clinical studies must also be submitted in support of a 510(k) Submission. If so, these data must be collected in a manner that conforms with specific requirements in accordance with federal regulations. The U.S. FDA must issue an order finding substantial equivalence before commercial distribution can occur. Changes to existing devices covered by a 510(k) Submission which do not significantly affect safety or effectiveness can generally be made by us without additional 510(k) Submissions.

The second process requires that an application for premarket approval (PMA) be made to the U.S. FDA to demonstrate that the device is safe and effective for its intended use as manufactured. This approval process applies to most Class III devices, including LuViva. In this case, two steps of U.S. FDA approval are generally required before marketing in the United States can begin. First, investigational device exemption (IDE) regulations must be complied with in connection with any human clinical investigation of the device in the United States. Second, the U.S. FDA must review the PMA application, which contains, among other things, clinical information acquired under the IDE. The U.S. FDA will approve the PMA application if it finds that there is a reasonable assurance that the device is safe and effective for its intended purpose.

We completed enrollment in our U.S. FDA pivotal trial of LuViva in 2008 and, on November 18, 2010,after the U.S. FDA requested two-years of follow-up data for patients enrolled in the study, the U.S. FDA accepted our completed PMA application on November 18, 2010, effective September 23, 2010, for substantive review. On March 7, 2011, we announced that the U.S. FDA had inspected two clinical trial sites and audited our clinical trial data base systems as part of its review process and raised no formal compliance issues. On January 20, 2012, we announced our intent to seek an independent panel review of our PMA application after receiving a “not-approvable” letter from the U.S. FDA. On November 14, 2012 we filed an amended PMA with the U.S. FDA. On September 6, 2013, we received a letter from the U.S. FDA with additional questions and met with the U.S. FDA on May 8, 2014 to discuss our response. On July 25, 2014, we announced that we had responded to the U.S. FDA’s most recent questions

questions.

We received a “not-approvable” letter from the U.S. FDA on May 15, 2015. We had a follow up meeting with the U.S. FDA to discuss a path forward on November 30, 2015, at which we agreed to submit a detailed clinical protocol for U.S. FDA review so that additional studies can be completed. These studies will not be completed in 2016.2018, although we intend to pursue FDA approval and start studies in 2018 once funds are available. We remain committed to obtaining U.S. FDA approval, but we are focused on international sales growth, where we believe the commercial opportunities are larger and the clinical need is more significant.

The process of obtaining clearance to market products is costly and time-consuming in virtually all of the major markets in which we sell, or expect to sell, our products and may delay the marketing and sale of our products. Countries around the world have recently adopted more stringent regulatory requirements, which are expected to add to the delays and uncertainties associated with new product releases, as well as the clinical and regulatory costs of supporting those releases. No assurance can be given that our products will be approved on a timely basis in any particular jurisdiction, if at all. In addition, regulations regarding the development, manufacture and sale of medical devices are subject to future change. We cannot predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

 32
 


Noncompliance with applicable requirements can result in import detentions, fines, civil penalties, injunctions, suspensions or losses of regulatory approvals or clearances, recall or seizure of products, operating restrictions, denial of export applications, governmental prohibitions on entering into supply contracts, and criminal prosecution. Failure to obtain regulatory approvals or the restriction, suspension or revocation of regulatory approvals or clearances, as well as any other failure to comply with regulatory requirements, would have a material adverse effect on our business, financial condition and results of operations.

Regulatory approvals and clearances, if granted, may include significant labeling limitations and limitations on the indicated uses for which the product may be marketed. In addition, to obtain regulatory approvals and clearances, the U.S. FDA and some foreign regulatory authorities impose numerous other requirements with which medical device manufacturers must comply. U.S. FDA enforcement policy strictly prohibits the marketing of approved medical devices for unapproved uses. Any products we manufacture or distribute under U.S. FDA clearances or approvals are subject to pervasive and continuing regulation by the U.S. FDA. The U.S. FDA also requires us to provide it with information on death and serious injuries alleged to have been associated with the use of our products, as well as any malfunctions that would likely cause or contribute to death or serious injury.

The U.S. FDA requires us to register as a medical device manufacturer and list our products. We are also subject to inspections by the U.S. FDA and state agencies acting under contract with the U.S. FDA to confirm compliance with good manufacturing practice. These regulations require that we manufacture our products and maintain documents in a prescribed manner with respect to manufacturing, testing, quality assurance and quality control activities. The U.S. FDA also has promulgated final regulatory changes to these regulations that require, among other things, design controls and maintenance of service records. These changes will increase the cost of complying with good manufacturing practice requirements.

Distributors of medical devices may also be required to comply with other foreign regulatory agencies, and we or our distributors currently have marketing approval for LuViva from Health Canada, COFEPRIS in Mexico, the Ministry of Health in Kenya, and the Singapore Health Sciences Authority. The time required to obtain these foreign approvals to market our products may be longer or shorter than that required in China or the United States, and requirements for those approvals may differ from those required by the CFDA or the U.S. FDA.
We are also subject to a variety of other controls that affect our business. Labeling and promotional activities are subject to scrutiny by the U.S. FDA and, in some instances, by the U.S. Federal Trade Commission. The U.S. FDA actively enforces regulations prohibiting marketing of products for unapproved users. We are also subject, as are our products, to a variety of state and local laws and regulations in those states and localities where our products are or will be marketed. Any applicable state or local regulations may hinder our ability to market our products in those regions. Manufacturers are also subject to numerous federal, state and local laws relating to matters such as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may be required to incur significant costs to comply with these laws and regulations now or in the future. These laws or regulations may have a material adverse effect on our ability to do business.

We will

Although our marketing and distribution partners around the world assist in the regulatory approval process, ultimately, we are be responsible for obtaining and maintaining regulatory approvals for our products. The inability or failure to comply with the varying regulations or the imposition of new regulations would materially adversely affect our business, financial condition and results of operations.

Employees and Consultants

As of March 31, 2016,2018, we had tennine regular employees and two consultantsone consultant to provide services to us on a full- or part-time basis. Of the 12 peopleten-people employed or engaged by us, 32 are engaged in engineering, manufacturing and development, 34 are engaged in sales and marketing activities, 1 is engaged in clinical testing and regulatory affairs, 1 are engaged in research and development activities, and 43 are engaged in administration and accounting. No employees are covered by collective bargaining agreements, and we believe we maintain good relations with our employees.

Our ability to operate successfully and manage our potential future growth depends in significant part upon the continued service of key scientific, technical, managerial and finance personnel, and our ability to attract and retain additional highly qualified personnel in these fields. Two of these key employees have an employment contract with us; none are covered by key person or similar insurance. In addition, if we are able to successfully develop and commercialize our products, we likely will need to hire additional scientific, technical, marketing, managerial and finance personnel. We face intense competition for qualified personnel in these areas, many of whom are often subject to competing employment offers. The loss of key personnel or our inability to hire and retain additional qualified personnel in the future could have a material adverse effect on our business, financial condition and results of operations.

Corporate History

We are a Delaware corporation, originally incorporated in 1992 under the name “SpectRx, Inc.,” and, on February 22, 2008, changed our name to Guided Therapeutics, Inc. At the same time, we renamed our wholly owned subsidiary, InterScan, which originally had been incorporated as “Guided Therapeutics.”

 33
 

PROPERTIES

Our corporate offices, which also comprise our administrative, researchprincipal executive and development, marketing and production facilities, areoperations facility is located at 5835 Peachtree Corners East, Suite D,B, Norcross, Georgia 30092, where we lease approximately 23,000 square feet under a lease that expires in June 2017.

LEGAL PROCEEDINGS

We are subject to claims and legal actions that arise in the ordinary course of business. However, we are not currently subject to any claims or actions that we believe would have a material adverse effect on our financial position or results of operations.

30092.


MARKET FOR OURPRICE OF THE REGISTRANT’S COMMON STOCKEQUITY AND RELATED STOCKHOLDER MATTERS

Common Stock
Our common stock is dually quotedlisted on the OTC Bulletin Board (OTCBB) and the OTCQB quotation systems under the ticker symbol “GTHP.” The number of record holders of our common stock at June 15, 20161, 2018 was 209. On February 24, 2016, we implemented a210.
A 1:100800 reverse stock split of all of our issued and outstanding common stock.stock was implemented on November 7, 2016. As a result of the reverse stock split, every 100800 shares of issued and outstanding common stock was converted into 1 share of common stock. All fractional shares created by the reverse stock split were rounded to the nearest whole share. The number of authorized shares of common stock did not change.

The high and low salescommon stock share prices for the first and second quarter of 20162018 and calendar years 20152017 and 2014,2016, as reported by the OTCBB, are as set forth in the following table. All share prices set forth in the table have been retroactively adjusted to reflect the 1:100 reverse stock split (as discussed above) for all periods presented.
 
 
2018
 
 
2017
 
 
2016   
 
 
 
High
 
 
Low
 
 
High
 
 
Low
 
 
High
 
 
Low
 
First Quarter
 $0.032 
 $0.006 
 $2.13 
 $0.31 
 $1,352.00 
 $85.60 
Second Quarter*
 $0.016 
 $0.0055 
 $0.40 
 $0.13 
 $140.00 
 $3.28 
Third Quarter
    
    
 $0.18 
 $0.03 
 $7.84 
 $0.80 
Fourth Quarter
    
    
 $0.055 
 $0.013 
 $1.35 
 $0.02 
*Through June 1, 2018.
Holders of Record
The number of record holders of our common stock.

 2016 2015 2014
 High Low High Low High Low
First Quarter$         1.690 $       0.107    $23.00 $14.00 $60.00 $46.00
Second Quarter*$         0.175 $       0.010   $25.00 $8.00 $60.00 $40.00
Third Quarter   $12.00 $5.00 $50.00 $31.00
Fourth Quarter   $6.00 $1.00 $34.00 $21.00

*Throughstock at June 15, 2016.

Dividend Policy

1, 2018 was 148. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.

Dividends
We have notnever declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any dividends sincefuture earnings for use in the operation of our inceptionbusiness and do not intend to payanticipate paying any dividends on our common stock in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

Allfuture, if at all. Any future determination to declare dividends will be made at the securities we have provideddiscretion of our employees,board of directors and consultants have been issued underwill depend on our stock option plans, which are approved byfinancial condition, results of operations, capital requirements, general business conditions and other factors that our stockholders. We have issued common stock to other individuals that are not employees orboard of directors in lieu of cash payments, that are not part of any plan approved by our stockholders.

Securities authorized for issuance under equity compensation plans, as of June 15, 2016:

 

 

 

 

Plan category

 

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

 

 

Weighted-average exercise price of outstanding options, warrants and rights

 

Number of securities

remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

  (a) (b) (c)
Equity compensation plans approved by security holders 

 

 

104,356

 

 

 

$45.00

 

 

 

26,616

Equity compensation plans not approved by security holders 

 

 

-

 

 

 

-

 

 

 

-

 TOTAL 104,356 $45.00 26,616

 34
may deem relevant.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

TheOPERATION

You should read the following discussion should be readof our financial condition and results of operations in conjunction with our financial statements and notes thereto accompanyingincluded elsewhere in this prospectus.

Overview

We The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section labeled “Risk Factors.”

This section of the prospectus includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are a medical technology company focusedoften identified by words like “believe,” “expect,” “estimate,” “anticipate,” “intend,” “project,” and similar expressions, or words that, by their nature, refer to future events. You should not place undue certainty on developing innovative medicalthese forward-looking statements, which apply only as of the date of this prospectus. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

Results of Operations
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
Sales Revenue, Cost of Sales and Gross Loss from Devices and Disposables:Revenues from the sale of LuViva devices that haveand disposables for the potentialthree months ended March 31, 2018 and 2017 were $4,000 and $21,000, respectively. Revenues decreased by approximately $17,000, or 83% from the same period in 2017. The decrease was due to improve healthcare. Our primary focus is theless activity in sales orders being shipped in 2018 and lack of funding to support sales and marketing efforts. Related costs of our LuViva® Advanced Cervical Scan non-invasive cervical cancer detection device.sales were approximately $3,000 and $16,000 for the three months ended March 31, 2018 and 2017, respectively. Costs of sales for the three months ended March 31, 2018 were approximately $13,000, or 82% lower than the same period in 2017. This resulted in a gross profit of approximately $1,000 on the sales of devices and disposables for the three months ended March 31, 2018, compared with a gross profit of approximately $5,000 for the same period in 2017.
Research and Development Expenses:Research and development expenses for the three months ended March 31, 2018 decreased to approximately $69,000, from approximately $91,000 for the same period in 2017. The underlying technologydecrease, of approximately $22,000, or 24%, was primarily due to decreases in payroll expenses.
Sales and Marketing Expenses:Sales and marketing expenses for the three months ended March 31, 2018 decreased to approximately $62,000, from approximately $82,000 for the same period in 2017. The decrease, of approximately $20,000, or 24%, was primarily due to Company-wide expense reduction and cost savings efforts.
General and Administrative Expenses:General and administrative expenses for the three months ended March 31, 2018 decreased to approximately $246,000, from approximately $346,000 for the same period in 2017. The decrease, of approximately $100,000, or 30%, was primarily related to lower compensation and option expenses incurred during the same period.
Other Income:Other income for the three months ended March 31, 2018 increased to approximately $14,000, compared to $2,000 for the same period in 2017. The increase of approximately $12,000, or 600%, was primarily related to a refund from a commercial insurance policy.
Interest Expense:Interest expense for the three months ended March 31, 2018 increased to approximately $244,000, compared to $223,000 for the same period in 2017. The increase of approximately $21,000, or 9%, was primarily due to less debt issuance costs than those incurred during the same period.
Fair Value of Warrants Expense: Fair value of warrants recovery for the three months ended March 31, 2018 increased to approximately $1,688,000, compared to $628,000 for the same period in 2017. The increase of approximately $1,060,000, or 169%, was primarily due to the significant changes in warrant conversion prices.
Net Income (loss):Net Income attributable to common stockholders was approximately $1,027,000, or $0.012 per share, for the three months ended March 31, 2018, compared to a net loss of $206,000, or $(0.22) per share, for the same period in 2017. The increase of $1,233,000, or 600%, was for reasons outlined above.
COMPARISON OF 2017 AND 2016
Sales Revenue, Cost of Sales and Gross Loss from Devices and Disposables: Revenues from the sale of LuViva primarily relatesdevices for 2017 and 2016 were approximately $244,000 and $605,000, respectively. Revenues in 2017 were approximately, $361,000 or 60% lower when compared to the usesame period in 2016, due to lack of biophotonicsfunding to support sales and marketing efforts. In addition, revenues were lower for 2017 and 2016 due to the repurchase of inventory in the amount of $83,000 and $92,000, respectively. Related costs of sales were approximately $530,000 and $493,000 in 2017 and 2016, respectively. Costs of sales in 2017, were approximately, $37,000 or 8% higher when compared to the same period in 2016, due to an increase in the inventory allowance. This resulted in a gross loss of approximately $286,000 on the sales of devices and disposables for 2017 compared with a gross profit of approximately $112,000 for the non-invasive detectionsame period in 2016.
Research and Development Expenses: Research and development expenses for 2017, decreased to approximately $334,000, from approximately $733,000 in 2016. The decrease of cancers. LuViva is designed$399,000, or 54%, was primarily due to identify cervical cancerscost reduction plans in research and precancers painlessly, non-invasivelydevelopment payroll expenses.
Sales and atMarketing Expenses: Sales and marketing expenses for 2017, decreased to approximately $245,000, compared to $393,000 in 2016. The decrease, of approximately $148,000, or 38% was primarily due to Company-wide expense reduction and cost savings efforts.

General and Administrative Expense: General and administrative expenses for 2017, decreased to approximately $2,256,000, compared to $2,806,000 for the pointsame period in 2016. The decrease of care by scanningapproximately $550,000, or 20%, was primarily related to lower compensation and option expenses incurred during the cervix with light, then analyzing the reflectedsame period. For 2017, general and fluorescent light.

LuViva provides a less invasiveadministrative expenses consisted primarily of professional fees, insurance, allowance for doubtful accounts, and painless alternativepaid and accrued compensation costs.

Other Income: Other income was approximately $18,000 in 2017, compared to conventional tests for cervical cancer screening and detection. Additionally, LuViva improves patient well-being not only because it eliminates pain, but also because it is convenient to use and provides rapid results at the point of care. We focus on two primary applications for LuViva: first, as a cancer screening tool$68,000 in the developing world, where infrastructuresame period in 2016, a decrease of $50,000 or 73%.
Interest Expense: Interest expense for 2017 decreased to support traditional cancer-screening methods is limitedapproximately $1,106,000, compared to $1,895,000 for the same period in 2016. The decrease of approximately $789,000, or non-existent,42%, was primarily related to amortization expense of debt issuance cost and second, as a triage following traditional screeningpenalty on event default of convertible debt that were higher in 2016.
Fair Value of Warrants Expense: Fair value of warrants expense for 2017, increased to approximately $6,487,000 compared to fair value of warrants recovery of $1,677,000 for the same period in 2016. The increase of approximately $8,164,000, or 487% was primarily due to the significant changes in warrant conversion prices, in the developed world, where a high numberfiscal year ended December 31, 2017.
Net Loss: Net loss attributable to common stockholders increased to approximately $10,974,000, or $1.29 per share, in 2017, from $4,995,000, or $24.62 per share, in 2016. The increase in the net loss of false positive results cause a high rate of unnecessary$5,979,000, or 120% was for reasons outlined above.
There was no income tax benefit recorded for 2017 or 2016, due to recurring net operating losses.
Liquidity and ultimately costly follow-up tests.

We are a Delaware corporation, originally incorporated in 1992 under the name “SpectRx, Inc.,” and, on February 22, 2008, changed our name to Guided Therapeutics, Inc. At the same time, we renamed our wholly owned subsidiary, InterScan, which originally had been incorporated as “Guided Therapeutics.”

Capital Resources

Since our inception, we have raised capital through the public and private sale of debt and equity, funding from collaborative arrangements, and grants.

Our prospects must be considered in light At March 31, 2018, we had cash 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 competitionapproximately $76,000 and a high failure rate. We have experienced operating losses since our inception and, asnegative working capital of approximately $11.7 million.

Our major cash flows for the quarter ended March 31, 2016 we have an accumulated deficit2018 consisted of about $122.9 million. To date, we have engaged primarily in research and development efforts andcash out-flows of $395,000 from operations, including approximately $1,082,000 of net income, ($1,688,000 from a gain for the early stages of marketing our products. We do not have significant experience in manufacturing, marketing or selling our products. We may not be successful in growing sales for our products. Moreover, required regulatory clearances or approvals may not be obtained in a timely manner, or at all. Our products may not ever gain market acceptance and we may not ever generate significant revenues or achieve profitability. The development and commercialization of our products requires substantial development, regulatory, sales and marketing, manufacturing and other expenditures. We expect our operating losses to continue through at least the end of 2016 as we continue to expend substantial resources to complete commercialization of our products, obtain regulatory clearances or approvals, build our marketing, sales, manufacturing and finance capabilities, and conduct further research and development.

Our product revenues to date have been limited. In 2015, the majority of our revenues were from the sale of LuViva devices and disposables, as well as some revenue from grants from the NIH and licensing agreement fees received. We expect that the majority of our revenue in 2016 will be derived from revenue from the sale of LuViva devices and disposables.

Recent Developments

Reverse Stock Split.On May 18, 2016, our board determined to recommend that at our 2016 annual stockholders’ meeting, our stockholders grant the board the authority, in its discretion, to effect a reverse stock split by a ratio of not less than 1:10 and not more than 1:400, with no change in the numberfair value of authorizedwarrants), and a net change from financing activities of $470,000, which primarily represented the proceeds received from proceeds from debt financing.

On February 13, 2017, we entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $170,000 in aggregate principal amount of a 12% convertible promissory note for an aggregate purchase price of $156,400 (representing a $13,600 original issue discount). On February 13, 2017, we issued the note to Auctus. Pursuant to the purchase agreement, we also issued to Auctus a warrant exercisable to purchase an aggregate of 200,000 shares of our common stock, and all fractional shares created by the reverse stock splitstock. The warrant is exercisable at any time, at an exercise price per share equal to be rounded to the nearest whole share. On May 26, 2016, our largest stockholder, John Imhoff, who is also one of our directors, agreed to vote his shares of common stock in favor$0.00514 (110% of the reverse stock split. As of the record date for the 2016 annual meeting, Dr. Imhoff held 19.26% of the outstanding shares of common stock. The reverse stock split will not be effective unless and until the board files an amendment to our certificate of incorporation, which must occur prior to the first anniversary of the 2016 annual meeting. It is our intent to effect the reverse stock split prior to the closing of this offering.

 35

Warrant Restructuring. Between June 13, 2016 and June 14, 2016, we entered into various agreements with holders of certain warrants (including John Imhoff, the chairman of our board of directors) originally issued in May 2013, and with GPB Debt Holdings II LLC, holder of a warrant issued February 12, 2016, pursuant to which each holder separately agreed to exchange warrants for either (1) shares of common stock equal to 166% of the number of shares of common stock underlying the surrendered warrants, or (2) new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered warrants. As a result of the exchanges, we effectively eliminate any potential exponential increase in the number of underlying shares issuable upon exercise of our outstanding warrants. In total, for surrendered warrants then-exercisable for an aggregate of 115,237,788 shares of common stock (but subject to exponential increase upon operation of certain anti-dilution provisions), we issued or are obligated to issue 13,517,342 shares of common stock and new warrants that, if exercised as of June 14, 2016, would be exercisable for an aggregate of 214,189,622 shares of common stock.

In certain circumstances, in lieu of presently issuing all of the shares (for each holder that opted for shares of common stock), we and the holder further agreed that we will, subject to the terms and conditions set forth in the applicable warrant exchange agreement, from time to time, be obligated to issue the remaining shares to the holder. No additional consideration will be payable in connection with the issuance of the remaining shares.

The holders that elected to receive shares for their surrendered warrants have agreed that they will not sell shares on any trading day in an amount, in the aggregate, exceeding 20% of the composite aggregate trading volumeprice of the common stock for that trading day.

The holders that elected to receive new warrants will be required to surrender their old warrants upon consummation of this offering. The new warrants will have an initial exercise price equal toon the exercise price of the surrendered warrants as of immediatelyday prior to consummation of this offering,issuance), subject to certain customary “downside price protection” for as long as our common stock is not listed onadjustments and price-protection provisions contained in the warrant. The warrant has a national securities exchange, and will expire five yearsfive-year term. The note matured nine months from the date of issuance.

Shenghuo License Agreement.On June 5, 2016, we entered intoissuance and, in addition to the original issue discount, accrues interest at a license agreement with Shenghuo Medical, LLC pursuantrate of 12% per year. We could have prepaid the note, in whole or in part, for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any time from 31 to which we granted Shenghuo an exclusive license60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance to manufacture, sell and distribute LuViva in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Shenghuo was already our exclusive distributor in China, Macau and Hong Kong, and the license extends to manufacturing in those countries as well. Under the terms of the license agreement, once Shenghuo is capable of manufacturing LuViva in accordance with ISO 13485 for medical devices, Shenghuo will pay us 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 will underwrite the cost of securing approval of LuViva with Chinese Food and Drug Administration. At its option, Shenghuo also will provide up to $1.0 million in furtherance of our efforts to secure regulatory approval for LuViva180 days from issuance. After six months from the U.S. Food and Drug Administration,date of issuance, Auctus may convert the note, at any time, in exchange for the right to receive payments equal to 2% of our future saleswhole or in the United States, up to an aggregate of $4.0 million.

Pursuant to the license agreement, Shenghuo has the option, after our next annual meeting of stockholders, to have a designee appointed to our board of directors.

As partial consideration for, and as a condition to, the license, and to further align the strategic interests of the parties, we have agreed to issue a convertible note to Shenghuo, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment to Shenghuo of $240,000, due upon consummation of any capital raising transaction by us within 90 days and with net cash proceeds of at least $1.0 million. Absent such a transaction, the payment will increase to $300,000 and will be payable by December 31, 2016. The note will accrue interest at 20% per year on any unpaid amounts due after that date. The note will be convertiblepart, into shares of our common stock, at a conversion price per shareequal to the lower of $0.017402,the price offered in our next public offering or a 40% discount to the average of the two lowest trading prices of the common stock during the 20 trading days prior to the conversion, subject to certain customary anti-dilution adjustment.adjustments and price-protection provisions contained in the note. The note will be unsecured, and is expected to provide forincludes customary events of default. We will also issue Shenghuodefault provisions and a five-year warrant exercisable immediatelydefault interest rate of 24% per year. Upon the occurrence of an event of default, Auctus may require us to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. In connection with the transaction, we agreed to reimburse Auctus for approximately 13.8 million$30,000 in legal and diligence fees, of which we paid $10,000 in cash and $20,000 in restricted shares of common stock, valued at an exercise price equal$0.40 per share (a 42.86% discount to the conversionclosing price of the note, subject to customary anti-dilution adjustment.

Short Term Promissory Notes.On May 4, 2016 and May 26, 2016, Aquarius Opportunity Fund advanced us a total of $87,500 for 2% simple interest notes due the earlier of December 31, 2016 or consummation of this offering. Also on May 26, 2016, GPB Debt Holdings II LLC, holder of our outstanding senior secured convertible note, advanced as an additional $87,500,common stock on the same terms as the note.day prior to issuance). We intend to offer eachallocated proceeds of them the opportunity to participate in the offering at least up$90,000 to the extent of the outstanding principalwarrants and interest on these cash advances, by extinguishing all or a portion of the debt on a dollar-for-dollar basis.

Series C Exchanges. Series C Exchanges.Between April 27, 2016 and May 3, 2016, we entered into various agreements with certain holders of our Series C preferred stock, including John Imhoff, one of our directors, pursuant to which those holders separately agreed to exchange each share of Series C preferred stock held for 2.25 shares of our newly created Series C1 preferred stock and 9,600 shares of our common stock. In connection with these exchanges, each holder also agreed to exchange the $1,000 stated value per share of the holder’s shares of Series C1 preferred stock for new securities that we issue in the next qualifying financing we undertake on a dollar-for-dollar basis. We expect this offering will be a qualifying financing. Finally, each holder agreed, except in the event of an additional $50,000 cash investment in the financing by the holder, to execute a customary “lockup” agreement in connection with the qualifying financing. In total, for 1,916 shares of Series C preferred stock surrendered, we issued 4,311 shares of Series C1 preferred stock and 18,396,800 shares of common stock.

 36

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.” See “Description of Securities” for a description of the material terms of the Series C1 preferred stock.

Separately, on April 27, 2016, we entered into a rollover and amendment agreement with another holder of Series C preferred stock, Aquarius Opportunity Fund, pursuant to which Aquarius agreed to exchange any shares of Series C preferred stock (stated value plus make-whole dividend), as well as any remaining principal and accrued interest on our convertible promissory note Aquarius holds, for new securities that we issue in our next financing, all on a dollar-for-dollar basis, as long as the next financing involves at least $1 million in cash from investors unaffiliated with Aquarius. We expect this offering will be a qualifying financing. Aquarius also agreed to return to us for cancelation warrants exercisable for 7,148,813 shares of our common stock that it held. Except in the event of an additional $50,000 cash investment by Aquarius in the qualifying financing, Aquarius has agreed to execute a customary “lockup” agreementissued in connection with the financing. Finally, Aquarius, as the holderAs of a majority of the outstanding Series C preferred stock, agreed to amend the Series C stock purchase agreement to eliminate any participation rights held by the Series C shareholders and to waive operation of certain anti-dilution provisions of the Series C that would otherwise be triggered by the transactions described in “—Recent Developments.”

Critical Accounting Policies

Our material accounting policies, which we believe are the most critical to an investors understanding of our financial results and condition, are discussed below. Because we are still early in our enterprise development, the number of these policies requiring explanation is limited. As we begin to generate increased revenue from different sources, we expect that the number of applicable policies and complexity of the judgments required will increase.

Revenue Recognition: We recognize revenue from contracts on a straight line basis, over the terms of the contract. We recognize revenue from grants based on the grant agreement, at the time the expenses are incurred. Revenue from the sale of the Company’s products is recognized upon shipment of such products to its customers.

Valuation of Deferred Taxes: We account for income taxes in accordance with the liability method. Under the liability method, we recognize deferred assets and liabilities based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. We establish a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be utilized against future taxable income.

Valuation of Equity Instruments Granted to Employee, Service Providers and Investors: On the date of issuance, the instruments are recorded at their fair value as determined using either the Black-Scholes valuation model or Monte Carlo Simulation model. See Note 4 to the consolidated financial statements accompanying this report for the assumptions used in the Black-Scholes valuation.

Allowance for Accounts Receivable: We estimate losses from the inability of our customers to make required payments and periodically review the payment history of each of our customers, as well as their financial condition, and revise our reserves as a result.

Inventory Valuation: All inventories are stated at lower of cost or market, with cost determined substantially on a “first-in, first-out” basis. Selling, general, and administrative expenses are not inventoried, but are charged to expense when purchased.

Reverse Stock Split: On February 24, 2016, we implemented a 1:100 reverse stock split of all of our issued and outstanding common stock. As a result of the reverse stock split, every 100 shares of issued and outstanding common stock was converted into 1 share of common stock. All fractional shares created by the reverse stock split were rounded to the nearest whole share. The number of authorized shares of common stock did not change.

 37

Results of Operations (except where indicated, all per share amounts reported on a post-February 2016 reverse stock split basis, but on a pre-__________ 2016 reverse stock split basis)

Comparison of the Three Months Ended March 31, 20162018, we had net debt and 2015

Sales Revenue, Costinterest of Sales and Gross Loss from Devices and Disposables: Sales revenue from the sale of LuViva devices and disposables for the three months ended March 31, 2016, was $262,000, a 106% increase compared to the same period in 2015. Related costs of sales and net realizable value expenses were approximately $68,000, which resulted in a gross profit of approximately $194,000. Sales revenue for the three months ended March 31, 2015, was approximately $127,000. Related costs of sales were approximately $107,000, which resulted in a gross loss on the device and disposables of approximately $20,000. The increase was related to additional sales of devices and disposables with the Company’s primary distributor, which carry a higher profit margin than unit sales.

Research and Development Expenses:  Research and development expenses decreased to approximately $290,000 for the three months ended March 31, 2016, compared to $373,000 for the same period in 2015.  The decrease, of approximately $83,000, was primarily due to a slight decrease in payroll expenses.

Sales and Marketing Expenses:  Sales and marketing expenses were approximately $117,000 during the three months ended March 31, 2016, compared to $172,000 for the same period in 2015. The decrease was primarily due to the Company-wide expense reduction and cost savings efforts.

General and Administrative Expenses:  General and administrative expenses decreased to approximately $917,000 during the three months ended March 31, 2016, compared to approximately $963,000 for the same period in 2015.  The decrease of approximately $46,000, or 5.0%, is primarily related to lower compensation and option expenses incurred during the same period.

Other Income: Other income for the three months ended March 31, 2016, was approximately $23,000, compared to other income of approximately $21,000 for the three months ended March 31, 2015.

Interest Expense:  Interest expense decreased to approximately $158,000 for the three months ended March 31, 2016,$30,800 as compared to approximately $492,000net debt and interest of $76,664 for the same period in 2015, primarily due to amortization of debt discount and debt issuance costs that were higher for the same period in 2015.

Fair Value of Warrants Expense: Fair value of warrants expense recovery was approximately $1,395,000 for the three months ended March 31, 2016, as compared to approximately $714,000 for the same period in 2015.

Net income was approximately $130,000 during the three months ended March 31, 2016, compared to a net loss of $1,245,000 for the same period in 2015, for the reasons outlined above.

Comparison of 2015 and 2014

General:Net loss attributable to common stockholders deceased to approximately $9.5 million, or $7.42 per share, in 2015, from $10.0 million, or $13.02 per share, in 2014.

Sales Revenue, Cost of Sales and Gross Loss from Devices and Disposables:Revenues from the sale of LuViva devices for 2015 and 2014 were approximately $564,000 and $758,000, respectively. Related costs of sales and valuation allowances on the net realizable values were approximately $537,000 and $891,000 in 2015 and 2014, respectively, which resulted in a gross profit of approximately $27,000 on the sales of devices and disposables for 2015 and a gross loss of approximately $133,000 for 2014.

Revenue from Grants and other Agreements: Revenue from grants and other agreements decreased to approximately $42,000 in 2015, from $65,000 in 2014, primarily due to fewer royalty receipts from certain agreements in 2015. There were no costs of sales associated with this revenue in 2015 and 2014.

Research and Development Expenses: Research and development expenses decreased to approximately $1.5 million for 2015, from approximately $2.8 million in 2014. The decrease was primarily due to reduction in research and development expenses due to product launch.

Sales and Marketing Expenses: Sales and marketing expenses decreased to approximately $718,000 in 2015, compared to approximately $1.2 million in 2014, due to an ongoing expense reduction program.

 38

General and Administrative Expense:General and administrative expense decreased to approximately $4.1 million in 2015, from about $4.6 million in 2014. The decrease, of approximately 548,000 or 11.8%, was primarily due to an overall reduction in operating expenses in 2015.

Other Income: Other income was approximately $74,000 in 2015, compared to $25,000 in 2014. The increase was primarily related to income from a distribution agreement entered into in December 31, 2015.

Interest Expense:Interest expense increased to approximately $1.3 million for 2015, as compared to approximately $979,000 for 2014. The increase was primarily related to amortization expense of debt issuance cost and amortization of debt discount, in conjunction with our financing efforts in 2015.

Loss on Extinguishment of Debt: Loss on extinguishment of debt was zero for 2015, compared to approximately $325,000 for 2014. There was no debt extinguished in the year ended December 31, 2015.

Fair Value of Warrants Expense:Fair value of warrants recovery was approximately $568,000 for 2015, as compared to recovery of $65,000 for 2014. The change in fair value of warrants was primarily due to the significant changes in warrant conversion prices, in the fiscal year ended December 31, 2015.

There was no income tax benefit recorded for 2015 or 2014, due to recurring net operating losses.

Liquidity and Capital Resources

Since our inception, we have raised capital through the private sale of preferred stock and debt securities, public and private sales of common stock, funding from collaborative arrangements, and grants. At March 31, 2016, we had cash of approximately $56,000 and working capital deficit of approximately $4.0 million.

Our major cash flows in the quarter ended March 31, 2016, consisted of cash out-flows of approximately $955,000 from operations, no cash inflow nor outflow from investing activities and a net change from financing activities of $976,000, which primarily represents the proceeds received from the issuance of $1,437,500 in principal amount of a 17.0% senior secured convertible note, which resulted in net cash proceeds to the Company of $1,029,000.

Our major cash flows for the year ended December 31, 2015 consisted of cash out-flows of $4.0 million from operations, including approximately $6.9 million of net loss, cash outflows of $8,000 from investing activities and a net change from financing activities of $3.9 million, which primarily represented the proceeds received from issuance of common stock and warrants, proceeds from debt financing, as well as exercise of outstanding warrants and options.

2017.


On February 20, 2014, our President and CEO, Gene Cartwright, advanced us $50,000, in cash, for a 10% simple interest note. On October 23, 2014, August 4, 2014, and May 21, 2014, he advanced us $30,000, $200,000, and $100,000, respectively, in cash for 5% simple interest notes. On December 30, 2015, he advanced us $10,000 in cash for a 6% simple interest note. On October 24, 2014, October 7, 2014, and August 26, 2014, our Senior Vice President of Engineering, Richard Fowler, advanced us $6,100, $20,000 and $75,000, respectively, in cash for 6% simple interest notes. On October 7, 2014, our Director of Marketing advanced us $10,000 in cash for a 6% simple interest note. On November 4, 2014, Richard Blumberg, one of our stockholders, advanced us $100,000 in cash for a note for $106,500 in aggregate principal and interest due November 30, 2014. On February 20, 2014, directors Michael James, Linda Rosenstock, and John Imhoff advanced us $50,000, $50,000, $50,000, and $25,000 in cash, respectively, for 10% simple interest notes.

On April 23, 2014,17, 2017, we entered into a securities purchase agreement with an accredited investorEagle Equities, LLC, providing for the issuance and salepurchase by Eagle of a 6% seniortwo convertible note with an initialredeemable notes in the aggregate principal amount of $1.5 million$88,000, with the first note being in the amount of $44,000, and an 18-month term, forthe second note being in the amount of $44,000. The first note was fully funded on May 19, 2017, upon which we received $40,000 of net proceeds (net of a purchase price of $1.0 million (an approximately 33.3%10% original issue discount). Additionally, pursuantThe second note was issued on December 21, 2017 and was initially paid for by the issuance of an offsetting $40,000 secured note issued by Eagle. Eagle was required to pay the purchase agreement, the investor purchased on May 23, 2014 an additional 6% senior convertible note with a principal amount of $2.0 millionits secured note in cash and in full prior to executing any conversions under the second note we issued. The notes bear an 18-month term, for a fixed purchase priceinterest rate of $2.0 million. On July 1, 2015, we repaid the entire outstanding balance.

On September 2, 2014, we entered into a subscription agreement with a Turkish corporation, pursuant to which, on September 27, 2014, we sold 1,651,042 shares of our common stock (pre-stock split) and a warrant to purchase an additional 325,521 shares (pre-stock split), for an aggregate purchase price of $200,000. The warrant is immediately exercisable, has an exercise price per share of $0.4608 (pre-stock split)8%, and expires five years from the date of issuance.

 39

On September 10, 2014, we entered into a note purchase agreement with an accredited investor pursuant to which we sold a secured promissory note with an initial principal amount of $1,275,000, for a purchase price of $700,000 (an original issue discount of $560,000). Weare due and payable on May 17, 2018. The notes may prepay the notebe converted by Eagle at any time. The note is secured by our current and future accounts receivable and inventory, pursuant to a security agreement entered into in connection with the note purchase agreement. As a result of a series of amendments to the note (since assigned to two accredited investors), the maturity date currently is August 31, 2016, and has been accruing interest at a rate of the lesser of 18% per year or the maximum rate permitted by applicable law. Pursuant to the amendments, the holders may convert the outstanding balancetime after five months from issuance into shares of our common stock at a conversion price per share equal to(as determined in the lower of (1) $0.25 (pre-stock split) and (2) 75% of the lowest daily volume weighted average price per share of our common stock during the five business days prior to conversion. If the conversion pricenotes) calculated at the time of any conversion, request wouldexcept for the second note, which also requires full payment by Eagle of the secured note it issued to us before conversions may be lower than $0.15(pre-stock split) per share,made. The conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which we havereceive 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 we 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. As of deliveringMarch 31, 2018, the conversion amount in cash in lieunotes had been converted and no balance remained outstanding, as compared to net debt of shares$41,322, including unamortized original issue discount of our common stock.

$5,214, unamortized and debt issuance costs of $11,160 for the period ended December 31, 2017.

On November 26, 2014,May 17, 2017, we entered into a securities purchase agreement with certain accredited investorsAdar Bays, LLC, providing for the issuancepurchase by Adar of two convertible redeemable notes in the aggregate principal amount of $88,000, with the first note being in the amount of $44,000, and salethe second note being in the amount of $44,000. The first note was fully funded on May 19, 2017, upon which we received $40,000 of net proceeds (net of a public offering10% original issue discount). The second note was issued on December 21, 2017 and was initially paid for by the issuance of an aggregateoffsetting $40,000 secured note issued by Adar. Adar was required to pay the principal amount of 16,785,415its secured note in cash and in full prior to executing any conversions under the second note we issued. The notes bear an interest rate of 8%, and are due and payable on May 17, 2018. The notes may be converted by Adar at any time after five months from issuance into shares of our common stock (pre-stock split) and five-year warrants(as determined in the notes) calculated at the time of conversion, except for the second note, which also requires full payment by Adar of the secured note it issued to purchase an aggregate of 8,392,708 additional shares (pre-stock split) at a purchaseus before conversions may be made. The conversion price of $0.225 per share (pre-stock split),the notes will be equal to 60% of the lowest trading price of the common stock for aggregate gross proceeds (including non-cash extinguishment of debt) of approximately $3.8 million. We consummated the public offering on December 2, 2014.

On March 16, 2015 and March 19, 2015, we entered into subscription agreements with certain accredited investors, pursuant to20 prior trading days including the day upon which we agreedreceive 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 we 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. As of March 31, 2018, the notes had been converted and no balance remained outstanding. As of March 31, 2018, the notes had been converted and no balance remained outstanding, as compared to sell an aggregatenet debt of 4.0 million shares$42,216, including unamortized original issue discount of our common stock (pre-stock split)$5,214, unamortized and three-year warrants to purchase an additional 2.0 million shares (pre-stock split) with an exercise price per sharedebt issuance costs of $0.255 (pre-stock split),$11,160 for an aggregate purchase price of $720,000.

the period ended December 31, 2017.

On June 29, 2015,May 18, 2017, we entered into a securities purchase agreement with certain accredited investorsGHS Investments, LLC, an existing investor, providing for the issuance and salepurchase by GHS of an aggregate of 6,737 shares of our Series C preferred stock, at a purchase price of $750 per share and an initial conversion price of $0.095 per share (pre-stock split), and five-year warrants exercisable to purchase an aggregate of approximately 106.4 million shares of our common stock (pre-stock split) at an initial exercise price of $0.095 per share (pre-stock split), subject to certain customary adjustments and anti-dilution provisions. On September 3, 2015 we entered into an interim agreement amending the securities purchase agreement to provide for certain of the investors to purchase an additional aggregate of $550,000 in shares of Series C preferred stock and warrants on the same terms as set forth in the original agreement.

On February 24, 2016, we implemented a 1:100 reverse stock split of all of our issued and outstanding common stock. As a result of the reverse stock split, every 100 shares of issued and outstanding common stock was converted into 1 share of common stock. All fractional shares created by the reverse stock split were rounded to the nearest whole share. The number of authorized shares of common stock did not change.

On February 11, 2016, we consented to an assignment of our outstanding securedconvertible promissory note to two accredited investors. In connection within the assignment, the holders waived an ongoing event of default under the notes related to our minimum market capitalization, and agreed to eliminate the requirement going forward. On March 7, 2016, we further amended the notes to eliminate the volume limitations on sales of common stock issued or issuable upon conversion of the notes.

On February 11, 2016, we entered into a securities purchase agreement with an accredited investor for the issuance and sale on February 12, 2016 of approximately $1.4 million in aggregate principal amount of $66,000, for $60,000 in net proceeds (representing a senior secured convertible note for an aggregate purchase price of $1.15 million (a 20%10% original issue discount). The transaction closed on May 19, 2017. The note matures onupon the second anniversaryearlier of issuanceour receipt of $100,000 from revenues, loans, investments, or any other means (other than the Eagle and inAdar bridge financings) and December 31, 2017. In addition to the 20%10% original issue discount, the note accrues interest at a rate of 17%8% per year. SubjectWe may prepay the note, in whole or in part, for 110% of outstanding principal and interest until 30 days from issuance, for 120% of outstanding principal and interest at any time from 31 to certain restrictions, it is60 days from issuance and for 140% of outstanding principal and interest at any time from 61 days to 180 days from issuance. The note may not be prepaid after 180 days. After six months from the date of issuance, the note will become convertible, at any time thereafter, in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price equal to $0.8060% of the lowest trading price during the 25 trading days prior to conversion. The note includes customary event of default provisions and a default interest rate of the lesser of 20% per share, subjectyear or the maximum amount permitted by law. Upon the occurrence of an event of default, the holder of the note may require us to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance. As of March 31, 2018, we had net debt of $66,000 and interest of $6,793, as compared to net debt of $66,000 for the period ended December 31, 2017.

On August 18, 2017, we entered into a securities purchase agreement with Power Up Lending Group Ltd., providing for the purchase by Power Up from us of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on May 19, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain customary adjustmentsrepresentations, warranties, covenants and anti-dilution provisions.events of default, including if we are delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults As of March 31, 2018, the notes had been converted and no balance remained outstanding as compared to a net debt of $46,405, including unamortized debt issuance costs of $6,595 for the period ended December 31, 2017.

On October 12, 2017, we entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for the purchase by Power Up from us of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on July 20, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if we are delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of March 31, 2018, we had net debt of $49,840, including unamortized debt issuance costs of $3,160 as compared to net debt of $47,288, including unamortized debt issuance costs of $5,722 for the period ended December 31, 2017.
On December 11, 2017, we entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for the purchase by Power Up from us of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on September 20, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if we are delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of March 31, 2018, we had net debt of $48,110, including unamortized debt issuance costs of $4,890 as compared to net debt of $45,565, including unamortized debt issuance costs of $7,435 for the period ended December 31, 2017.
On August 7, 2017, we entered into a forbearance agreement with GPB, with regard to the senior secured convertible note. Under the forbearance agreement, GPB has agreed to forbear from exercising certain of its rights and remedies (but not waive such rights and remedies), arising as a result of our failure to pay the monthly interest due and owing on the note. In addition,consideration for the investor receivedforbearance, we agreed to waive, release, and discharge GPB from all claims against GPB based on facts existing on or before the date of the forbearance agreement in connection with the note, or the dealings between we and GPB, or our equity holders and GPB, in connection with the note. Pursuant to the forbearance agreement, we have reaffirmed its obligations under the note and related documents and executed a five-yearconfession of judgment regarding the amount due under the note, which GPB may file upon any future event of default by us. During the forbearance period, we must continue to comply will all the terms, covenants, and provisions of the note and related documents.
On March 20, 2018, we entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $150,000 in aggregate principal amount of a 12% convertible promissory note for an aggregate purchase price of $135,000 (representing a $15,000 original issue discount). On March 20, 2018, we issued the note to Auctus. Pursuant to the purchase agreement, we also issued to Auctus a warrant exercisable to purchase an aggregate of approximately 1.79 million3,409,090 shares of our common stock withstock. The warrant is exercisable at any time, at an exercise price of $0.80 per share equal to $0.00228 (110% of the closing price of the common stock on the day prior to issuance), subject to certain customary adjustments and anti-dilution provisions.

In connection withprice-protection provisions contained in the transaction, on Februarywarrant. The warrant has a five-year term. The note matured nine months from the date of issuance and, in addition to the original issue discount, accrues interest at a rate of 12% per year. We could have prepaid the note, in whole or in part, for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance to 180 days from issuance. After six months from the date of issuance, Auctus may convert the note, at any time, in whole or in part, into shares of our common stock, at a conversion price equal to the lower of the price offered in our next public offering or a 40% discount to the average of the two lowest trading prices of the common stock during the 20 trading days prior to the conversion, subject to certain customary adjustments and price-protection provisions contained in the note. The note includes customary events of default provisions and a default interest rate of 24% per year. Upon the occurrence of an event of default, Auctus may require us to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. As of March 31, 2018, we had net debt of $118,500 including unamortized debt issuance costs of $31,000.

On March 12, 2016,2018, we and the investor entered into a four-year consultingsecurities purchase agreement pursuant towith Eagle Equities, LLC, providing for the purchase by Eagle of a convertible redeemable note in the principal amount of $66,667. The note was fully funded on March 14, 2018, upon which we received $51,000 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 12, 2019. The note may be converted by Eagle at any time after twelve months from issuance into shares of our common stock (as determined in the investor will provide management consulting servicesnotes) calculated at the time of conversion, except for the second note, which also requires full payment by Eagle of the secured note it issued to us in exchange for a royalty payment, payable quarterly,before conversions may be made. The conversion price of the notes will be equal to 3.5%60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which we receive 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 we 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. As of March 31, 2018, the outstanding balance was $51,816, including unamortized debt issuance costs of $8,532 and unamortized discount of $6,319.

On February 12, 2018, we entered into a securities purchase agreement with Adar Bays, LLC, providing for the purchase by Adar of three convertible redeemable notes in the aggregate principal amount of $285,863, with the first note being in the amount of $95,288, and the second and third note being in the same amount. The first note was fully funded on February 13, 2018, upon which we received $75,000 of net proceeds (net of a 10% original issue discount). The notes bear an interest rate of 8%, and are due and payable on October 12, 2018. The notes may be converted by Adar at any time after eight months from issuance into shares of our revenues fromcommon stock (as determined in the salenotes) calculated at the time of products.

See “—Recent Developments”conversion, except for information regarding capital-raising activities sincethe second note, which also requires full payment by Adar of the secured note it issued to us before conversions may be made. The conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which we receive 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 we 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. As of March 31, 2016.

2018, we had a net debt of $76,626, including unamortized debt issuance costs of $11,672 and unamortized discount of $6,890.

On February 8, 2018, we entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for the purchase by Power Up from us of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on November 30, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of our common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if we are delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of March 31, 2018, we had net debt of $46,102, including unamortized debt issuance cost of $6,898.
The “Forbearance Period” shall mean the period beginning on the date hereof and ending on the earliest to occur of: (i) the date on which Lender delivers to us a written notice terminating the Forbearance Period, which notice may be delivered at any time upon or after the occurrence of any Forbearance Default (as hereinafter defined), and (ii) the date we repudiate or assert any defense to any Obligation or other liability under or in respect of this Agreement or the Transaction Documents or applicable law, or makes or pursues any claim or cause of action against Lender; (the occurrence of any of the foregoing clauses (i) and (ii), a “Termination Event”). As used herein, the term “Forbearance Default” shall mean: (A) the occurrence of any Default or Event of Default other than the Specified Default; (B) the failure of us to timely comply with any material term, condition, or covenant set forth in this Agreement; (C) the failure of any representation or warranty made by us under or in connection with this Agreement to be true and complete in all material respects as of the date when made; or (D) Lender’s reasonable belief that we: (1) have ceased or is not actively pursuing mutually acceptable restructuring or foreclosure alternatives with Lender; or (2) are not negotiating such alternatives in good faith. Any Forbearance Default will not be effective until one (1) Business Day after receipt of written notice from Lender of such Forbearance Default. Any effective Forbearance Default shall constitute an immediate Event of Default under the Transaction Documents.
We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements, as soon as possible. We cannot be certain that our existing and available capital resources will be sufficient to satisfy our funding requirements through the second quarter of 2016.2018. We are evaluating various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including loans.

 40
 

Substantial

Generally, substantial capital will be required to develop our products, including completing product testing and clinical trials, obtaining all required U.S. and foreign regulatory approvals and clearances, and commencing and scaling up manufacturing and marketing our products. Any failure to obtain capital would have a material adverse effect on our business, financial condition and results of operations.

Based on discussions with our distributors, we expect to generate purchase orders for approximately $2 million in LuViva devices and disposables in 2018, and expect those purchase orders to result in actual sales of $1.5 million in 2018, representing what we view as current demand for our products. We cannot be assured that we will generate all or any of these additional purchase orders, or that existing orders will not be canceled by the distributors or that parts to build product will be available to meet demand, such that existing orders will result in actual sales. Because we have a short history of sales of our products, we cannot confidently predict future sales of our products beyond this time frame, and cannot be assured of any particular amount of sales. Accordingly, we have not identified any particular trends with regard to sales of our products.

Our financial statements have been prepared and presented on a basis assuming we will continue as a going concern. The above factors raise substantial doubt about our ability to continue as a going concern, as more fully discussed in Note 1 to the consolidated financial statements contained herein and in the report of our independent registered public accounting firm accompanying our financial statements.

statements contained in our annual report on Form 10-K for the year ended December 31, 2017.


Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, no special purpose entities, and no activities that include non-exchange-traded contracts accounted for at fair value.

 41
 

CHANGES IN AND DISAGREMENTS WITH ACCOUNTANTS
None.
DIRECTORS, AND EXECUTIVE OFFICERS,

PROMOTERS, AND CONTROL PERSONS

Our executive officers are elected by and serve at the discretion of our board of directors. The following table lists information about our directors and executive officers as of June 15, 2016:

officers:
NameAgePosition with Guided Therapeutics
Gene S. Cartwright, Ph.D.62
63
Chief ExecuteExecutive Officer, President, Acting Chief Financial Officer and Director
Mark Faupel, Ph.D.
62
Chief Operating Officer and Director
Richard L. Fowler59
61
Senior Vice President of Engineering
Richard P. Blumberg
61
Director
John E. Imhoff, M.D.67
68
Director
Michael C. James57
59
Chairman and Director
Jonathan M. Niloff, M.D. 62Director 
Linda Rosenstock, M.D.65Director

Except as set forth below, all of the executive officers have been associated with us in their present or other capacities for more than the past five years. Officers are elected annually by the board of directors and serve at the discretion of the board. There are no family relationships among any of our executive officers and directors. On May 5, 2016 and May 9, 2016 respectively, Drs. Niloff and Rosenstock formally announced their decisions not to stand for reelection to our board of directors at our 2016 annual meeting of stockholders. Both of their decisions to resign were for personal reasons and were not a result of any disagreement with the Company on any matter relating to our operations, policies or practices.

Gene S. Cartwright, Ph.D. joined us in January 2014 as the President, Chief Executive Officer and Acting Chief Financial Officer. He was elected as a director on January 31,11, 2014. His most recent position was with Omnyx, LLC, a Joint Venture between GE Healthcare and the University of Pittsburgh Medical Center, where, as CEO for over four years he founded and managed the successful development of products for the field of Digital Pathology. Prior to his work with Omnyx, LLC, he was President of Molecular Diagnostics for GE Healthcare. Prior to GE, Dr. Cartwright was Divisional Vice President/General Manager for Abbott Diagnostics’ Molecular Diagnostics business. In his 24 year career at Abbott, he also served as Divisional Vice President for U.S. Marketing for five years. He received a Masters of Management degree from Northwestern’s Kellogg School of Management and also holds a Ph.D. in chemistry from Stanford University and an AB from Dartmouth College.

Dr. Cartwright brings over 30 years of experience working in the IVD diagnostics industry. He has great experience in the diagnostics market both in the development and introduction of new diagnostics technologies, as well as extensive successful commercial experience with global businesses. With his background and experience, Dr. Cartwright, as President and Chief Executive Officer, as well as Acting Chief Financial Officer, works with and advises the board as to how we can successfully market and build LuViva international sales.

Mark Faupel, Ph.D., rejoined us as Chief Operating Officer and director on December 8, 2016. He previously served on our board of directors through 2013 and has more than 30 years of experience in developing non-invasive alternatives to surgical biopsies and blood tests, especially in the area of cancer screening and diagnostics. Dr. Faupel was one of our co-founders and also served as our Chief Executive Officer from May 2007 through 2013. Prior thereto was our Chief Technical Officer from April 2001 to May 2007. Dr. Faupel has served as a National Institutes of Health reviewer, is the inventor on 26 U.S. patents and has authored numerous scientific publications and presentations, appearing in such peer-reviewed journals as The Lancet. Dr. Faupel earned his Ph.D. in neuroanatomy and physiology from the University of Georgia. Dr. Faupel is also a shareholder of Shenghuo Medical, LLC. See Item 13, Certain Relationships and Related Transactions and Director Independence
Rick Fowler, Mr. Fowler, Senior Vice President of Engineering is an accomplished Executive with significant experience in the management of businesses that sell, market, produce and develop sophisticated medical devices and instrumentation. Mr. Fowler’s 25 plus years of experience includes assembling and managing teams, leading businesses and negotiating contracts, conducting litigation, and developing ISO, CE, FDA QSR, GMP and GCP compliant processes and products. He is adept at providing product life cycle management through effective process definition and communication - from requirements gathering, R&D feasibility, product development, product launch, production startup and support. Mr. Fowler combines outstanding analytical, out-of-the-box, and strategic thinking with strong leadership, technical, and communication skills and he excels in dynamic, demanding environments while remaining pragmatic and focused. He is able to deliver high risk projects on time and under budget as well as enhance operational effectiveness through outstanding cross-functional team leadership (R&D, marketing, product development, operations, quality assurance, sales, service, and finance). In addition, Mr. Fowler is well versed in global medical device regulatory and product compliance requirements.


Richard P. Blumberg was appointed to the Board of Directors on November 10, 2016. Mr. Blumberg has been a long-time investor in the Company. Since 1978, Mr. Blumberg has been a Principal at Webster, Mrak & Blumberg, a medical-legal and class action labor litigation firm. He is also currently the Managing Member of Elysian Medical, LLC, a company with world-wide rights for certain breast cancer detection technology. He served from 2004 to 2007 as Chief Executive Officer of Energy Logics, a wind power company that developed projects in Alberta, Canada and Montana. Mr. Blumberg holds a B.S. in Electrical Engineering and Computer Science from the University of Illinois and received a J. D. from Stanford University. He also brings extensive experience as a venture capitalist specializing in high-tech and life science companies. Mr. Blumberg is also a Managing Member of Shenghuo Medical, LLC. See Item 13, Certain Relationships and Related Transactions and Director Independence.
John E. Imhoff, M.D.has served as a member of our Board of Directors since April 2006. Dr. Imhoff is an ophthalmic surgeon who specializes in cataract and refractive surgery. He is one of our principal stockholders and invests in many other private and public companies. He has a B.S. in Industrial Engineering from Oklahoma State University, an M.D. from the University of Oklahoma and completed his ophthalmic residency at the Dean A. McGee Eye Institute. He has worked as an ophthalmic surgeon and owner of Southeast Eye Center since 1983.

Dr. Imhoff has experience in clinical trials and in other technical aspects of a medical device company. His background in industrial engineering is especially helpful to us, especially as Dr. Imhoff can combine this knowledge with clinical applications. His experience in the investment community is invaluable to a public company often undertaking capital raising efforts.

 42
 

Michael C. Jameshas served as a member of our Board of Directors since March 2007 and as Chairman of the Board since October 15, 2013. Mr. James is also the Managing Partner of Kuekenhof Capital Management, LLC, a private investment management company, Chief Executive Officer and the Chief Financial Officer of Inergetics, Inc., a nutraceutical supplements company and also the Chief Financial Officer of Terra Tech Corporation, which is a hydroponic and agricultural company. He also holds the position of Managing Director of Kuekenhof Equity Fund, L.P. and Kuekenhof Partners, L.P. Mr. James currently sits on the Board of Directors of Inergetics; Inc. Mr. James was Chief Executive Officer of Nestor, Inc. from January 2009 to September 2009 and served on their Board of Directors from July 2006 to June 2009. He was employed by Moore Capital Management, Inc., a private investment management company from 1995 to 1999 and held position of Partner. He was employed by Buffalo Partners, L.P., a private investment management company from 1991 to 1994 and held the position of Chief Financial and Administrative Officer. He began his career in 1980 as a staff accountant with Eisner LLP. Mr. James received a B.S. degree in Accounting from Farleigh Dickinson University in 1980.

Mr. James has experience both in the areas of company finance and accounting, which is invaluable to us during financial audits and offerings. Mr. James has extensive experience in the management of both small and large companies and his entrepreneurial background is relevant as we develop as a company.

Jonathan M. Niloff, M.D.was elected

Significant Employees
None.
Family Relationships
There are no family relationships among any of our directors or officers.
Involvement in Certain Legal Proceedings
There are no known pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company's property is not the subject of any other pending legal proceedings
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who beneficially own more than 10% of a registered class of our equity securities to file reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. These persons are required by regulations of the Securities and Exchange Commission to furnish us with copies of all Section 16(a) forms they file.

Based solely on our review of the copies of these forms received by us, we believe that, with respect to fiscal year 2016, our officers, directors were in compliance with all applicable filing requirements.
Audit Committee and Financial Expert
We do not have an audit committee or an audit committee financial expert. Our corporate financial affairs are simple at this stage of development and each financial transaction can be viewed by any officer or Director at will. We will form an audit committee if it becomes necessary as a director in April 2010. Dr. Niloff was Vice President and Chief Medical Officer at McKesson Technology Solutions, a medical software company until May 6, 2016. Prior to that, Dr. Niloff was the Founder, Chairmanresult of growth of the Board and Chief Medical Officer of MedVentive Inc. Prior to joining MedVentive, Dr. Niloff servedCompany or as President of the Beth Israel Deaconess Physicians Organization, Medical Director for Obstetrics and Gynecology for its Affiliated Physicians Group, and Chief of Gynecology at New England Deaconess Hospital. He served as an Associate Professor of Obstetrics, Gynecology, and Reproductive Biology at Harvard Medical School. He has deep expertise in all aspects of medical cost and quality improvement, and has published extensively on the topic of gynecologic oncology including the development of the CA125 test for ovarian cancer. Dr. Niloff received his undergraduate education at The Johns Hopkins University, an M.D. degree from McGill University, and an MBA degree from Boston University.

Dr. Niloff is uniquely qualified to assist the Board and management because he combines his clinical background as a Harvard Ob-Gyn with his business acumen developed through an MBA degree and as CMO of MedVentive. Dr. Niloff has specific experience in evaluating new medical technology (e.g., CA125) and its implications to cost containment and reimbursement. Furthermore, Dr. Niloff has numerous professional contacts in the Ob-Gyn community that can aid in our development and marketing of our cervical cancer detection technology.

Linda Rosenstock, M.D.was appointed to the Board in April 2012. Dr. Linda Rosenstock is Dean Emeritus (served as Dean from 2000 - 2012) of the University of California, Los Angeles (UCLA) Fielding School of Public Health. She holds appointments at UCLA as Professor of Health Policy and Management, Medicine and Environmental Health Sciences and is a recognized authority in broad areas ofmandated by public health and science policy. Internationally, Dr. Rosenstock has been active in teaching and research in many developing countries and has served as an advisor to the World Health Organization. Dr. Rosenstock also chaired the United Auto Workers/General Motors Occupational Health Advisory Board. She is an Honorary Fellow of the Royal College of Physicians and an elected member of the National Academy of Sciences' Institute of Medicine where she has served as a member of their Board on Health Sciences Policy and Chair of the Committee for Preventive Services for Women. In January 2011, she was appointed by President Obama to the Advisory Group on Prevention, Health Promotion and Integrative and Public Health. She has served on the Board of Directors for Skilled Health Care since 2009.

Before coming to UCLA in 2000, Dr. Rosenstock served as Director of the National Institute for Occupational Safety and Health (NIOSH) for nearly seven years. As Director of NIOSH, Dr. Rosenstock led the only federal agency with a mandate to undertake research and prevention activities in occupational safety and health. During her tenure, she was instrumental in creating the National Occupational Research Agenda, a framework for guiding occupational safety and health research, and in expanding the agency's responsibilities. In recognition of her efforts, Dr. Rosenstock received the Presidential Distinguished Executive Rank Award, the highest executive service award in the government and was also the James P. Keogh Award Winner for 2011 in appreciation of a lifetime of extraordinary leadership in occupational health and safety. Dr. Rosenstock received her M.D. and M.P.H. from The Johns Hopkins University. She conducted her advanced training at the University of Washington, where she was Chief Resident in Primary Care Internal Medicine and a Robert Wood Johnson Clinical Scholar.

Dr. Rosenstock is uniquely qualified as a Board Member for Guided Therapeutics. First, as a trained physician who has  also chaired  the Preventive Services for Women Committee of the  National Academies’ Institute of Medicine, she has been directly involved in setting institutional and government policy for breast and cervical cancer screening, which is directly relevant to our LuViva cervical cancer detection device. Secondly, she brings a wealth of international experience in developing countries, which is a focus of our product distribution effort in cancer detection. Thirdly, she has demonstrated a lifetime of extraordinary leadership and her international recognition as an expert in health policy will provide outstanding credibility to Guided Therapeutics as a leading innovator in women’s healthcare.

 43
 

CORPORATE GOVERNANCE

Board Meetings and Committees

Our board

Code of directors held fourteen meetings in 2015. No director attended fewer than 75%Ethics
We have adopted a code of the meetings of the board of directors or the committees on which he or she served during 2015. We encourage our directorsethics that applies to attend the annual meeting of stockholders. In 2015, all of our directors, attendedofficers and employees. To obtain a copy without charge, contact our annual meeting. All of the members of the board of directors, with the exception of our Chief Executive Officer, serve on the audit, compensation and nomination committees. Although we are not subject to the listing standards of any national securities exchange or inter-dealer quotation system, based on the definition of independence in the NASDAQ listing standards, Dr. Imhoff, Mr. James, Dr. Niloff and Dr. Rosenstock are independent directors. The board works with its members and management to identify new board members, and will consider nominees recommended by stockholders. Any recommendation should be addressed in writing to the Board of Directors, c/o Corporate Secretary, Guided Therapeutics, Inc., 5835 Peachtree Corners East, Suite D,B, Norcross, Georgia 30092.

If we amend our code of ethics, other than a technical, administrative or non-substantive amendment, or we grant any waiver, including any implicit waiver, from a provision of the code that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, we will disclose the nature of the amendment or waiver on our website, www.guidedinc.com, under the “Investor Relations” tab under the tab “About Us.” Also, we may elect to disclose the amendment or waiver in a report on Form 8-K filed with the Securities and Exchange Commission.

EXECUTIVE COMPENSATION
Summary Compensation Table
The audit committee selectsfollowing table lists specified compensation we paid or accrued during each of the fiscal years ended December 31, 2017 and engages2016 to the independent registered public accounting firmChief Executive Officer and our two other most highly compensated executive officers, collectively referred to audit our annualas the “named executive officers,” in 2016:
2017 and 2016 Summary Compensation Table
 
 
Name and Principal Position
 
 
 
Year
 
 
 
Salary
($)
 
 
 
Bonus
($)
 
 
Option Awards
 ($)(1)
 
 
 
Total
($)
 
Gene S. Cartwright, Ph.D.
2017
  - 
  150,000 
  - 
  - 
President, CEO, Acting CFO and Director (2) 2016
  104,990 
  150,000 
  - 
  254,990
 
Mark Faupel, Ph.D.2017
  - 
  - 
  - 
  -
 
COO and Director(3)
2016
  132,557 
  - 
  - 
  132,557 
Richard Fowler,
2017
  107,500 
  - 
  - 
  107,500 
Senior Vice President of Engineering
2016
  129,995 
  - 
  - 
  129,995 
(1)
See Note 4 to the audited consolidated financial statements and pre-approves all allowable auditthat accompany this prospectus.
(2)
All amounts reported as accrued. Dr. Cartwright has elected to get paid partial salary, due to our cash position.
(3)
In 2016, Dr. Faupel was not employed by us, but instead provided consulting services and any special assignments given to the accountants. The audit committee also determines the planned scope of the annual audit, any changes in accounting principles, the effectiveness and efficiency of our internal accounting staff and the independence of our external auditors. The audit committee met fourteen times in 2015. The audit committee currently consists of Dr. Imhoff, Mr. James and Drs. Niloff, and Rosenstock. Each member of the audit committee is independent in accordance with the NASDAQ listing standards for audit committee independence and applicable SEC regulations. None of the members of the audit committee has participated in the preparation of our financial statements at any time during the past three years. The board has also determined that Mr. James and Drs. Niloff, Imhoff, and Rosenstock meet the criteria specified under applicable SEC regulations forus on an “audit committee financial expert” and thatas-needed basis. On December 8, 2016, the committee members are financially sophisticated.

The board of directors appointed Dr. Faupel as our new COO and director.

For 2017, Dr. Cartwright did not receive salary compensation. While in consultation with our Chief Executive Officer, sets2016, Dr. Cartwright agreed to reduce his base salary compensation to $75,000 from $300,000. The board-granted performance bonus remained the same at $150,000 for both years, and he received usual customary company benefits. During 2015, he also received 20,000 performance-based restricted shares of common stock, which will vest as follows: (1) seven shares will vest if the stock price closes at or above $1,200 for 30 consecutive trading days, and an additional seven will vest on the first anniversary of such vesting date, in each case subject to continuous employment through the applicable vesting date; and (2) seven shares will vest if the stock price closes at or above $200,000 for 30 consecutive trading days, and an additional seven will vest on the first anniversary of such vesting date, in each case subject to continuous employment through the applicable vesting date. As of December 31, 2017, Dr. Cartwright’s deferred salary plus interest was $383,039 and his deferred bonus was $600,000.

Dr. Faupel’s 2017 and 2016 compensation consisted of a base salary of zero and $132,577, respectively, plus usual and customary company benefits. He received no bonus in the years ended December 31, 2017 and 2016. In 2015, he received options to purchase 1,900 shares of common stock, which vest over 48 months. As of December 31, 2017, Dr. Faupel’s remaining deferred salary plus interest and bonus was $178,035. He also holds a promissory note of $346,960 for our officers, reviews management organizationpast un-paid salary.
For 2017, Mr. Fowler accrued base salary of $88,894. On March 2016, Mr. Fowler began working half-time and development, reviews significant employee benefit programs and establishes and administers executiveagreed to reduce his base salary compensation programs. The compensation committee currently consists of Dr. Imhoff, Mr. James, Drs. Niloff and Rosenstock, each of whom is independent under NASDAQ listing standards. The compensation committee met fourteen timesto $107,500 from $243,000 in 2015.

The board of directors, in consultation with our Chief Executive Officer, reviews For both years he received the usual and recommends individuals to be nominated as directors. Our board has historically evaluated all candidates based upon, among other factors, a candidate’s financial literacy, knowledge of our industry or other background relevant to our needs, status as a stakeholder, independence, and willingness, ability and availability for service. Other than the foregoing, there have beencustomary company benefits. He received no stated minimum criteria for director nominees, although our board has considered such other factors as it has deemed to bebonus in the best interestsyears ended December 31, 2017 and 2016. In 2015, he received options to purchase 1,930 shares of us and our stockholders. The board has considered diversity as it has deemed appropriate in this context (without having a formal diversity policy), given current needs and the current needscommon stock, which vest over 48 months. As of the boardDecember 31, 2017, Mr. Fowler’s total deferred salary plus interest was approximately $429,053.

Outstanding Equity Awards to maintain a balance of knowledge, experience and capability. When considering diversity, the board has considered diversity as one factor, of no greater or lesser importance than other factors and has considered diversity in a broad context of race, gender, age, business experience, skills, international experience, education, other board experience and other relevant factors.

The audit committee and the compensation committee have each adopted charters, which are availableOfficers at December 31, 2017

 
 
Option Awards
 
Name and Principal
Position
 
Number of
Securities
 Underlying
Options
Exercisable (#)(1)
 
 
Number of Securities Underlying
Options Un-exercisable (#)
 
 
Equity Incentive Plan Awards: Number of Securities Under-
lying Unexercised
Unearned Options (#)
 
 
Option
 Exercise
Price
($)(2)
 
 
Option
Expiration
Date
 
Gene S. Cartwright, Ph.D.
President, CEO, Acting CFO and Director
  2 
  - 
  3 
  21,600.00 
12/31/2024
Mark Faupel, Ph.D.
COO and Director
  32 
  - 
  3 
  57,600.00 
12/31/2024
Richard Fowler
Senior Vice President of Engineering
  11 
  - 
  3 
  47,200.00 
12/31/2024
(1)
Represents fully vested options.
(2)
Based on our web site,all outstanding options.
Outstanding Equity Awards to Directors at www.guidedinc.com/Investors.htm. The nomination committee currently operates without a charter.

Board Leadership Structure and Role in December 31, 2017

 
 
Option Awards
 
Name and Principal Position
 
Option Awards
(#)
 
 
Exercise Price
($)
 
Ronald W. Hart, Ph.D., Director (resigned as of December 11, 2015)
  18 
  17,600.00 
John E. Imhoff, M.D., Director
  16 
  26,400.00 
Michael C. James, Chairman and Director
  13 
  16,000.00 
Jonathan Niloff, M.D., former Director
  14 
  17,600.00 
Linda Rosenstock, M.D., former Director
  14 
  16,800.00 
Risk Oversight

Dr. Cartwright, our President and Chief Executive Officer, also serves as a director; our board is led by the Chairman, Mr. James, one of our independent directors.

Our board as a whole has responsibility for risk oversight, with reviews of certain areas being conducted by the relevant board committees that report on their deliberations to the full board, as further described below. Given the small size of the board, the board feels that this structure for risk oversight is appropriate (except for those risks that require risk oversight by independent directors only). The audit committee is specifically charged with discussing risk management (primarily financial and internal control risk), and receives regular reports from management and independent auditors on risks related to, among others, our financial controls and reporting. The compensation committee reviews risks related to compensation and makes recommendations to the board with respect to whether the Company’s compensation policies are properly aligned to discourage inappropriate risk-taking, and is regularly advised by management. In addition, ourthe Company’s management regularly communicates with the board to discuss important risks for their review and oversight, including regulatory risk, and risks stemming from periodic litigation or other legal matters in which we are involved. Given the small size of the board, the board feels that this structure for risk oversight is appropriate (except for those risks that require risk oversight by independent directors only).

 44
 

The board of directors is specifically charged with discussing risk management (primarily financial and internal control risk), and receives regular reports from management, independent auditors, internal audit and outside legal counsel on risks related to, among others, our financial controls and reporting. The board of directors reviews risks related to compensation and makes recommendations to the board with respect to whether our compensation policies are properly aligned to discourage inappropriate risk-taking, and is regularly advised by management and, as deemed appropriate, outside legal counsel.

Communication with Directors

Any stockholder is welcome to communicate with any director or the board of directors by writing to a director or the board as a whole, c/o Corporate Secretary, 5835 Peachtree Corners East, Suite D, Norcross, Georgia 30092.

Director Compensation

None of our directors received any compensation or reimbursement in cash in 2015; however, they did receive stock options or shares, in lieu of cash, for 2015 and 2014, respectively, in connection with their services as members of the board of directors and their service on board committees.

Director Compensation Table, for year ended December 31, 2015

Name and Principal Position

Stock Option

Awards (#)

Michael C. James, Chairman and Director6,000
John E. Imhoff, M.D., Director6,000
Jonathan M. Niloff, M.D., Director6,000
Linda Rosenstock, M.D., Director6,000

EXECUTIVE COMPENSATION

The purpose of our compensation philosophy, policies and practices is to attract and retain experienced, highly qualified executives critical to our long-term success and enhancement of stockholder value. We rely on a combination of base salary and customary benefits along with long-term equity incentive compensation to achieve these objectives. In establishing compensation packages for our executive officers, the compensation committee believes that we provide our executive officers with the opportunity to earn a competitive annual base salary, and that options grants reward our executive officers for meaningful performance that contributes to enhanced long-term stockholder value and our general long-term financial health, and helps to align the interests of our executive officers with those of our stockholders.

Summary Compensation Table

The following table lists specified compensation we paid or accrued during each of the fiscal years ended December 31, 2015 and 2014 to the Chief Executive Officer and our two other most highly compensated executive officers, collectively referred to as the “named executive officers,” in 2015:

2015 and 2014 Summary Compensation Table

 

 

Name and Principal Position

 

 

Year

 

Salary

($)

 

Bonus

($)

Option Awards

($)(1)

 

Total

($)

Gene S. Cartwright, Ph.D.

President, CEO, Acting CFO and Director (2)

2015300,000150,000-$450,000
2014300,000150,000$731,000$1,046,000

Mark Faupel, Ph.D.

Former President, CEO and Acting CFO(3)

2015198,073-$30,400228,473
2014264,09713,60017,000294,697

Richard Fowler,

Senior Vice President of Engineering

2015

2014

243,000

203,000

-

-

$30,880

17,000

273,880

220,000

(1)See Note 4 to the audited consolidated financial statements that accompany this prospectus.
(2)All amounts reported as accrued. Dr. Cartwright has elected to get paid partial salary, due to the Company’s cash position.
(3)Dr. Faupel is no longer employed by the Company, but instead provides consulting services to the Company.

 45

 

Dr. Cartwright’s 2015

Item 12. Security Ownership of Certain Beneficial Owners and 2014 compensation consisted of a base salary of $300,000, with $150,000 performance condition related bonus,Management and the usual customary company benefits. He also received 20,000 both market and performance condition restricted shares of common stock (10,000 shares if the stock price closes at/above $1.50 for 30 consecutive trading days (the “Tier 1 Vesting Date”); subject to the Executive’s continuous employment with the Company through the applicable vesting date; (i) 5,000 shares will vest on the Tier 1 Vesting Date; and (ii) 5,000 shares will vest on the first anniversary of the Tier 1 Vesting Date. 10,000 GT stock price closes at/above $250.00 for 30 consecutive trading days (the “Tier 2 Vesting Date”); subject to the Executive’s continuous employment with the Company through the applicable vesting date: (i) 5,000 shares will vest on the Tier 2 Vesting Date; and (ii) 5,000 shares will vest on the first anniversary of the Tier 2 Vesting Date). Dr. Cartwright was also issued 350 and 2,500 of stock options that vest over 48 months in 2014. As of December 31, 2015, Dr. Cartwright’s deferred salary plus interest was $282,734 and his deferred bonus was $300,000.

Dr. Faupel’s 2015 and 2014 compensation consisted of a base salary of $198,073 and $264,097, respectively, and usual and customary company benefits. He received no bonus in the years ended December 31, 2015 and 2014. He received 1,900 and 350 shares of stock options, which vest over 48 months in 20154 and 2014, respectively. As of December 31, 2015, Dr. Faupel’s remaining deferred salary plus interest and bonus was $53,433. He also holds a promissory note of $250,512 for past un-paid salary.

Mr. Fowler’s 2015 and 2014 compensation consisted of a base salary of $243,000 and $203,000, respectively, and usual and customary company benefits. He received no bonus in the years ended December 31, 2015 and 2014. He received 1,930 and 350 shares of stock options, which vest over 48 months in 2015 and 2014, respectively. As of December 31, 2015, Mr. Fowler’s total deferred salary plus interest was approximately $247,469.

Outstanding Equity Awards to Officers at December 31, 2015

 Option Awards

Name and Principal

Position

Number of

Securities

 Underlying

Options

Exercisable (#)(1)

Number of Securities Underlying

Options Un-exercisable (#)

Equity Incentive Plan Awards: Number of Securities Under-

lying Unexercised

Unearned Options (#)

Option

 Exercise

Price

($)(2)

Option

Expiration

Date

Gene S. Cartwright, Ph.D.

President, CEO, Acting CFO and Director

756-2,09427.0012/31/2024

Mark Faupel, Ph.D.

Former President, CEO & Acting CFO

21,058-1,84272.0012/31/2024

Richard Fowler

Senior Vice President of Engineering

6,173-1,97759.0012/31/2024
(1)Represents fully vested options.
(2)Based on all outstanding options.

Outstanding Equity Awards to Directors at December 31, 2015

 Option Awards
Name and Principal Position

Option Awards

(#)

Exercise Price

($)

Ronald W. Hart, Ph.D., Director (resigned as of December 11, 2015)10,92522.00
John E. Imhoff, M.D., Director9,03833.00
Michael C. James, Chairman and Director7,07520.00
Jonathan Niloff, M.D., Director  7,42922.00
Linda Rosenstock, M.D., Director7,25021.00

 46
Related Stockholder Matters
 

SHARE OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS

The following table lists information regarding the beneficial ownership of our common stockequity securities as of June 15, 20161, 2018 by (1) each person whom we know to beneficially own more than 5% of the outstanding shares of our common stock, (2) each director, (3) each officer named in the summary compensation table above,below, and (4) all directors and executive officers as a group. Unless otherwise indicated, the address of each officer and director is 5835 Peachtree Corners East, Suite D.B, Norcross, Georgia 30092.

 

 

 

Name and Address of Beneficial Owner

 Amount and Nature of Beneficial Ownership(1) 

 

 

Percent of Class(2)

John E. Imhoff (3) 186,727,185 76.44%
Michael C. James / Kuekenhof Equity Fund, LLP (4) 16,884  *
Gene Cartwright (5) 26,379  *
Richard L. Fowler (6) 7,224  *
Linda Rosenstock (7) 10,123  *
Jonathan Niloff (8) 10,828  *
      
All directors and executive officers as a group (6 persons) (9) 186,798,623 76.46%
      

 
 
 
Common Stock (2)
 
 
Series C
Preferred Stock (3)
 
 
Series C1
Preferred Stock (4)
 
Name and Address of Beneficial Owner (1)
 
Number of Shares
 
 
Percentage
 
 
Number of Shares
 
 
Percentage
 
 
Number of Shares
 
 
Percentage
 
John E. Imhoff (5)
  330,818,044 
  61.03%
  - 
  - 
  2,400.75 
  55.67%
Lynne Imhoff (6)
  92,521,032 
  30.45%
  - 
  - 
  675.00 
  15.65%
Michael C. James/Kuekenhof Equity Fund, LLP (7)
  28 
  * 
  - 
  - 
  - 
  - 
Gene Cartwright (8)
  38 
  * 
  - 
  - 
  - 
  - 
Richard L. Fowler (9)
  16 
  * 
  - 
  - 
  - 
  - 
Richard P. Blumberg (10)
  700,037 
  * 
  - 
  - 
  - 
  - 
Mark Faupel (11)
  41,119,459 
  16.29%
    
    
  300.00 
  6.96%
All directors and executive officers as a group (4 persons) (12)
  372,637,623 
  63.82%
  - 
  - 
  2,700.75 
  62.63%

(*)Less than 1%.
(1)Except as otherwise indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock.
(2)Percentage ownership is based on 67,901,547211,291,990 shares of common stock outstanding as of the record date.June 1, 2018. Beneficial ownership is determined in accordance with the rules of the SEC, based on factors that include voting and investment power with respect to shares. Shares of common stock subject to convertible securities convertible or exercisable within 60 days after the record date, are deemed outstanding for purposes of computing the percentage ownership of the person holding those securities, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
(3)Consists Note that certain of 10,361,179our outstanding securities, including certain warrants and the shares of Series C1 preferred stock held by the persons listed in this table, have anti-dilution “ratchet”  or “price-protection” provisions that, when triggered, will increase the number of shares of common stock 168,781,637underlying such securities. Subject to customary exceptions, these provisions are triggered anytime we issue shares of common stock to third parties at a price lower than the then-current conversion price or exercise price of the subject securities. As a result, the beneficial ownership reported in this table is only as of the date presented, and the beneficial ownership amounts of the persons in this table may increase on a future date, even though such persons have not actually acquired any additional shares of common stock.
(3)As of June 1 , 2018, there were 451 shares of Series C preferred stock outstanding, and each such share was convertible into approximately 137,061 shares of common stock.
(4)As of June 1, 2018, there were 4,312.50 shares of Series C1 preferred stock outstanding, and each such share was convertible into approximately 137,061 shares of common stock.
(5)Shares of common stock consist of 12,952 shares of common stock directly held, 1,754,912 shares issuable upon exercise of warrants, 16 shares subject to options, and 329,050,164 shares issuable upon conversion of 2,400.75 shares of Series C1 preferred stock, 7,575,331 shares issuable upon exercise of warrants, and 9,038 shares subject to options. As of the record date,stock. Dr. Imhoff is on the board of directors.
(4)(6)ConsistsShares of 7,451common stock consist of 3,612 shares of common stock 2,357directly held, 973 shares issuable upon exercise of warrants, and 7,07692,516,447 shares issuable upon conversion of 675.00 shares of Series C1 preferred stock.
(7)Shares of commons stock consist of 10 shares of common stock directly held, 4 shares issuable upon exercise of warrants, and 14 shares subject to options. As of the record date, Mr. James is on the board of directors.
(5)(8)
ConsistsShares of 22,732commons stock consist of 29 shares of common stock 2,357directly held, 4 shares issuable upon exercise of warrants, and 1,2905 shares subject to options. As of the record date, Mr.  Dr. Cartwright is the CEO and on the board of directors.
(6)(9)
ConsistsShares of 981commons stock consist of 2 shares of common stock directly held and 6,24314 shares subject to options.
(7)(10)Consists of 2,872 shares Shares of common stock and 7,251 shares subject to options. As consist of the record date,Dr. Rosenstock is on the board of directors.
(8)Consists of 3,39923 shares of common stock directly held and 7,429700,014 shares subject to options.Asissuable upon exercise of the record date,Dr. Niloff is on the board of directors.warrants.
(9)(11)ConsistsShares of 10,398,614common stock consist of 1,600 shares of common stock 168,781,637 shares issuable upon conversion of 2,400.75 shares of Series C1 preferred stock, 7,580,046directly held, 46 shares issuable upon exercise of warrants, and 38,32727 shares subject to options.options, and 41,117,786 shares issuable upon conversion of 300.00 shares of Series C1 preferred stock. Dr. Faupel is the COO and on the board of directors.
(12)Shares of commons stock consists of 14,616 shares of common stock directly held, 2,454,980 shares issuable upon exercise of warrants, 49 shares subject to options, and 370,167,951 shares issuable upon conversion of 2,700.75 shares of Series C1 preferred stock.

CERTAIN RELATIONSHIPS AND


See Item 5 of this report for information regarding Securities Authorized for Issuance under Equity Compensation Plans.
TRANSACTIONS WITH RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE

PERSONS

Our board recognizes that related person transactions present a heightened risk of conflicts of interest. The audit committee has the authority to review and approve all related party transactions involving our directors or executive officers.

Under the policy, when management becomes aware of a related person transaction, management reports the transaction to the audit committee and requests approval or ratification of the transaction. Generally, the audit committee will approve only related party transactions that are on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third person. The audit committee will report to the full board all related person transactions presented to it.

Based on the definition of independence of the NASDAQ Stock Market, the board has determined that Mr. James and Drs. Niloff,Dr. Imhoff and Rosenstock are independent directors.

John E. Imhoff is one of our directors. In June 2015, Dr. Imhoff agreed to exchange certain of his warrants, originally issued in December 2014 and exercisable for 1 share of our common stock, for two new warrants that, unlike the original warrant, do not contain any price or share reset provisions. Each new warrant is exercisable for the same number of shares of our common stock as the original warrant, at any time until December 2, 2020. The exercise price of the first new warrant is $72 per share and the second new warrant is $88 per share but, aside from the exercise price, the new warrants are identical in terms to each other. As additional consideration, we issued Dr. Imhoff an additional 1 share of common stock. Dr. Imhoff participated on terms equal to those of other holders of the December 2014 warrants. As a result of these transactions, Dr. Imhoff’s beneficial ownership of our common stock increased from approximately 11.7% immediately prior to the exchange, to approximately 11.8% immediately afterward.
In September 2015, Dr. Imhoff participated in our Series C preferred stock issuance by exchanging all of his shares of Series B preferred stock and investing $300,000 in cash, for a total of 1,067 shares of Series C preferred stock and warrants to purchase 16,847,368211 shares of common stock. Dr. Imhoff participated on terms equal to those of other Series C investors. As a result of these transactions, Dr. Imhoff’s beneficial ownership of our common stock increased from approximately 14% immediately prior to his first acquisition of shares of Series C preferred stock, to 25% immediately afterward.
On March 11, 2016, Dr. Imhoff received 24 shares of common stock as a dividend on his Series B preferred stock (previously accrued but unpaid), in accordance with the terms of the Series B preferred stock.
In April 2016, Dr. Imhoff exchanged his shares of Series C preferred stock for a total of 2400.752,400.75 shares of Series C1 preferred stock and 10,243,20012,804 shares of common stock. See “Summary—Recent Developments.”

 47
Dr. Imhoff participated on terms equal to those of other Series C1 investors. As a result of this transaction, Dr. Imhoff’s beneficial ownership of our common stock increased from approximately 25% immediately prior to the transaction, to 77% immediately afterward.
 

LEGAL MATTERS

Jones Day, Atlanta, Georgia, passed

In June 2016, Dr. Imhoff agreed to exchange certain of his warrants, exercisable for 4,560 shares of our common stock and subject to certain anti-dilution provisions, in exchange for new warrants, exercisable for 9,120 shares of our common stock, but without those anti-dilution provisions. Dr. Imhoff will be required to surrender his old warrants upon consummation of our next financing resulting in net cash proceeds to us of at least $1 million. The new warrants will have an initial exercise price equal to the validityexercise price of the surrendered warrants as of immediately prior to consummation of the financing, subject to customary “downside price protection” for as long as our common stock is not listed on a national securities exchange, and will expire five years from the date of issuance.
On September 6, 2016, we entered into a royalty agreement with Dr. Imhoff and another party. Pursuant to the royalty agreement, in exchange for a payment of $50,000 by Dr. Imhoff and the other party, we granted them a royalty on future sales of our single-use cervical guides. The royalty rate was initially $0.10 per disposable, until October 2, 2016, at which point the royalty rate increased to $0.20 per disposable. Any royalty payments will be split evenly between Dr. Imhoff and the other party.
Lynne Imhoff (no relation) currently beneficially owns in excess of 10% of our outstanding common stock. In September 2015, Ms. Imhoff participated in our Series C preferred stock issuance by exchanging all of her shares of Series B preferred stock and investing $125,000 in cash, for a total of 300 shares of Series C preferred stock and warrants to purchase 592 shares of common stock. Ms. Imhoff participated on terms equal to those of other Series C investors. As a result of these transactions, Ms. Imhoff’s beneficial ownership of our common stock increased from approximately 2% immediately prior to her first acquisition of shares of Series C preferred stock, to 4% immediately afterward.
In April 2016, Ms. Imhoff exchanged her shares of Series C preferred stock for a total of 675 shares of Series C1 preferred stock and 3,600 shares of common stock. Ms. Imhoff participated on terms equal to those of other Series C1 investors. As a result of this transaction, Ms. Imhoff’s beneficial ownership of our common stock increased from approximately 4% immediately prior to the transaction, to 45% immediately afterward.

In June 2016, Ms. Imhoff agreed to exchange certain of her warrants, exercisable for 912 shares of our common stock and subject to certain anti-dilution provisions, in exchange for new warrants, exercisable for 1,824 shares of our common stock, but without those anti-dilution provisions. Ms. Imhoff will be required to surrender her old warrants upon consummation of our next financing resulting in net cash proceeds to us of at least $1 million. The new warrants will have an initial exercise price equal to the exercise price of the surrendered warrants as of immediately prior to consummation of the financing, subject to customary “downside price protection” for as long as our common stock is not listed on a national securities exchange, and will expire five years from the date of issuance.
Mark Faupel is one of our directors and our Chief Operating Officer, and Richard Blumberg is another one of our directors. Dr. Faupel is a shareholder of Shenghuo, and Mr. Blumberg, is a managing member of Shenghuo. We entered into a license agreement with Shenghuo pursuant to which we granted Shenghuo an exclusive license to manufacture, sell and distribute our LuViva Advanced Cervical Cancer device and related disposables in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Shenghuo has been our exclusive distributor in China, Macau and Hong Kong, and the license extends to manufacturing in those countries as well. Pursuant to the license agreement, Shenghuo had the option to have a designee appointed to our board of directors. As partial consideration for, and as a condition to, the license, and to further align the strategic interests of the parties, we agreed to issue a convertible note to Shenghuo, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment to Shenghuo of $300,000, expected to be due the earlier of 90 days from issuance and consummation of any capital raising transaction by us with net cash proceeds of at least $1.0 million. The note will accrue interest at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares of our common stock at a conversion price per share of $13.92, subject to customary anti-dilution adjustment. The note will be unsecured, and is expected to provide for customary events of default. We will also issue Shenghuo a five-year warrant exercisable immediately for 17,239 shares of common stock that may be offered by this prospectus. Ellenoff Grossman & Schole LLP, New York, New York, acted as counselat an exercise price equal to the placement agent.

EXPERTS

Our consolidated financial statements as of December 31, 2015 and 2014, and for the years then ended have been audited by UHY LLP, an independent registered public accounting firm, as set forth in its report, included in this prospectus. Our financial statements and the related independent registered public accounting firm report thereon have been included herein in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN GET MORE INFORMATION

We have filed with the SEC under the Securities Act a registration statement on Form S-1 of which this prospectus forms a part. This prospectus does not contain allconversion price of the information containednote, subject to customary anti-dilution adjustment.

In September 2015, Dr. Faupel participated in our Series C preferred stock issuance by investing $100,000 in cash, for a total of 133 shares of Series C preferred stock and warrants to purchase 46 shares of common stock. Dr. Faupel participated on terms equal to those of other Series C investors. In April 2016, Dr. Faupel exchanged his shares of Series C preferred stock for a total of 300 shares of Series C1 preferred stock and 1,600 shares of common stock. Dr. Faupel participated on terms equal to those of other Series C1 investors.
Promoters and Certain Control Persons
We did not have any promoters at any time during the registration statement and its exhibits. past five fiscal years.
Director Independence
We strongly encourage youare not subject to read carefully the registration statement and its exhibits.

Any statement made in this prospectus concerning the contentslisting requirements of any contract, agreementnational securities exchange or other document is onlynational securities association and, as a summaryresult, we are not at this time required to have a majority of the actual contract, agreement or other document. If we have filed any contract, agreement or other document as an exhibit to the registration statement, you should read the exhibit for a more complete understanding“independent directors” on our board of the document or matter involved.

directors. We file annual, quarterly and current reports; proxy statements and other information with the SEC. You may read and copydo not believe that any of this information at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the operation of the Public Reference Room. The SEC also maintains an Internet website that contains reports, proxy statements and other information regarding issuers, including us, who file electronically with the SEC. The address of that site is http://www.sec.gov. The information contained on the SEC’s website is expressly not incorporated by reference into this prospectus.

our current directors are independent.


GUIDED THERAPEUTICS, INC. 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
March 31, 2018 AND 2017
(Unaudited)
  48

INDEX TO FINANCIAL STATEMENTS

Annual Consolidated Financial Statements 
  
Report of Independent Registered Public Accounting FirmConsolidated Financial Statements (Unaudited)F-2
  
Consolidated Balance Sheets (Unaudited) as of March 31, 2018 and December 31, 2015 and 20142017F-347
  
Consolidated Statements of Operations (Unaudited) for the YearsThree Months Ended DecemberMarch 31, 20152018 and 20142017F-4
Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2015 and 2014F-548
  
Consolidated Statements of Cash Flows (Unaudited) for the YearsThree Months Ended DecemberMarch 31, 20152018 and 20142017F-649
  
Notes to Consolidated Financial StatementsF-8
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015F-3
Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2016 and 2015F-4
Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and 2015F-6
Notes to Condensed Consolidated Financial StatementsF-8

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Guided Therapeutics, Inc.

We have audited the accompanying consolidated balance sheets of Guided Therapeutics, Inc. and Subsidiary (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guided Therapeutics, Inc. and Subsidiary as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As described in Note 1 to the consolidated financial statements, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company’s recurring losses from operations and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ UHY LLP

UHY LLP

Sterling Heights, Michigan

March 15, 2016


GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2015 AND 2014
(In Thousands)
     
ASSETS  2015   2014 
CURRENT ASSETS:        
    Cash and cash equivalents $35  $162 
    Accounts receivable, net of allowance for doubtful accounts of  $95 and $76 at
         December 31, 2015 and 2014, respectively		  190   338 
    Inventory, net of reserves of $118 and $144 at December 31, 2015 and 2014, respectively  1,119   1,180 
    Other current assets  780   99 
                    Total current assets  2,124   1,779 
         
    Property and equipment, net  318   587 
    Debt issuance costs  48   564 
    Other assets  73   101 
                    Total noncurrent assets  806   1,252 
                    TOTAL ASSETS  2,563  $3,031 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT        
CURRENT LIABILITIES:        
    Short-term notes payable, including related parties current portion of long term debt  752   646 
    Note payable, in default  133   123 
    Short-term convertible notes payable, net of discount  686   1,062 
    Accounts payable  1,824   1,733 
    Accrued liabilities  1,907   1,015 
    Deferred revenue  217   24 
                    Total current liabilities  5,519   4,603 
         
    Warrants, at fair value  2,606   2,070 
    Long-term debt, net  —     40 
    Convertible note, net of discount  —     783 
                    Total long-term liabilities  2,606   2,893 
                    TOTAL LIABILITIES  8,125   7,496 
         
COMMITMENTS & CONTINGENCIES (Note 6)        
STOCKHOLDERS’ DEFICIT:        
Series B convertible preferred stock, $.001 par value; 3 shares authorized, zero and 1.2 shares issued and outstanding as of December 31, 2015 and 2014, respectively (liquidation
preference of none in December 31, 2015 and $1,200 at December 31, 2014, respectively)		  —     678 
   Series C convertible preferred stock, $.001 par value; 9.0 shares authorized, 5.6 shares issued and outstanding as of December 31, 2015 and none authorized or issued and outstanding at December 31, 2014. (Liquidation preference of $5,555 at December 31, 2015 and none at December 31, 2014).  2,052   —   
   Common stock, $.001 par value; 1,000,000 and 195,000 shares authorized, 2,371 and 969 shares issued and outstanding as of December 31, 2015 and 2014, respectively  236   97 
   Additional paid-in capital  114,845   107,952 
   Treasury stock, at cost  (132)  (132)
   Accumulated deficit  (122,563)  (113,060)
                   TOTAL GUIDED THERAPEUTICS STOCKHOLDERS’ DEFICIT  (5,562)  (4,465)
         
                   TOTAL STOCKHOLDERS’ DEFICIT  (5,562)  (4,465)
         
  TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $2,563  $3,031 
The accompanying notes are an integral part of these consolidated statements.

F-350
 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(In Thousands )
     
   2015   2014 
REVENUE:        
 Sales – devices and disposables $564  $758 
          Cost of goods sold  537   891 
                Gross profit (loss)  27   (133)
         
        Contract and grant revenue  42   65 
         
OPERATING EXPENSES:        
         
         Research and development  1,477   2,788 
         Sales and marketing  718   1,164 
         General and administrative  4,101   4,649 
                  Total operating expenses  6,296   8,601 
         
                  Operating loss  (6,227)  (8,669)
         
OTHER INCOME (EXPENSES):        
          Other income  74   25 
          Interest expense  (1,317)  (979)
          Loss on extinguishment of debt  —     (325)
          Change in fair value of warrants  568   65 
                  Total other expenses  (675)  (1,214)
         
LOSS  FROM OPERATIONS  (6,902)  (9,883)
         
PROVISION FOR INCOME TAXES  —     —   
         
NET LOSS  (6,902)  (9,883)
DEEMED DIVIDENDS  (1,263)  —   
PREFERRED STOCK DIVIDENDS  (1,338)  (152)
         
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(9,503) $(10,035)
         

BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE

TO COMMON STOCKHOLDERS (post 1:100 reverse stock split)

 $(7.42) $(13.02)
         
WEIGHTED AVERAGE SHARES OUTSTANDING  1,280   771 
         
         
The accompanying notes are an integral part of these consolidated statements.
         

F-4

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 (InBALANCE SHEETS Unaudited (in Thousands)

 
   

Preferred Stock

Series B

   

Preferred Stock

Series C

   

 

Common Stock

   

Additional

Paid-In

   

 

Treasury

   

 

Accumulated

     
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Stock   Deficit   TOTAL 
BALANCE, January 1, 2014  2  $1,139   —    $—     705  $—    $101,840  $(132) $(103,025) $(107)
Preferred dividends  —     —     —     —     —     —     —     —     (152)  (152)
Conversion of preferred stock  (1)  (461)  —     —     23   2   459   —     —     —   
Issuance of common stock and warrants  —     —     —     —     209   21   3,348   —     —     3,369 
Exercise of warrants and options into         common stock  —     —     —     —     4   —     96   —     —     96 
Conversion of debt into common stock  —     —     —     —     28   3   890   —     —     893 
Issuance of warrants and options  —     —     —     —     —     —     433   —     —     433 
Stock-based compensation expense  —     —     —     —     —     —     886   —     —     886 
Net Loss  —     —     —     —     —     —     —     —     (9,883)  (9,883)
BALANCE, December 31, 2014  1  $678   —     —     969   97   107,952   (132)  (113,060)  (4,465)
                                         

   

Preferred Stock

Series B

   

Preferred Stock

Series C

   

 

Common Stock

   

Additional

Paid-In

   

 

Treasury

   

 

Accumulated

     
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Stock   Deficit   TOTAL 
BALANCE, January 1, 2015  1  $678   —    $—     969  $97  $107,952  $(132) $(113,060) $(4,465)
Preferred dividends  —     —     —     —     —     —     —     —     (352)  (352)
Conversion of Series C preferred stock to common stock  —     —     (2)  (840)  990   99   1,727   —     (986)  —   
Issuance of common stock and warrants  —     —     —     —     106   11   1,327   —     —     1,338 
Exercise of warrants and options for common stock  —     —     —     —     111   11   132   —     —     143 
Conversion of debt into common stock  —     —     —     —     168   15   999   —     —     1,014 
December 2014 public offering warrants exchange and common shares issuance  —     —     —     —     27   3   1,368   —     (1,049)  322 
Series B, Tranche A, warrant price adjustment  —     —     —     —     —     —     64   —     (64)  —   
Series C preferred stock and warrant issuance  (1)  (678)  8   2,892   —     —     268   —     (150)  2,332 
Stock-based compensation  —     —             —     —     1,008   —     —     1,008 
Net Loss  —     —             —     —     —     —     (6,902)  (6,902)
BALANCE, December 31, 2015  —    $—     6  $2,052   2,371  $236  $114,845  $(132) $(122,563) $(5,562)

ASSETS
 
March 31,
2018
 
 
December 31,
2017
 
CURRENT ASSETS:
 
 
 
 
 
 
Cash and cash equivalents
 $76 
 $1 
Accounts receivable, net of allowance for doubtful accounts of $244 and $160 at March 31, 2018 and December 31, 2017, respectively
  5 
  3 
Inventory, net of reserves of $716, at March 31, 2018 and December 31, 2017
  295 
  265 
Other current assets
  90 
  111 
                    Total current assets
  466 
  380 
 
    
    
Property and equipment, net
  43 
  49 
Other assets
  18 
  60 
                    Total noncurrent assets
  61 
  109 
 
    
    
                    TOTAL ASSETS
 $527 
 $489 
 
    
    
LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
    
 
    
    
CURRENT LIABILITIES:
    
    
Notes payable in default, including related parties
 $1,114 
 $1,091 
Short-term note payable, including related parties
  545 
  447 
Convertible notes in default
  2,296 
  2,321 
Convertible notes payable, net
  905 
  783 
Accounts payable
  2,976 
  3,019 
Accrued liabilities
  4,327 
  4,247 
Deferred revenue
  28 
  21 
                    Total current liabilities
  12,191 
  11,929 
 
    
    
Warrants at fair value
  6,274 
  7,962 
 
    
    
                    TOTAL LIABILITIES
  18,465 
  19,891 
 
    
    
COMMITMENTS & CONTINGENCIES (Note 7)
 
STOCKHOLDERS’ DEFICIT:
    
    
Series C convertible preferred stock, $.001 par value; 9.0 shares authorized, 0.7 and 0.9 shares issued and outstanding as of March 31, 2018 and December 31, 2017, (Liquidation preference of $686 and $970 at March 31, 2018 and December 31, 2017)
  251 
  355 
Series C1 convertible preferred stock, $.001 par value; 20.3 shares authorized, 4.3 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively (Liquidation preference of $4,312 at March 31, 2018 and December 31, 2017, respectively)
  701 
  701 
Common stock, $.001 Par value; 1,000,000 shares authorized, 138,315 and 49,563 shares issued and outstanding as of March 31, 2018 and December 31, 2017
  879 
  791 
Additional paid-in capital
  117,869 
  117,416 
Treasury stock, at cost
  (132)
  (132)
Accumulated deficit
  (137,506)
  (138,533)
 
    
    
                   TOTAL STOCKHOLDERS’ DEFICIT
  (17,938)
  (19,402)
 
    
    
                   TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 $527 
 $489 
The accompanying notes are an integral part of these condensed consolidated financial statements.


 
 
GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(In Thousands)
  2015 2014
CASH FLOWS FROM OPERATING ACTIVITIES:        
     Net loss $(6,902) $(9,883)
     Adjustments to reconcile net loss to net cash used in operating activities:        
        Bad debt expense  19   63 
        Depreciation and Amortization  1,054   1,240 
        Stock-based compensation  1,008   886 
        Non-employee stock based compensation  400   —   
        Change in fair value of warrants  (568)  (65)
    Changes in operating assets and liabilities:        
        Accounts receivable  129   (267)
        Inventory  61   14 
        Other current assets  (681)  2 
        Other assets  28   254 
        Accounts payable  91   842 
        Deferred revenue  193   10 
        Accrued liabilities  1,125   296 
                Total adjustments  2,859   3,600 
         
                Net cash used in operating activities  (4,043)  (6,283)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
       Additions to fixed assets  (8)  (150)
         
                Net cash used in investing activities  (8)  (150)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
      Net proceeds from issuance of preferred stock and warrants, net  3,698   —   
      Net proceed from issuance of common stock and warrants  720   1,730 
      Proceeds from debt financing, net of discount  425   5,263 
      Payment for debt issuance costs  (48)  (452)
      Payments on notes  (1,014)  (656)
      Proceeds from options and warrants exercised  143   97 
         
                Net cash provided by financing activities  3,924   5,982 
         
NET CHANGE IN CASH AND CASH EQUIVALENTS  (127)  (451)
         
CASH AND CASH EQUIVALENTS, beginning of year  162   613 
         
CASH AND CASH EQUIVALENTS, end of year $35  $162 
         
SUPPLEMENTAL SCHEDULE OF:        
Cash paid for:        
        Interest $76  $33 
NONCASH INVESTING AND FINANCING ACTIVITIES:        
   Deemed dividend on beneficial conversion features of Series C Preferred stock $150  $—   
   Deemed dividend on price changes for Series B preferred stock warrants $64  $—   
   Deemed dividend on December 2014 public offering warrants $1,049  $—   
   Term changes on Series B preferred stock and December 2014 public offering warrants                resulting in transfer to equity $324  $—   
   Issuance of common stock as debt repayment $1,014  $—   
   Repayment of deferred compensation via issuance of preferred stock $100  $—   
   Dividends on preferred stock $1,338  $152 
   Conversion of accrued expenses into common stock $—    $207 
   Payment of debt issuance costs via warrants and common stock $—    $522 
   Conversion of convertible debt into common stock $—    $893 
   Repayment of debt via issuance of common stock and warrants $—    $1,697 
   Issuance of common stock as board compensation $—    $355 
 
  The accompanying notes are an integral part of these consolidated statements.

F-6
 



GUIDED THERAPEUTICS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in Thousands)
 
 
FOR THE THREE MONTHS
ENDED MARCH 31,
 
 
 
2018
 
 
2017
 
REVENUE:
 
 
 
 
 
 
          Sales – devices and disposables
 $4 
 $21 
          Cost of goods sold
  3 
  16 
                                     Gross profit
  1 
  5 
 
    
    
OPERATING EXPENSES:
    
    
         Research and development
  69 
  91 
         Sales and marketing
  62 
  82 
         General and administrative
  246 
  346 
                                   Total operating expenses
  377 
  519 
 
    
    
                                   Loss from operations
  (376)
  (514)
 
    
    
OTHER INCOME (EXPENSE):
    
    
         Other income
  14 
  2 
         Interest expense
  (244)
  (223)
         Change in fair value of warrants
  1,688 
  628 
                                 Total other income
  1,458 
  407 
 
    
    
INCOME (LOSS) BEFORE INCOME TAXES
  1,082 
  (107)
 
    
    
INCOME TAXES
  — 
  — 
 
    
    
NET INCOME (LOSS)
 $1,082 
 $(107)
PREFERRED STOCK DIVIDENDS
  (55)
  (99)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
 $1,027 
 $(206)
 
    
    
NET INCOME (LOSS) PER SHARE (BASIC)
 $0.012 
 $(0.22)
NET INCOME (LOSS) PER SHARE (DILUTED)
 $0.001 
 $(0.22)
 
    
    
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
    
    
         BASIC
  88,577 
  946 
         DILUTED
  1,994,293 
  946 
The accompanying notes are an integral part of these condensed consolidated financial statements.

GUIDED THERAPEUTICS INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in Thousands)
 
 
FOR THE THREE MONTHS
ENDED MARCH 31,
 
 
 
2018
 
 
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
     Net income (loss)
 $1,082 
 $(107)
     Adjustments to reconcile net income (loss) to net cash used in operating activities:
    
    
           Bad debt expense (recovery)
  1 
  (35)
           Depreciation
  6 
  37 
           Stock based compensation
  13 
  19 
           Amortization of debt issuance costs and discount
  52 
  — 
           Change in fair value of warrants
  (1,688)
  (628)
 Changes in operating assets and liabilities:
    
    
           Inventory
  (30)
  (63)
           Accounts receivable
  (2)
  (6)
           Other current assets
  54 
  52 
           Other assets
  9 
  1 
           Accounts payable
  (45)
  148 
           Deferred revenue
  7 
  (4)
           Accrued liabilities
  146 
  179 
                         Total adjustments
  (1,477)
  (300)
 
    
    
                         Net cash used in operating activities
  (395)
  (407)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
      Net proceeds from issuance of common stock and warrants, net
  38 
  217 
      Proceeds from debt financing, net of discounts and debt issuance costs
  432 
  212 
      Payments made on notes payable
  — 
  (35)
 
    
    
                        Net cash provided by financing activities
  470 
  394 
 
    
    
NET CHANGE IN CASH AND CASH EQUIVALENTS
  75 
  (13)
CASH AND CASH EQUIVALENTS, beginning of year
  1 
  14 
CASH AND CASH EQUIVALENTS, end of period
 $76 
 $1 
SUPPLEMENTAL SCHEDULE OF:
    
    
Cash paid for:
    
    
     Interest
 $69 
 $1 
NONCASH INVESTING AND FINANCING ACTIVITIES:
    
    
  Issuance of common stock as debt repayment
 $286 
 $17 
  Dividends on preferred stock
 $55 
 $99 
The accompanying notes are an integral part of these condensed consolidated financial statements.

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2015 (UNAUDITED)

1.   ORGANIZATION, BACKGROUND, AND 2014

1. Organization, Background, and Basis of Presentation

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

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

A 1:800 reverse stock split of all the Company’s issued and outstanding common stock was implemented on November 7, 2016. As a result of the reverse stock split, every 800 shares of issued and outstanding common stock 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 453,694,400 shares to 570,707 shares as of that date. See Note 4, Stockholders’ Deficit. Unless otherwise specified, all per share amounts are reported on a post-stock split basis, as of December 31, 2017. On February 24, 2016, the Company had also implemented a 1:100 reverse stock split of its issued and outstanding common stock.
The Company’s prospects must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate. The Company has experienced net losses since its inception and, as of DecemberMarch 31, 2015,2018, it had an accumulated deficit of approximately $122.6$137.5 million. Through December 31, 2015,To date, the Company has devoted substantial resources toengaged primarily in research and development efforts. The Company first generated revenue from product sales in 1998, but does not have significant experience in manufacturing,efforts and the early stages of marketing or selling its products. The Company’s development efforts may not result in commercially viable products and itCompany may not be successful in growing sales for its products. Moreover, required regulatory clearances or approvals may not be obtained.obtained in a timely manner, or at all. The Company’s products may not ever gain market acceptance and the Company may not ever achieve levels of revenue to sustain further development costs and support ongoing operationsgenerate significant revenues or achieve profitability. The development and continued commercialization of the Company’s products will requirerequires substantial development, regulatory, sales and marketing, manufacturing and other expenditures. The Company expects operating losses to continue throughfor 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.

On February 24, 2016,

Basis of Presentation
The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial reporting and with the Company implementedinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. These statements reflect adjustments, all of which are of a 1:100 reverse stock splitnormal, recurring nature, and which are, in the opinion of its issued and outstanding common stock. The reverse stock split decreasedmanagement, necessary to present fairly the Company’s issued and outstanding shares of common stock from 237,101,702 shares of Common Stock to 2,371,007 sharesfinancial position as of March 31, 2018, results of operations for the three months ended March 31, 2018 and 2017, and cash flows for the three months ended March 31, 2018 and 2017. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results for a full fiscal year. Preparing financial statements requires the Company’s management to make estimates and assumptions that date. See Note 12, Subsequent Events. Unless otherwise specified, all per shareaffect the reported amounts are reportedof assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on a post-stock split basis, as ofForm 10-K for the year ended December 31, 2015.

2017.

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

Going Concern

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

At DecemberMarch 31, 2015,2018, the Company had a negative working capital of approximately $3.4$11.7 million, accumulated deficit of $122.6$137.5 million, and incurred a net lossincome of $6.9$1.1 million for the yearquarter then ended.ended (net income for the quarter for the period ended March 31, 2018, related to the gain for the fair value of warrants of $1.7 million). Stockholders’ deficit totaled approximately $5.6$17.9 million at DecemberMarch 31, 2015, primarily due to recurring net losses from operations, deemed dividends on warrants and preferred stock, offset by proceeds from the exercise of options and warrants and proceeds from sales of stock.

2018.

The Company’s capital-raising efforts are ongoing. If sufficient capital cannot be raised during the second quarter of 2016,2018, the Company haswill continue its plans to curtailof 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 2.8666.7 million shares of its common stock outstanding at DecemberMarch 31, 2015,2018, with exercise prices ranging between $1.03$0.001 and $105$40,000 per share. Exercises of these warrants would generate a total of approximately $6.7$4.8 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.

F-7
However, please refer to Footnote 10 - CONVERTIBLE DEBT IN DEFAULT in the paragraph: Debt Restructuring for more information regarding our warrants.
 

2.   Summary of Significant Accounting Policies

SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies were set forth in the audited financial statements and notes thereto for the year ended December 31, 2017 included in its annual report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”).
Use of Estimates

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

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 May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers,Distributors (Topic 606),” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customersdistributors and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five stepfive-step analysis in determining when and how revenue is recognized. The new model will requirerequires revenue recognition to depict the transfer of promised goods or services to customersdistributors in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.receive. ASU 2014-09 isalso requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from distributor contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Deferral of the Effective Date”, which amends ASU 2014-09. As a result, the effective for reporting periods beginning Januarydate will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017. The Company is evaluating the impact that adoption of this guidance will have on the determination or reporting of its financial results.

In June 2014,Subsequently, the FASB has issued the following standards related to ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period,2014-09: ASU 2016-08, “Revenue from Contracts with Distributors (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” (“ASU 2014-12”2016-08”).; ASU 2014-12 requires that a performance target that affects vesting,2016-10, “Revenue from Contracts with Distributors (Topic 606), Identifying Performance Obligations and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. Licensing,” (“ASU 2014-12 is effective for the reporting periods beginning after December 15, 2015. Early adoption is permitted.2016-10”); ASU 2016-12, “Revenue from Contracts with Distributors (Topic 606) Narrow-Scope Improvements and Practical Expedients,” (“ASU 2016-12”); and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Distributors,” (“ASU 2016-20”), which are intended to provide additional guidance and clarity to ASU 2014-09. The Company is evaluatingmust adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 along with ASU 2014-09 (collectively, the impact that adoption“New Revenue Standards”). The New Revenue Standards may be applied using one of this guidance will have on the determination or reporting of its financial results.

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue astwo retrospective application methods: (1) a Going Concern,” (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern for a one year period subsequent to the date of the financial statements, as entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The guidance is effectivefull retrospective approach for all entities for the first annual period ending after December 15, 2016 and interim periods thereafter, with early adoption permitted. The Company is evaluating the impactpresented, or (2) a modified retrospective approach that adoption of this guidance will have on the determination or reporting of its financial results.

In April 2015, the FASB issued ASU 2015-03, “Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs,” (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related topresents a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective for reporting periods beginning after December 15, 2015 and interim periods within those fiscal years with early adoption permitted. ASU 2015-03 should be applied on a retrospective basis, wherein the balance sheet of each period presented should be adjusted to reflect the effects of adoption. The Company is evaluating the impact that adoption of this guidance will have on the determination or reporting of its financial results.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 requires inventory be measured at the lower of cost and net realizable value and options that currently exist for market value be eliminated. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. The Company is evaluating the impact adoption of this guidance will have on determination or reporting of its financial results.

F-8

In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which amends ASC 835-30, “Interest - Imputation of Interest”. The ASU clarifies the presentation and subsequent measurement of debt issuance costs associated with lines of credit. These costs may be presented as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. The effective date will be the first quarter of fiscal year 2016 and will be applied retrospectively. The Company is evaluating the impact adoption of this guidance will have on determination or reporting of its financial results.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments.” This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effective date will be the first quarter of fiscal year 2016. The Company is evaluating the impact adoption of this guidance will have on determination or reporting of its financial results.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes.” The amendments in ASU 2015-17 seek to simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early application permitted for all entitiescumulative effect as of the beginning of an interim or annual reporting period.adoption date and additional required disclosures. The Company is evaluatingadopted this standard on January 1, 2018, using the modified retrospective method, with no impact adoptionon its 2017 financial statements. The cumulative effect of thisinitially applying the new guidance will havehad no impact on determination or reporting of its financial results.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendmentsstatements. However, additional disclosures will be included in ASU 2016-01, among other things, require equity investments (except those accounted for under the equity method of accounting, or those that resultfuture reporting periods in consolidationaccordance with requirements of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost. The effective date will be the first quarter of fiscal year 2018. The Company is evaluating the impact the adoption of this new standard will have on its consolidated financial statements.

guidance.


In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” that requires lessees to recognizebe recognized on the balance sheet with the assets and liabilities associated with the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance or operating lease. The update is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact adoption of this guidance will have on determination or reporting of its financial results.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” (“ASU 2016-13”). ASU 2016-13 sets forth a “current expected credit loss” model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. The guidance in this new standard replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. The effective date will be the first quarter of fiscal year 2020. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments,” (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice in financial reporting by clarifying existing principles in ASC 230, “Statement of Cash Flows,” and provides specific guidance on certain cash flow classification issues. The effective date for ASU 2016-15 will be the first quarter of fiscal year 2018, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the year ended March 31, 2018.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” (“ASU 2016-18”). ASU 2016-18 requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-year and end-of-year total amounts shown on the statement of cash flows. The guidance is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the year ended March 31, 2018.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting)” (“ASU 2017-09”) which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the year ended March 31, 2018.
Except as noted above, the guidance issued by the FASB during the current year is not expected to have a material effect on the Company’s consolidated financial statements.


Cash Equivalents

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

Accounts Receivable

The Company performs periodic credit evaluations of its customers’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. The Company does not accrue interest receivable on past due accounts receivable.

F-9
 

Concentrations of Credit Risk

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

The Company performs periodic credit evaluations of its customers’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. The Company does not accrue interest receivable on past due accounts receivable.

Inventory Valuation

All inventories are stated at lower of cost or market,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 purchased.incurred. At DecemberMarch 31, 20152018 and December 31, 2014,2017, our inventories were as follows (in thousands):

  Year Ended December 31,
  2015 2014
Raw materials $686  $884 
Work in process  186   304 
Finished goods  365   136 
Inventory reserve  (118)  (144)
       Total $1,119  $1,180 

 
 
March 31,
 
 
December 31,
 
 
 
2018
 
 
2017
 
Raw materials
 $790 
 $789 
Work in process
  81 
  82 
Finished goods
  27 
  27 
Consigned inventory
  113 
  83 
Inventory reserve
  (716)
  (716)
       Total
 $295 
 $265 
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 depreciatedamortized at the shorter of the useful life of the asset or the remaining lease term. Depreciation and amortization expense is included in general and administrative expense on the statement of operations. Expenditures for repairs and maintenance are expensed as incurred. Property and equipment are summarized as follows at March 31, 2018 and December 31, 2015 and 20142017 (in thousands):

  Year Ended December 31,
  2015 2014
Equipment $1,377  $1,391 
Software  740   737 
Furniture and fixtures  124   124 
Leasehold Improvement  199   180 
   2,440   2,432 
Less accumulated depreciation  (2,122)  (1,845)
            Total $318  $587 

 
 
March 31,
 
 
December 31,
 
 
 
2018
 
 
2017
 
Equipment
 $1,378 
 $1,378 
Software
  740 
  740 
Furniture and fixtures
  124 
  124 
Leasehold Improvement
  199 
  199 
 
  2,441 
  2,441 
Less accumulated depreciation and amortization
  (2,398)
  (2,392)
            Total
 $43 
 $49 
 
    
    


Debt Issuance Costs

Debt issuance costs incurred in securing the Company’s financing arrangements are capitalized and amortized over the term of the associated debt. Deferred financingDebt issuance costs are includedpresented in other long term assets.

the balance sheet as a direct deduction from the carrying amount of the debt liability consistent with the debt discount.

Other Assets

Other assets primarily consist of shortshort- and long-term deposits for various tooling inventory that are being constructed for the Company. At December 31, 2015 and 2014, such balances were approximately $413,000 and $72,000, respectively.

Patent Costs (Principally Legal Fees)

Costs incurred in filing, prosecuting, and maintaining patents are recurring, and expensed as incurred. Maintaining patents are expensed as incurred as the Company has not yet received FDA approval and recovery of these costs is uncertain. Such costs aggregated approximately $47,000$6,000 and $50,000 in 2015$15,000 as of March 31, 2018 and 2014,December 31, 2017, respectively.

F-10
 


Accrued Liabilities

Accrued liabilities are summarized as follows at December 31, 2015 and 2014 (in thousands):

  

As of

December 31,

  2015 2014
Accrued compensation $1,235  $447 
Accrued professional fees  154   203 
Deferred rent  36   54 
Accrued warranty  82   119 
Accrued vacation  177   144 
Other accrued expenses  223   48 
            Total $1,907  $1,015 

 
 
March 31,
2018
 
 
December 31,
2017
 
Accrued compensation
 $2,225 
 $2,122 
Accrued professional fees
  193 
  223 
  Accrued interest
  532 
  511 
Accrued warranty
  37 
  39 
Accrued vacation
  160 
  152 
Accrued dividends
  226 
  291 
Stock subscription
  276 
  276 
Accrued expenses for licensee
  429 
  429 
Other accrued expenses
  249 
  204 
            Total
 $4,327 
 $4,247 
Revenue Recognition

Revenue from the sale of the Company’s products is recognized upon shipment of such products to its customers.distributors. The Company recognizes revenue from contracts on a straight linestraight-line basis, over the terms of the contracts. Contracts generally are for shipment of devices and disposables and revenue is recognized once it is transferred to a third-party shipper this is identified in the contract as the performance obligation that has been met.
The Company recognizesadopted a new revenue from grants basedstandard on January 1, 2018, using the modified retrospective method with no impact on our financial statements. The cumulative effect of initially adopting the new guidance had no impact on the grant agreements, atopening balance of retained earnings as of January 1, 2018. There was no material impact on the timecondensed consolidated balance sheets as of March 31, 2018 or on the expensescondensed consolidated statements of income for the three months ended March 31, 2018. Results for reporting periods beginning after January 1, 2018 are incurred.

presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Significant Customers

In 2015 and 2014,Distributors

During the majority ofthree months ended March 31, 2018, all the Company’s revenues were from fourtwo distributors and two customers, respectively.for extended warranty. Revenue from these customersdistributors totaled approximately $280,000 or 73% and approximately $414,000 or 50% of total revenue$4,000 for the yearperiod ended DecemberMarch 31, 2015 and 2014, respectively.2018. Accounts receivable due from those customersthese distributors represents 62% and 17% as100% of Decemberthe balance for the period ended March 31, 2015 and 2014, respectively.

2018. During the three months ended March 31, 2017, there were revenues from one distributor, that totaled approximately $21,000.



Deferred Revenue

The Company defers payments received as revenue until earned based on the related contracts on a straight linestraight-line basis, over the terms of the contract.

As of March 31, 2018, and December 31, 2017, the Company has received prepayments for devices and disposables recorded as deferred revenue in the amount of $28,000 and $21,000, 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 is currently delinquent with its federal and applicable state tax return filings, payments and certain Federal and State Unemployment Tax filings. Some of the federal income tax returns are currently under examination by the U.S. Internal Revenue Service (“IRS”). The Company has entered an agreed upon payment plan with the IRS for delinquent payroll taxes. 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 March 31, 2018 and December 31, 2017, the Company has approximately $82.9 million of net operating losses. This net operating loss will be eligible to be carried forward for tax purposes at federal and applicable states level. A full valuation allowance has been recorded related the deferred tax assets generated from the net operating losses.
Corporate tax rates in the U.S. have decreased from 34% to 21%.
Uncertain Tax Positions

Effective January 1, 2007 the

The Company adopted ASC guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all income tax positions. Eachassesses each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At March 31, 2018 and December 31, 2015 and 2014,2017, there were no uncertain tax positions.

F-11
 

The Company is current with its federal and applicable state tax returns filings. Although we have been experiencing recurring losses, we are obligated to file tax returns for compliance with Internal Revenue Service (“IRS”) regulations and that of applicable state jurisdictions. As of December 31, 2015, the Company has approximately $27.8 million of net operating loss eligible to be carried forward for tax purposes at federal and applicable states level.

None of the Company’s federal or state income tax returns are currently under examination by the IRS or state authorities.

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.period. The Company records equity instruments including warrants issued to non-employees based on the fair value at the date of issue. The fair value of warrants classified as equity instruments at the date of issuance is estimated using the Black-Scholes Model. The fair value of warrants classified as liabilities at the date of issuance is estimated using the Monte Carlo Simulation or Binomial model.

Stock Based Compensation

The Company records compensation expense related to options granted to non-employees based on the fair value of the award.

Compensation cost is recorded as earned for all unvested stock options outstanding at the beginning of the first year based upon the grant date fair value estimates, and for compensation cost for all share-based payments granted or modified subsequently based on fair value estimates.

For the yearsthree months ended DecemberMarch 31, 20152018 and 2014,2017, share-based compensation for options attributable to employees, officers and Board members were approximately $1,008,000$13,000 and $886,000,$19,000, respectively. These amounts have been included in the Company’s statements of operations. Compensation costs for stock options which vest over time are recognized over the vesting period. As of DecemberMarch 31, 2015,2018, the Company had noapproximately $39,000 of unrecognized compensation costs related to granted stock options to be recognized over the remaining vesting period of approximately threetwo years.


3.   FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

The Company records its derivative activities at fair value, which consisted of warrants as of DecemberMarch 31, 2015.2018. The fair value of the warrants was estimated using the Monte CarloBinomial Simulation model. Gains and losses from derivative contracts are included in net gain (loss) from derivative contracts in the statement of operations. The fair value of the Company’s derivative warrants is classified as a Level 3 measurement, since unobservable inputs are used in the valuation.

The following table presents the fair value for those liabilities measured on a recurring basis as of March 31, 2018 and December 31, 2015 and 2014:

2017: 

FAIR VALUE MEASUREMENTS ( In(In Thousands)

Description  Level 1   Level 2   Level 3   Total   Date 
Warrants issued in connection with the issuance of Series C preferred stock $—    $—    $(1,145) $(1,145)  

 

December 31, 2015

 
Warrants issued in connection with the issuance of Series B preferred stock    $(1,461) $(1,461)  December 31, 2015 
      Total long-term liabilities at fair value $—    $—    $(2,606) $(2,606)  December 31, 2015 

F-12
 

Description  Level 1   Level 2   Level 3   Total   Date 
Warrants issued in connection with the December 2014 public offering of common stock $—    $—    $(587) $(587)  

 

December 31, 2014

 
Warrants issued in connection with the issuance of Series B preferred stock $—    $—    $(1,483) $(1,483)  

 

December 31, 2014

 
     Total long-term liabilities at fair value $—    $—    $(2,070) $(2,070)    
 
 

Fair Value Measurements Using Significant Unobservable

Inputs (Level 3)

 
  

December 2014

Public Offering

ExchangedWarrants

   Series B Warrants   

Series C

Warrants 

   Total     
                     
Balance, December 31, 2014 $(587) $(1,483) $—    $(2,070)    
                     
 Warrants issued during the period  —     —     (1,428)  (1,428)    
 Change in fair value during the period  263   22   283   568     
 Transfer to equity as a result of changes
to provisions		  324   —     —     324     
                     
 Balance, December 31, 2015 $—    $(1,461) $(1,145) $(2,606)    

The following is summary of items that the Company measures at fair value on a recurring basis:
 
 
 
Fair Value at March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrants issued in connection with Distributor Debt
 $— 
 $— 
 $(114)
 $(114)
Warrants issued in connection with Short-Term Loans
    
    
  (15)
  (15)
Warrants issued in connection with Senior Secured Debt
  — 
  — 
  (6,145)
  (6,145)
 
    
    
    
    
            Total long-term liabilities at fair value
 $— 
 $— 
 $(6,274)
 $(6,274)
 
    
    
    
    
 
 
 
Fair Value at December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrants issued in connection with Distributor Debt
 $— 
 $— 
 $(114)
 $(114)
Warrants issued in connection with Short-Term Loans
    
    
  (11)
  (11)
Warrants issued in connection with Senior Secured Debt
  — 
  — 
  (7,837)
  (7,837)
 
    
    
    
    
            Total long-term liabilities at fair value
 $— 
 $— 
 $(7,962)
 $(7,962)
 
    
    
    
    

The following is a summary of changes to Level 3 instruments during the three months ended March 31, 2018:
 
 
Short-Term Loan
 
 
Senior Secured Debt
 
 
Distributor Debt
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 $(11)
 $(7,837)
 $(114)
 $(7,962)
Change in fair value during the period
  (4)
  1,692 
  - 
  1,688 
 
    
    
    
    
Balance, March 31, 2018
 $(15)
 $(6,145)
 $(114)
 $(6,274)
As of March 31, 2018, the fair value of warrants was approximately $6.3 million. A net change of approximately $1.7 million has been recorded to the accompanying statement of operations for the three months ended March 31, 2018.
4.  Stockholders’ Equity

STOCKHOLDERS’ DEFICIT

Common Stock

The Company has authorized 1,000,000,000 shares of common stock with $0.001 par value, of which 2,371,017138,315,085 were issued and outstanding as of March 31, 2018. As of December 31, 2015. For the year ended December 31, 2014,2017, there were 195,000,0001,000,000,000 authorized shares of common stock, of which 96,88949,562,810 were issued and outstanding.

A 1:800 reverse stock split of all our issued and outstanding common stock was implemented on November 7, 2016. As a result of the reverse stock split, every 800 shares of issued and outstanding common stock 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. On February 24, 2016, the Company had also implemented a 1:100 reverse stock split of its issued and outstanding common stock. The number of the authorized shares did not change.
For the yearthree months ended DecemberMarch 31, 2015,2018, the Company issued 1,402,12888,752,275 shares of common stock as listed below:

Sales of unregistered securities  - Issuance - For CashSeries C Preferred Stock Conversions40,000
Issuance - For Debt Repayment152,117
25,523,606
Series C ConversionPreferred Stock Dividends1,006,777
11,704,861
Series C DividendsConvertible Debt Conversions18,562
51,523,808
Series B Dividends11,086
Option Exercised1,786
Warrant  Exercised - Cashless95,413
Warrant Exercised – For Cash13,500
Issued for December 2014 public offering warrant exchange26,190
Issued for Consulting Services36,697
Total1,402,128
88,752,275

On January 22, 2017, the Company entered into a license agreement with Shandong Yaohua Medical Instrument Corporation, or SMI, pursuant to which the Company granted SMI an exclusive global license to manufacture the LuViva device and related disposables (subject to a carve-out for manufacture in Turkey) and exclusive distribution rights in the Peoples Republic of China, Macau, Hong Kong and Taiwan. In exchange for the license, SMI will pay a $1.0 million licensing fee, payable in five installments through November 2017, as well as a royalty on each disposable sold in the territories. As of March 31, 2018, SMI had paid $750,000. SMI will also underwrite the cost of securing approval of LuViva with the Chinese Food and Drug Administration, or CFDA. Pursuant to the SMI agreement, SMI must become capable of manufacturing LuViva in accordance with ISO 13485 for medical devices by the second anniversary of the SMI agreement, or else forfeit the license. Based on the agreement, SMI must purchase no fewer than ten devices (with up to two devices pushed to 2018 if there is a delay in obtaining approval from the CFDA). SMI purchased five devices in 2017 and have not purchased any in 2018. In the three years following CFDA approval, SMI must purchase a minimum of 3,500 devices (500 in the first year, 1,000 in the second, and 2,000 in the third) or else forfeit the license. As manufacturer of the devices and disposables, SMI will be obligated to sell each to us at costs no higher than our current costs. As partial consideration for, and as a condition to, the license, and to further align the strategic interests of the parties, the Company agreed to issue $1.0 million in shares of its common stock to SMI, in five installments through October 2017, at a price per share equal to the lesser of the average closing price for the five days prior to issuance and $1.25. These shares have not been issued as of March 31, 2018.

In order to facilitate the SMI agreement, immediately prior to its execution the Company entered into an agreement with Shenghuo Medical, LLC, regarding its previous license to Shenghuo (see Note 7, Commitments and Contingencies). Under the terms of the new agreement, Shenghuo agreed to relinquish its manufacturing license and its distribution rights in SMI’s territories, and to waive its rights under the original Shenghuo agreement, all for as long as SMI performs under the SMI agreement. As consideration, the Company agreed to split with Shenghuo the licensing fees and net royalties from SMI that the Company will receive under the SMI agreement. Should the SMI agreement be terminated, the Company have agreed to re-issue the original license to Shenghuo under the original terms. The Company’s COO and director, Mark Faupel, is a shareholder of Shenghuo, as well as Dr. John Imhoff, a director and another director, Richard Blumberg, are a managing member of Shenghuo.
Preferred Stock

The Company has authorized 9,000,0005,000,000 shares of preferred stock with a $.001 par value. The board of directors has the authority to issue these shares and to set dividends, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions. The board of directors designated 525,000 shares of preferred stock as redeemable convertible preferred stock, none of which remain outstanding; 3,00033,000 shares of preferred stock as Series B Convertible Preferred Stock, none of which none and 1,277 shares were issued andremained outstanding, at December 31, 2015 and December 31, 2014, respectively; and 9,000 shares of preferred stock as Series C Convertible Preferred Stock, of which 5,555686 and 0 shares970 were issued and outstanding at DecemberMarch 31, 20152018 and December 31, 2014, respectively.

F-13
2017, respectively, and 20,250 shares of Series C1 Convertible Preferred Stock, of which 4,312 were issued and outstanding at March 31, 2018 and December 31, 2017.
 

Series B Convertible Preferred Stock

Pursuant to the terms of the Series B Preferred Stock set forth in the Series B designations, shares of Series B Preferred Stock were convertible into common stock by their holder at any time, and were mandatorily convertible upon the achievement of certain conditions, including the receipt of certain approvals from the U.S. Food and Drug Administration and the achievement by the Company of specified average trading prices and volumes for the common stock.

Holders of the Series B Preferred Stock were entitled to quarterly dividends at an annual rate of 10.0%, payable in cash or, subject to certain conditions, common stock, at the Company’s option. Preferred dividends totaled approximately $352,000 and $152,000 for 2015 and 2014, respectively. Dividends were paid via issuance of common stock.

The Series B Preferred Stock was originallywere issued with Tranche A warrants to purchase 18,58124 shares of common stock and Tranche B warrants purchasing 18,5817,539 shares of common stock, both at an exercise price of $108.00 per share.

On June 30, 2015, as consideration for obtaining consents to an amendment to the Series B designations, the Company reduced the exercise price of the Tranche A warrants from $108.00 to $104.55$8,364 and $75 per share, and the exercise price of the Tranche B warrants from $10.455 to $9.00 per share. The change in exercise price of these warrants resulted in a deemed dividend totaling $64,000 that has been recorded as an increase to additional paid-in capital with an offsetting charge to retained earnings. The deemed dividend has been subtracted from income (added to the loss) in computing loss per common stockholder.

respectively.

At December 31, 2015, as a result of the operation of certain anti-dilution provisions, the Tranche B warrants were convertible into 1,292,8191 shares of common stock. These warrants arewere re-measured based upon their fair value each reporting period and classified as a liability on the Balance Sheet.

Between June 13, 2016 and June 14, 2016, the Company entered into various agreements with holders of the Company’s “Series B Tranche B” warrants, pursuant to which each holder separately agreed to exchange the warrants for either (1) shares of common stock equal to 166% of the number of shares of common stock underlying the surrendered warrants, or (2) new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered warrants.

Series C Convertible Preferred Stock

On June 29, 2015, the Company entered into a securities purchase agreement with certain accredited investors, including John Imhoff and Mark Faupel, members of the Board, for the issuance and sale of an aggregate of 6,737 shares of Series C convertible preferred stock, at a purchase price of $750 per share and a stated value of $1,000 per share. On September 3, 2015 the Company entered into an interim agreement amending the securities purchase agreement to provide for certain of the investors to purchase an additional aggregate of 1,166 shares. Total cash and non-cash expenses were valued at $853,000, resulting in net proceeds of $3,698,000. In connection with the transaction, the Company issued five-year warrants exercisable for an aggregate of 1,247,737 shares of common stock at an exercise price of $9.50 per share.

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 DecemberMarch 31, 2015,2018, there were 5,555686 shares outstanding with a conversion price of $1.03$0.007296 per share, such that each share of Series C preferred stock would convert into approximately 97,324137,061 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 Stockpreferred stock prior to the Dividend End Date, the Company will also pay to the converting holder a “make-whole payment” equal to the amount of unpaid dividends through the Dividend End Date on the converted shares. At March 31, 2018, the “make-whole payment” for a converted share of Series C preferred stock would convert to 57,566 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.

The Company has provisionally allocated net proceeds totaling $935,200 to the fair value of the Series C preferred stock. The effective conversion price of $935,000 allocated to the Series C preferred stock resulted in an associated beneficial conversion feature totaling $148,000 that has been recorded as an increase to additional paid-in capital with an offsetting charge to retained earnings representing a deemed dividend. The deemed dividend has been subtracted from income (added to the loss) in computing loss per common stockholder.

F-14
 



In addition, the purchasers of the Series C preferred stock received, on a pro rata basis, warrants exercisable to purchase an aggregate of approximately 106.4 million150 shares of Company’s common stock. The warrants contain anti-dilution adjustments in the event that the Company issues shares of common stock, or securities exercisable for 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. The Company has valued the warrants using a Binomial model and allocated $1,349,000 to the fair value of the warrants. At DecemberMarch 31, 2015,2018, the exercise price per share was $1.03.

$640.

On May 23, 2016, an investor canceled certain of these warrants, exercisable into 903 shares of common stock. The same investor also transferred certain of these warrants, exercisable for 150 shares of common stock, to two investors who also had participated in the 2015 Series C financing.
Series C1 Convertible Preferred Stock Options

Under

Between April 27, 2016 and May 3, 2016, the Company entered into various agreements with certain holders of Series C preferred stock, including directors John Imhoff and Mark Faupel, pursuant to which those holders separately agreed to exchange each share of Series C preferred stock held for 2.25 shares of the Company’s newly created Series C1 preferred stock and 12 (9,600 pre-split) shares of the Company’s common stock (the “Series C Exchanges”). In connection with the Series C Exchanges, each holder also agreed to roll over the $1,000 stated value per share of the holder’s shares of Series C1 preferred stock into the next qualifying financing undertaken by the Company on a dollar-for-dollar basis and, except in the event of an additional $50,000 cash investment in the Company by the holder, to execute a customary “lockup” agreement in connection with the financing. In total, for 1,916 shares of Series C preferred stock surrendered, the Company issued 4,312 shares of Series C1 preferred stock and 22,996 shares of common stock. At March 31, 2018, there were 4,312 shares outstanding with a conversion price of $0.007296 per share, such that each share of Series C preferred stock would convert into approximately 137,061 shares of the Company’s common stock.
The Series C1 preferred stock has terms that are substantially the same as the Series C preferred stock, except that the Series C1 preferred stock does not pay dividends (unless and to the extent declared on the common stock) or at-the-market “make-whole payments” and, while it has the same anti-dilution protections afforded the Series C preferred stock, it does not automatically reset in connection with a reverse stock split or conversion of our outstanding convertible debt.
Warrants
The following table summarizes transactions involving the Company’s outstanding warrants to purchase common stock for the quarter ended March 31, 2018:
Warrants
(Underlying Shares)
Outstanding, January 1, 2018
294,089,138
Issuances
372,622,233
Canceled / Expired
—
Exercised
—
Outstanding, March 31, 2018
666,711,371

The Company had the following shares reserved for the warrants as of March 31, 2018:
Warrants
(Underlying Shares)
 
Exercise Price
Expiration Date
24(1)$8,368.00 per shareMay 23, 2018
7,542(2)$75.00 per shareJune 14, 2021
3(3)$40,000.00 per shareApril 23, 2019
8(4)$36,000.00 per shareMay 22, 2019
3(5)$30,400.00 per shareSeptember 10, 2019
5(6)$36,864.80 per shareSeptember 27, 2019
10(7)$22,504.00 per shareDecember 2, 2019
105(8)$7,200.00 per shareDecember 2, 2020
105(9)$8,800.00 per shareDecember 2, 2020
25(11)$20,400.00 per shareMarch 30, 2018
22(12)$9,504.00 per shareJune 29, 2020
659(10)$640.00 per shareJune 29, 2020
343(11)$640.00 per shareSeptember 4, 2020
362(12)$640.00 per shareSeptember 21, 2020
7(13)$9,504.00 per shareSeptember 4, 2020
198(14)$640.00 per shareOctober 23, 2020
7(15)$9,504.00 per shareOctober 23, 2020
630,482,456(16)$0.00228 per shareJune 14, 2021
30,263,158(17)$0.00228 per shareFebruary 21, 2021
17,239(18)$13.92 per shareJune 6, 2021
200,000(19)$0.00228 per shareFebruary 13, 2022
20,000(20)$0.18 per shareMay 16, 2022
550,000(21)$0.019 per shareNovember 16, 2020
200,000(22)$0.029 per shareDecember 28, 2020
1,500,000(23)$0.0201 per shareJanuary 10, 2021
60,000(24)$0.011 per shareMarch 19, 2021
3,409,090(25)$0.00228 per shareMarch 20, 2021
666,711,371*
   
* However, please refer to Footnote 10 - CONVERTIBLE DEBT IN DEFAULT in the paragraph: Debt Restructuring for more information regarding our warrants.
(1)Issued in June 2015 in exchange for warrants originally issued as part of a May 2013 private placement.
(2)Issued in June 2015 in exchange for warrants originally issued as part of a May 2013 private placement.
(3)Issued to a placement agent in conjunction with an April 2014 private placement.
(4)Issued to a placement agent in conjunction with a September 2014 private placement
(5)Issued as part of a September 2014 Regulation S offering.
(6)Issued to a placement agent in conjunction with a 2014 public offering.
(7)Issued in June 2015 in exchange for warrants originally issued as part of a 2014 public offering.
(8)Issued as part of a March 2015 private placement.
(9)Issued to a placement agent in conjunction with a June 2015 private placement
(10)Issued as part of a June 2015 private placement.
(11)Issued as part of a June 2015 private placement.
(12)Issued as part of a June 2015 private placement.
(13)Issued to a placement agent in conjunction with a June 2015 private placement
(14)Issued as part of a June 2015 private placement.
(15)Issued to a placement agent in conjunction with a June 2015 private placement
(16)Issued as part of a February 2016 private placement.
(17)Issued to a placement agent in conjunction with a February 2016 private placement
(18)Issued pursuant to a strategic license agreement.
(19)Issued as part of a February 2017 private placement.
(20)Issued as part of a May 2017 private placement.
(21)Issued to investors for a loan in November 2017.
(22)Issued to investors for a loan in December 2017.
(23)Issued to investors for a loan in January 2018.
(24)Issued to investors for a loan in March 2018.
(25)Issued to investors for a loan in March 2018.

All outstanding warrant agreements provide for anti-dilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations, stock dividends, stock splits or other changes in the Company’s corporate structure; except for (9). In addition, warrants subject to footnotes (2) and (10)-(12), (14), and (16) – (25) in the table above are subject to “lower price issuance” anti-dilution provisions that automatically reduce the exercise price of the warrants (and, in the cases of warrants subject to footnote (2), (16) and (17) in the table above, increase the number of shares of common stock issuable upon exercise), to the offering price in a subsequent issuance of the Company’s common stock, unless such subsequent issuance is exempt under the terms of the warrants.
For the warrants to footnote (16), the Company further agreed to amend the warrant issued with the original senior secured convertible note, to adjust the number of shares issuable upon exercise of the warrant to equal the number of shares that will initially be issuable upon conversion of the new convertible note (without giving effect to any beneficial ownership limitations set forth in the terms of the new convertible note).
The warrants subject to footnote (2) are subject to a mandatory exercise provision. This provision permits the Company, subject to certain limitations, to require exercise of such warrants at any time following (a) the date that is the 30th day after the later of the Company’s receipt of an approvable letter from the U.S. FDA for LuViva and the date on which the common stock achieves an average market price for 20 consecutive trading days of at least $1,040.00 with an average daily trading volume during such 20 consecutive trading days of at least 250 shares, or (b) the date on which the average market price of the common stock for 20 consecutive trading days immediately prior to the date the Company delivers a notice demanding exercise is at least $129,600 and the average daily trading volume of the common stock exceeds 250 shares for such 20 consecutive trading days. If these warrants are not timely exercised upon demand, they will expire. Upon the occurrence of certain events, the Company may be required to repurchase these warrants, as well as the warrants subject to footnote (2) in the table above.
The warrants subject to footnote (5) in the table above are also subject to a mandatory exercise provision. This provision permits the Company, subject to certain limitations; to require the exercise of such warrants should the average trading price of its common stock over any 30-consecutive day trading period exceed $92.16.
The warrants subject to footnote (7) in the table above are also subject to a mandatory exercise provision. This provision permits the Company, subject to certain limitations, to require exercise of 50% of the then-outstanding warrants if the trading price of its common stock is at least two times the initial warrant exercise price for any 20-day trading period. Further, in the event that the trading price of the Company’s common stock is at least 2.5 times the initial warrant exercise price for any 20-day trading period, the Company will have the right to require the immediate exercise of 50% of the then-outstanding warrants. Any warrants not exercised within the prescribed time periods will be canceled to the extent of the number of shares subject to mandatory exercise.
The holders of the warrants subject to footnote (2) in the table above have agreed to surrender the warrants, upon consummation of a qualified public financing, for new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered warrants.
Series B Tranche B Warrants
As discussed in Note 3, Fair Value Measurements, between June 13, 2016 and June 14, 2016, the Company entered into various agreements with holders of the Company’s “Series B Tranche B” warrants, pursuant to which each holder separately agreed to exchange the warrants for either (1) shares of common stock equal to 166% of the number of shares of common stock underlying the surrendered warrants, or (2) new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered warrants. In total, for surrendered warrants then-exercisable for an aggregate of 1,185,357 shares of common stock (but subject to exponential increase upon operation of certain anti-dilution provisions), the Company issued or is obligated to issue 16,897 shares of common stock and new warrants that, if exercised as of the date hereof, would be exercisable for an aggregate of 216,707 shares of common stock. As of March 31, 2018, the Company had issued 14,766 shares of common stock and rights to common stock shares for 2,131. In certain circumstances, in lieu of presently issuing all the shares (for each holder that opted for shares of common stock), the Company and the holder further agreed that the Company will, subject to the terms and conditions set forth in the applicable warrant exchange agreement, from time to time, be obligated to issue the remaining shares to the holder. No additional consideration will be payable in connection with the issuance of the remaining shares. The holders that elected to receive shares for their surrendered warrants have agreed that they will not sell shares on any trading day in an amount, in the aggregate, exceeding 20% of the composite aggregate trading volume of the common stock for that trading day. The holders that elected to receive new warrants will be required to surrender their old warrants upon consummation of the Company’s next financing resulting in net cash proceeds to the Company of at least $1 million. The new warrants will have an initial exercise price equal to the exercise price of the surrendered warrants as of immediately prior to consummation of the financing, subject to customary “downside price protection” for as long as the Company’s common stock is not listed on a national securities exchange, and will expire five years from the date of issuance.

5.   STOCK OPTIONS
The Company’s 1995 Stock Plan (the “Plan”), a total of 26,616 has expired pursuant to its terms, so zero shares remained available for issuance at DecemberMarch 31, 2015 and 105,936 shares were subject to stock options outstanding as of that date, bringing the total number of shares subject to stock options outstanding and those remaining available for issue to 132,552 shares of common stock as of December 31, 2014.2018. The Plan allowsallowed for the issuance of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price of options iswas determined by the Company’s board of directors, but incentive stock options must bewere 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 overafter four years and expire ten years from the date of grant.

As of March 31, 2018, the Company has issued and outstanding options to purchase a total of 116 shares of common stock pursuant to the Plan, at a weighted average exercise price of $37,090 per share.
The fair value of stock options granted in 2015 and 2014 wereis estimated using the Black-Scholes option pricing model. A summary of the assumptions used in determining the fair value of options follows:

  2015 2014
Expected volatility  152.32%  157.70%
Expected option life in years  9.98   9.98 
Expected dividend yield  0.00%  0.00%
Risk-free interest rate  1.33%  2.55%
Weighted average fair value per option at grant date $0.49  $0.40 

Application of the Black-Scholes option pricing model involves assumptions that are judgmental and affect compensation expense. Historical information is the primary basis for the selection of expected volatility, expected option life and expected dividend yield. Expected volatility is based on the most recent historical period equal to the expected life of the option. The risk-free interest rate is based on yields of U.S. Treasury zero-coupon issues with a term equal to the expected life of the option on the date the stockNo options were granted.

issued during the period ended March 31, 2018.

Stock option activity for each of the two years ended DecemberMarch 31, 2015,2018 as follows:

  2015 2014
    

Weighted

Average

Exercise

   Weighted
Average
Exercise
  Shares Price Shares Price
Outstanding at beginning of year  69,404  $66.00   65,312  $68.00 
   Options granted  42,140  $12.00   7,548  $40.00 
   Options exercised  (1,786) $48.00   (2,424) $32.00 
   Options expired/forfeited  (3,822) $43.00   (1,031) $68.00 
Outstanding at end of year  105,936  $45.00   69,404  $66.00 
Options vested and exercisable at year-end  90,411  $49.00   59,881  $66.00 
Options available for grant at year-end  26,616       63,148     
Aggregate intrinsic value – options exercised $—        $497     
Aggregate intrinsic value – options outstanding $—        $4,941     
Aggregate intrinsic value – options vested and
exercisable		 $—        $6,129     
Options unvested, balance at beginning of year(1)  9,523       10,672  $112.00 
   Options granted (1)  42,140  $40.00   7,548  $40.00 
   Vested (1)  (34,383) $66.00   (7,666) $66.00 
Cancelled/Forfeited  (2,455) $68.00   (1,031  $68.00 
Balance, end of period (1)  14,825       9,523   —   
 
 
             
(1)   Includes awards not captured in valuation fragments             

F-15
 
 
2018
 
 
 
 
 
 
Weighted Average
 
 
 
Shares
 
 
Exercise Price
 
Outstanding at beginning of year
  116 
 $37,090 
   Options granted
  — 
 $— 
   Options exercised
  — 
 $— 
   Options expired/forfeited
  — 
 $— 
Outstanding at end of the period
  116 
 $37,090 
 

The Company estimates the fair value of stock options using a Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the expected term, expected volatility of the Company’s common stock, the risk free interest rate, option forfeiture rates, and dividends, if any. The expected term of the options is based upon the historical term until exercise or expiration of all granted options. The expected volatility is derived from the historical volatility of the Company’s stock on the OTCBB market for a period that matches the expected term of the option. The risk-free interest rate is the constant maturity rate published by the U.S. Federal Reserve Board that corresponds to the expected term of the option.

Warrants

The following table summarizes transactions involving the Company’s outstanding warrants to purchase common stock for the year ended December 31, 2015:

Warrants

(Underlying Shares)

Outstanding, January 1, 2015297,961
Issuances2,751,872
Canceled / Expired(35,973)
Exercised(211,476)
Outstanding, December 31, 20152,802,384

The Company had the following shares reserved for the warrants as of December 31, 2015:

Warrants (Underlying Shares)

Exercise Price Per Share

Expiration Date

4,399(1)$68.00March 31, 2016
2,852(2)$105.00November 20, 2016
18,581(3)$10.46May 23, 2018
1,292,820(3)$1.03May 23, 2018
2,000(4)$50.00April 23, 2019
5,618(4)$45.00May 22, 2019
1,842(5)38.00September 10, 2019
3,255(6)$46.08September 27, 2019
7,553(7)$28.13December 2, 2019
83,927(8)$9.00December 2, 2020
83,927(8)$11.00December 2, 2020
20,000(9)$25.50March 30, 2018
17,547 (10)$11.88June 29, 2020
526,421(11)$1.03June 29, 2020
273,684(12)$1.03September 4, 2020
289,737(13)$1.03September 21, 2020
5,163(14)$11.88September 4,2020
157,895(15)$1.03October 23, 2020
5,163(16)$11.88October 23,2020
2,802,384   

(1)Issued in February 2014 as part of a buy-back of a minority interest in Interscan in December 2012.
(2)Issued as part of a November 2011 private placement.
(3)Issued in June 2015 in exchange for warrants originally issued as part of a May 2013 private placement.
(4)Issued to a placement agent in conjunction with an April 2014 private placement.
(5)Issued to a placement agent in conjunction with a September 2014 private placement.
(6)Issued as part of a September 2014 Regulation S offering.
(7)Issued to a placement agent in conjunction with a 2014 public offering.
(8)Issued in June 2015 in exchange for warrants originally issued as part of a 2014 public offering.
(9)Issued as part of a March 2015 private placement.
(10)Issued to a placement agent in conjunction with a June 2015 private placement.
(11)    Issued as part of a June 2015 private placement.
(12)Issued as part of a June 2015 private placement.
(13)Issued as part of a June 2015 private placement.
(14)Issued to a placement agent in conjunction with a June 2015 private placement.
(15)  Issued as part of a June 2015 private placement.
(16)Issued to a placement agent in conjunction with a June 2015 private placement.

F-16
6.   LITIGATION AND CLAIMS
 

5. Income Taxes

The Company has incurred net operating losses (“NOLs”) since inception. As of December 31, 2015, the Company had NOL carryforwards available through 2034 of approximately $73.0 million to offset its future income tax liability. The NOL carryforwards began to expire in 2008. The Company has recorded a valuation allowance for all deferred tax assets related to the NOLs. Utilization of existing NOL carry forwards may be limited in future years based on significant ownership changes. The Company is in the process of analyzing its NOLs and has not determined if it is subject to any restrictions in the Internal Revenue Code that could limit the future use of NOL.

Components of deferred taxes are as follows at December 31 (in thousands):

  2015 2014
Deferred tax assets $626  $466 
   Net operating loss carry forwards  27,770   25,994 
Deferred tax liabilities  —     —   
   28,396   26,460 
Valuation allowance  (28,396)  (26,460)
  $0  $0 

The following is a summary of the items that caused recorded income taxes to differ from taxes computed using the statutory federal income tax rate for the years ended December 31:

  2015 2014
Statutory federal tax rate  34%  34%
State taxes, net of federal benefit  4   4 
Nondeductible expenses  —     —   
Valuation allowance  (38)  (38)
   0%  0%

6. Commitments and Contingencies

Operating Leases

In December 2009, the Company moved its offices, which comprise its administrative, research and development, marketing and production facilities to 5835 Peachtree Corners East, Suite D, Norcross, Georgia 30092. The Company leases approximately 23,000 square feet under a lease that expires in June 2017. The fixed monthly lease expense is approximately $15,000 plus common charges. The Company also leases office and equipment under operating lease agreements with monthly payments of approximately $2,000. These leases expire at various dates through April 2016. Future minimum rental payments at December 31, 2015 under non-cancellable operating leases for office space and equipment are as follows (in thousands):

       
 Year   Amount 
 2016  $201 
 2017   98 
 Total  $299 

Rental expense was approximately $170, 000 in 2015 and 2014.

Litigation and Claims

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

As of DecemberMarch 31, 20152018, and December 31, 2014,2017, there was no accrual recorded for any potential losses related to pending litigation.

F-17
 

Contracts

At

7.  COMMITMENTS AND CONTINGENCIES
Operating Leases
In December 31, 2015 and 2014,2009, the Company hadmoved its offices, which comprise its administrative, research and development, marketing and production facilities to 5835 Peachtree Corners East, Suite B, Norcross, Georgia 30092. The Company leased approximately 23,000 square feet under a royaltylease 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 March 31, 2018; $8,022 each month for the period beginning April 1, 2018 and ending March 31, 2019; $8,268 each month for the period beginning April 1, 2019 and ending March 31, 2020; and $8,514 each month for the period beginning April 1, 2020 and ending March 31, 2021. The Company recognizes rent expense on a straight-line basis over the estimated lease term. Future minimum rental payments at March 31, 2018 under non-cancellable operating leases for office space and equipment are as follows (in thousands):


Year
 
Amount
 
2018
  85 
2019
  98 
2020
  101 
2021
  26 
Related Party Contracts
On June 5, 2016, the Company entered into a license agreement with Freedom Meditech, entered into on August 26, 2008, inShenghuo Medical, LLC pursuant to which the Company receives quarterly royalty payments on Freedom Meditech’s sales of products using technology licensed fromgranted 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. The royalty payment equals 3% of net sales of licensed products covered by a valid claim. The aggregate royalties payable are capped at $4,000,000. Freedom Meditech’s obligationCompany’s exclusive distributor in China, Macau and Hong Kong, and the license extended to pay royalties with respect to salesmanufacturing in a particular country untilthose countries as well. Under the earlierterms of the datelicense agreement, once Shenghuo was capable of expirationmanufacturing LuViva in accordance with ISO 13485 for medical devices, Shenghuo would pay the Company a royalty equal to $2.00 or 20% of the last valid claimdistributor 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 such country or the aggregate royalty cap is reached. For the years ended December 31, 2015 and 2014, the Company received approximately $36,000 and 40,000 in royalties, respectively.

7. License and Technology Agreements

As partfurtherance of the Company’s efforts to conduct research and development activities and to commercialize potential products, the Company, from time to time, enters into agreements with certain organizations and individuals that further those efforts but also obligate the Company to make future minimum payments or to remit royalties ranging from 1% to 3% of revenuesecure regulatory approval for LuViva from the sale of commercial products developed from the research. The Company generally is required to make minimum royalty paymentsU.S. Food and Drug Administration, in exchange for the exclusive licenseright to develop certain technology.

8. Notes Payable

Short Term Notes Payable

At December 31, 2015 and 2014, the Company maintained notes payablereceive payments equal to Premium Assignment Corporation, an insurance premium financing company,2% of approximately $172,000 and $100,000, respectively. These notes are 10 month straight-line amortizing loan dated June 24, 2015 and June 24, 2014. The notes carry annual interest of 5.2% and 4.6%, respectively. The balance due to on the Premium Assignment note was approximately $70,000 and $37,000 at December 31, 2015 and December 31, 2014, respectively.

Note Payable in Default

At December 31, 2015, the Company maintained a note payable totaling approximately $133,000 of principal and accrued interest. The note accrues interest at 9% with a 16% default rate and requires monthly payments of $10,000. As of December 31, 2015 the note is accruing interest at the default rate and is past due. As of December 31, 2014, the balance was $163,000 and was not in default.

Short Term Convertible Note Payable

On September 10, 2014, the Company sold a secured promissory note an accredited investor with an initial principal amount of $1,275,000, for a purchase price of $700,000 (an original issue discount of $560,000). The Company may prepay the note at any time. The note is secured by the Company’s current and future accounts receivable and inventory, pursuantsales in the United States, up to a security agreement entered into in connection with the sale. On March 10, 2015, May 4, 2015, June 1, 2015, June 16, 2015, June 29, 2015, January 21, January 29 and February 12, 2016 the Company amended the termsan aggregate of the note to extend the maturity ultimately until August 31, 2016. During the extension, interest accrues on the note at a rate of the lesser of 18% per year or the maximum rate permitted by applicable law.$4.0 million. Pursuant to the termslicense agreement, Shenghuo had the option to have a designee appointed to the Company’s board of directors (director Richard Blumberg is that designee). As partial consideration for, and as a condition to, the license, and to further align the strategic interests of the amendedparties, the Company agreed to issue a convertible note to Shenghuo, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment to Shenghuo of $300,000, expected to be due the holder may convertearlier of 90 days from issuance and consummation of any capital raising transaction by the outstanding balanceCompany with net cash proceeds of at least $1.0 million. The note will accrue interest at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares of the Company’s common stock at a conversion price per share of $13.92, subject to customary anti-dilution adjustment. The note will be unsecured, and is expected to provide for customary events of default. The Company will also issue Shenghuo a five-year warrant exercisable immediately for approximately 21,549 shares of common stock at an exercise price equal to the lower of (1) $25.0 or (2) 75% of the lowest daily volume weighted averageconversion price of the common stock during the five days priornote, subject to conversion. If the conversion price at the time of any conversion is lower than $15.00, the Company has the option of delivering the conversion amount in cash in lieu of shares of common stock. As of December 31, 2015, the holder had converted $5,395 in outstanding principal and accrued interest into 90,240 shares of common stock. The Company paid a total of $65,000 in loan modification fees. At December 31, 2015 and 2014, the balance on the note was approximately $686,000 and $1,062,000, respectively. The original issue discount of $560,000 was fully amortized as of June 30, 2015.

Convertible Debt

customary anti-dilution adjustment. On April 23, 2014,January 22, 2017, the Company entered into a securities purchaselicense agreement with Shandong Yaohua Medical Instrument Corporation, or SMI, pursuant to which the Company granted SMI an accredited investor,exclusive global license to manufacture the LuViva device and related disposables (subject to a carve-out for manufacture in Turkey) and exclusive distribution rights in the Peoples Republic of China, Macau, Hong Kong and Taiwan. In order to facilitate the SMI agreement, immediately prior to its execution the Company entered into an agreement with Shenghuo Medical, LLC, regarding its previous license to Shenghuo. Under the terms of the new agreement, Shenghuo agreed to relinquish its manufacturing license and its distribution rights in SMI’s territories, and to waive its rights under the original Shenghuo agreement, all for as long as SMI performs under the SMI agreement.

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 6% senior convertible note withroyalty 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 initial principal amount of $1.5 millionaggregate perpetual royalty initially equal to $0.10, and an 18-month term,from and after October 2, 2016, equal to $0.20, for each disposable that the Company sells (or that is sold by a purchase price of $1.0 million (an approximately 33.3% original issue discount). Additionally,third party pursuant to a licensing arrangement with the purchase agreement, on May 23, 2014 the investor purchased an additional senior convertible note with an initial principal amount of $2.0 millionCompany).
8.   NOTES PAYABLE
Short Term Notes Payable
Notes Payable in Default
At March 31, 2018 and an 18-month term, for a fixed purchase price of $2.0 million. As of July 1, 2015, the notes were repaid in full. The balance at December 31, 2014 was $783,000.

F-18

The Company paid the investor a commitment fee for entering into the purchase agreement in the form of 3,218 shares of common stock. The Company also paid $50,000 of attorneys’ fees and expenses incurred by Magna in connection with the transaction. Total debt issuance costs incurred on the senior convertible note was approximately $844,000. This amount was fully amortized at December 31, 2015. Total amortization expense for the year ended December 31, 2015 and 2014 was $516,000 and $328,000, respectively.

In connection with the sale of the convertible notes, the Company issued its placement agent warrants exercisable for 2,000 shares of common stock at $50.00 per share with an expiration date of April 23, 2019, and warrants exercisable for 5,618 shares of common stock at $45.00 per share with an expiration date of May 22, 2019.

Prior to repayment in full, the Company had issued a total of 252,804 shares of common stock in conjunction with conversions of the senior convertible notes.

Loss on Extinguishment of Debt

As part of the Company’s December 2014 public offering of common stock, the Company repaid approximately $1.4 million of debt via the issuance of 77,005 shares of common stock and five-year warrants to purchase an additional 3,850,252 shares at an exercise price of $22.50 per share. Pursuant to the senior convertible note purchase agreement, the Company had to pay a prepayment penalty of 25% of the amount prepaid. The penalty on the transaction was approximately $325,000 and was charged to loss on extinguishment of debt on the statement of operations for the year ended December 31, 2014. There was no loss on extinguishment of debt in the year ended December 31, 2015.

9. Related Party Transactions

As of December 31, 2015 and 2014,2017, the Company maintained notes payable and accrued interest to both related and non-related parties totaling approximately $682,000$1,114,000 and $609,000,$1,091,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry an annual interest rate ofrates between 5% and 10% and have default rates as high a 18.0%. Included inThe Company is accruing interest at the short-termdefault rate of 18.0%.


Short Term Notes Payable
At March 31, 2018 and December 31, 2017, the Company maintained short term notes payable and accrued interest to both related and non-related parties totaling $508,000 and $354,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry annual interest rates between 5% and 10%.
In July 2017, the Company entered into a premium finance agreement to finance its insurance policies totaling $206,293. The note requires monthly payments of $18,766, including interest at 4.89% and matures in May 2018. The balance due on this note totaled $37,000 and $93,000 at March 31, 2018 and December 31, 2017, respectively.
9.  SHORT-TERM CONVERTIBLE DEBT
Related Party Convertible Note Payable – Short-Term
On June 5, 2016, the accompanying Balance Sheet.

CertainCompany entered into a license agreement with a distributor pursuant to which the Company granted the distributor an exclusive license to manufacture, sell and distribute the Company’s LuViva Advanced Cervical Cancer device and related disposables in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The distributor was already the Company’s exclusive distributor in China, Macau and Hong Kong, and the license will extend to manufacturing in those countries as well.

As partial consideration for, and as a condition to, the license, and to further align the strategic interests of the parties, the Company agreed to issue a convertible note to the distributor, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment to the distributor of $240,000, due upon consummation of any capital raising transaction by the Company within 90 days and with net cash proceeds of at least $1.0 million. As of March 31, 2018, the Company had a note due of $436,106 compared to a note due of $417,160 for the period ended December 31, 2017. The note accrues interest at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares of the Company’s directorscommon stock at a conversion price per share of $13.92, subject to customary anti-dilution adjustment. The note is unsecured, and officers investedis expected to provide for customary events of default. The Company will also issue the distributor a total of $182,603 in the December 2014 public offering and received 8,116five-year warrant exercisable immediately for 17,239 shares of common stock as well as five-year warrantsat an exercise price equal to purchase an additional 4,058 shares at $22.50 per share.

Directors and Officers holding the Company’s Series B preferred stock participated in the issuanceconversion price of the Company’s Series C preferred stock in the second half of 2015 by exchanging a total of $525,000 in liquidation value of Series B preferred stock and $400,000 in cash, and received 1,233 shares of Series C preferred stock and five-year warrantsnote, subject to purchase an additional 131,526 shares.

10. Valuation and Qualifying Accounts

Allowance for Doubtful Accounts

The Company has the following allowances for doubtful accounts (in thousands):

  

Year Ended

December 31,

  2015 2014
Beginning balance $76  $18 
Additions / (Adjustments)  19   58 
        Balance $95  $76 

F-19
customary anti-dilution adjustment.
 

Inventory Reserves

The Company has the following reserves for inventory balance (in thousands):

  

Year Ended

December 31,

  2015 2014
Beginning balance $144  $184 
Additions / (Adjustments)  (26)  (40)
        Balance $118  $144 

11. Loss Per Common Share

Basic net loss per share attributable to common stockholders amounts are computed by dividing the net loss plus preferred stock dividends and deemed dividends on preferred stock by the weighted average number of shares outstanding during the period.

12. Subsequent Events

Convertible Note Payable – Short-Term
On February 11, 2016,13, 2017, the Company entered into a securities purchase agreement with an accredited investorAuctus Fund, LLC for the issuance and sale on February 12, 2016to Auctus of $1.4375 million$170,000 in aggregate principal amount of a senior secured12% convertible promissory note for an aggregate purchase price of $1.15 million (a 20%$156,400 (representing a $13,600 original issue discount). In addition,On February 13, 2017, the investor receivedCompany issued the note to Auctus. Pursuant to the purchase agreement, the Company also issued to Auctus a warrant exercisable to purchase an aggregate of approximately 179.7 million200,000 shares of the Company’s common stock. The convertible note matureswarrant is exercisable at any time, at an exercise price per share equal to $0.00228 (110% of the closing price of the common stock on the second anniversaryday prior to issuance), subject to certain customary adjustments and price-protection provisions contained in the warrant. The warrant has a five-year term. The note matured nine months from the date of issuance and, in addition to the 20% original issue discount, accrues interest at a rate of 17%12% per year. The Company will pay monthly interest coupons and, beginning six months after issuance, will pay amortized quarterly principal payments. Ifcould have prepaid the Company does not receive, on or before the first anniversary after issuance, an aggregate of at least $3.0 million from future equity or debt financings or non-dilutive grants, then the holder will have the option of accelerating the maturity date to the first anniversary of issuance. The Company may prepay the convertible note, in whole or in part, without penalty, upon 20 days’ prior written notice. Subjectfor 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any time from 31 to resale restrictions under Federal securities laws60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance to 180 days from issuance. After six months from the availabilitydate of sufficient authorized but unissued shares ofissuance, Auctus converted the Company’s common stock, the convertible note, is convertible at any time, in whole or in part, at the holder’s option, into shares of the Company’s common stock, at a conversion price equal to the lesser of $0.008 per share (pre-stock split) or 70%lower of the price offered in the Company’s next public offering or a 40% discount to the average closing price per share forof the fivetwo lowest trading prices of the common stock during the 20 trading days prior to issuance,the conversion, subject to certain customary adjustments and anti-dilutionprice-protection provisions contained in the note. The note includes customary events of default provisions and a default interest rate of 24% per year. Upon the occurrence of an event of default, Auctus required the Company to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. In connection with the transaction, the Company agreed to reimburse Auctus for $30,000 in legal and diligence fees, of which we paid $10,000 in cash and $20,000 in restricted shares of common stock, valued at $0.40 per share (a 42.86% discount to the closing price of the common stock on the day prior to issuance). The Company allocated proceeds of $90,000 to the warrants and common stock issued in connection with the financing. As of March 31, 2018, the Company has net debt and interest of $30,800 as compared to net debt and interest of $76,664 for the period ended December 31, 2017.

On March 20, 2018, the Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $150,000 in aggregate principal amount of a 12% convertible note.

promissory note for an aggregate purchase price of $135,000 (representing a $15,000 original issue discount). On March 20, 2018, the Company issued the note to Auctus. Pursuant to the purchase agreement, the Company also issued to Auctus a warrant exercisable to purchase an aggregate of 3,409,090 shares of the Company’s common stock. The warrant is exercisable at any time, at an exercise price per share equal to $0.00228 (110% of the closing price of the common stock on the day prior to issuance), subject to certain customary adjustments and price-protection provisions contained in the warrant. The warrant has a five-year term. The note matures nine months from the date of issuance and, in addition to the original issue discount, accrues interest at a rate of 12% per year. The Company could have prepaid the note, in whole or in part, for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance to 180 days from issuance. After six months from the date of issuance, Auctus may convert the note, at any time, in whole or in part, into shares of the Company’s common stock, at a conversion price equal to the lower of the price offered in the Company’s next public offering or a 40% discount to the average of the two lowest trading prices of the common stock during the 20 trading days prior to the conversion, subject to certain customary adjustments and price-protection provisions contained in the note. The note includes customary events of default provisions and a default interest rate of 24% per year. Upon the occurrence of an event of default, Auctus may require the Company to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. As of March 31, 2018, the Company has net debt of $99,000 including unamortized debt issuance costs of $31,500 and reduction related to the allocated value of the warrants of $19,500.

On May 17, 2017, the Company entered into a securities purchase agreement with Eagle Equities, LLC (“Eagle”), providing for the purchase by Eagle of two convertible redeemable notes in the aggregate principal amount of $88,000, with the first note being in the amount of $44,000, and the second note being in the amount of $44,000. The first note was fully funded on May 19, 2017, upon which the Company received $40,000 of net proceeds (net of a 10% original issue discount). The second note was issued on December 21, 2017 and was initially paid for by the issuance of an offsetting $40,000 secured note issued by Eagle. Eagle was required to pay the principal amount of its secured note in cash and in full prior to executing any conversions under the second note the Company issued. The notes bear an interest rate of 8%, and are due and payable on May 17, 2018. The notes may be converted by Eagle at any time after five months from issuance into shares of our common stock (as determined in the notes) calculated at the time of conversion, except for the second note, which also requires full payment by Eagle of the secured note it issued to us before conversions may be made. The conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which the Company receive 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. As of March 31, 2018, the notes had been converted and no balance remained outstanding, as compared to net debt of $41,322, including unamortized original issue discount of $5,214, unamortized and debt issuance costs of $11,160 for the period ended December 31, 2017.
On March 12, 2018, 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 $66,667. The note was fully funded on March 14, 2018, upon which the Company received $51,000 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 12, 2019. The note may be converted by Eagle at any time after twelve months from issuance into shares of our common stock (as determined in the notes) calculated at the time of conversion, except for the second note, which also requires full payment by Eagle of the secured note it issued to us before conversions may be made. The conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which the Company receive 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. As of March 31, 2018, the outstanding balance was $51,816, including unamortized debt issuance costs of $8,532 and unamortized discount of $6,319.

On May 17, 2017, the Company entered into a securities purchase agreement with Adar Bays, LLC(“Adar”), providing for the purchase by Adar of two convertible redeemable notes in the aggregate principal amount of $88,000, with the first note being in the amount of $44,000, and the second note being in the amount of $44,000. The first note was fully funded on May 19, 2017, upon which the Company received $40,000 of net proceeds (net of a 10% original issue discount). The second note was issued on December 21, 2017 and was initially paid for by the issuance of an offsetting $40,000 secured note issued by Adar. Adar was required to pay the principal amount of its secured note in cash and in full prior to executing any conversions under the second note the Company issued. The notes bear an interest rate of 8%, and are due and payable on May 17, 2018. The notes may be converted by Adar at any time after five months from issuance into shares of our common stock (as determined in the notes) calculated at the time of conversion, except for the second note, which also requires full payment by Adar of the secured note it issued to us before conversions may be made. The conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which the Company receive 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. As of March 31, 2018, the notes had been converted and no balance remained outstanding, as compared to net debt of $42,216, including unamortized original issue discount of $5,214, unamortized and debt issuance costs of $11,160 for the period ended December 31, 2017.
On February 12, 2018, the Company entered into a securities purchase agreement with Adar Bays, LLC, providing for the purchase by Adar of three convertible redeemable notes in the aggregate principal amount of $285,863, with the first note being in the amount of $95,288, and the second and third note being in the same amount. The first note was fully funded on February 13, 2018, upon which the Company received $75,000 of net proceeds (net of a 10% original issue discount). The notes bear an interest rate of 8%, and are due and payable on October 12, 2018. The notes may be converted by Adar at any time after eight months from issuance into shares of our common stock (as determined in the notes) calculated at the time of conversion, except for the second note, which also requires full payment by Adar of the secured note it issued to us before conversions may be made. The conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which the Company receive 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. As of March 31, 2018, the Company has a net debt of $76,626, including unamortized debt issuance costs of $11,672 and unamortized discount of $6,890.
On May 18, 2017, the Company entered into a securities purchase agreement with GHS Investments, LLC, an existing investor, providing for the purchase by GHS of a convertible promissory note in the aggregate principal amount of $66,000, for $60,000 in net proceeds (representing a 10% original issue discount). The transaction closed on May 19, 2017. The note matures upon the earlier of our receipt of $100,000 from revenues, loans, investments, or any other means (other than the Eagle and Adar bridge financings) and December 31, 2017. In addition to the 10% original issue discount, the note accrues interest at a rate of 8% per year. The Company may prepay the note, in whole or in part, for 110% of outstanding principal and interest until 30 days from issuance, for 120% of outstanding principal and interest at any time from 31 to 60 days from issuance and for 140% of outstanding principal and interest at any time from 61 days to 180 days from issuance. The note may not be prepaid after 180 days. After six months from the date of issuance, the note will become convertible, at any time thereafter, in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price equal to 60% of the lowest trading price during the 25 trading days prior to conversion. The note includes customary event of default provisions and a default interest rate of the lesser of 19%20% per year or the maximum amount permitted by law. Upon the occurrence of an event of default, the holder of the note may require the Companyus to redeem the convertible note (or convert it into shares of common stock) at 120%150% of the outstanding principal balance. TheAs of March 31, 2018, the Company has net debt of $66,000 and interest of $6,793 as compared to net debt of $66,000 for the period ended December 31, 2017.
On August 18, 2017, the Company entered into a securities purchase agreement with Power Up Lending Group Ltd., providing for the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is secureddue and payable on May 19, 2018. The note may be converted by a lien on all of the Company’s assets, including its intellectual property, pursuant to a security agreement entered into by the Company and GPB in connection with the transaction.

The warrant is exercisablePower Up at any time pending availabilityafter 180 days from issuance into shares of sufficient authorized but unissuedCompany’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of March 31, 2018, the notes had been converted and no balance remained outstanding as compared to a net debt of $46,405, including unamortized debt issuance costs of $6,595 of December 31, 2017.


On October 12, 2017, the Company entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on July 20, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of March 31, 2018, the Company has a net debt of $49,840, including unamortized debt issuance costs of $3,160 as compared to net debt of $47,288, including unamortized debt issuance costs of $5,722 for the period ended December 31, 2017.
On December 11, 2017, the Company entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on September 20, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of March 31, 2018, the Company has a net debt of $48,110, including unamortized debt issuance costs of $4,890 as compared to net debt of $45,565, including unamortized debt issuance costs of $7,435 for the period ended December 31, 2017.
On February 8, 2018, the Company entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on November 30, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of March 31, 2018, the Company has net debt of $46,102, including unamortized debt issuance cost of $6,898.
On December 28, 2016, the Company entered into a securities purchase agreement with an investor for the issuance and sale to investor of up to $330,000 in aggregate principal amount of 10% original issuance discount convertible promissory notes, for an aggregate purchase price of $300,000. On that date, the Company issued to the investor a note in the principal amount of $222,000, for a purchase price of $200,000. The note matures six months from their date of issuance and, in addition to the 10% original issue discount, accrue interest at a rate of 10% per year. The Company may prepay the notes, in whole or in part, for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance until immediately prior to the maturity date. After six months from the date of issuance (i.e., if the Company fails to repay all principal and interest due under the notes at the maturity date), the investor may convert the notes, at any time, in whole or in part, into shares of the Company’s common stock, at an exercisea conversion price per share equal to 60% of the conversionlowest volume weighted average price of our common stock during the convertible note,20 trading days prior to conversion, subject to certain customary adjustments and anti-dilution provisions contained in the warrant. The warrant has a five-year term.

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

In connection with the transaction, on February 12, 2016, the Company and the investor entered into a four-year consulting agreement, pursuant to which the investor will provide management consulting services to the Company in exchange for a royalty payment, payable quarterly, equal to 3.5% of the Company’s revenues from the sale of products.

On February 24, 2016, the Company implemented a 1:100 reverse stock split of all of its issued and outstanding common stock. As a result of the reverse stock split, every 100 shares of issued and outstanding common stock of the Company were converted into 1 share. All fractional shares created by the reverse stock split were rounded to the nearest whole share. The reverse stock split decreased the Company’s issued and outstanding shares of common stock from 287,729,113 shares to 2,877,291 shares. The number of the authorized shares did not change.

F-20


GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (in Thousands)
 
ASSETS March 31, 2016 December 31, 2015
CURRENT ASSETS:        
Cash and cash equivalents $56  $35 
Accounts receivable, net of allowance for doubtful accounts of $75 and $95 at March 31, 2016 and December 31, 2015, respectively  230   190 
Inventory, net of reserves of $156 and $118, at March 31, 2016 and December 31, 2015, respectively  1,253   1,119 
Prepaid expenses and deposits  509   780 
                    Total current assets  2,048   2,124 
         
Property and equipment, net  264   318 
Other assets  54   121 
                    Total noncurrent assets  318   439 
         
                    TOTAL ASSETS $2,366  $2,563 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT        
         
CURRENT LIABILITIES:        
Short-term notes payable, including related parties $259  $752 
Note payable in default, including related parties  590   133 
Convertible note – current portion  479   —   
Short-term convertible notes payable, net  591   686 
Accounts payable  1,977   1,824 
Accrued liabilities  2,069   1,907 
Deferred revenue  66   217 
                    Total current liabilities  6,031   5,519 
         
Warrants, at fair value  1,588   2,606 
 Long-term convertible notes payable, net  197   —   
                    Total long-term liabilities  1,785   2,606 
         
                    TOTAL LIABILITIES  7,816   8,125 
         
STOCKHOLDERS’ DEFICIT:        
Series C convertible preferred stock, $.001 par value; 9.0 shares authorized, 5.0 and 5.6 shares issued and outstanding as of March 31, 2016 and December 31, 2015, (Liquidation preference of $4,966 and $5,555 at March 31, 2016 and December 31, 2015)  1,817   2,052 
Common stock, $.001 Par value; 1,000,000 shares authorized, 5,322 and 2,371 shares issued and outstanding as of March, 31 2016 and December 31, 2015  297   236 
Additional paid-in capital  115,471   114,845 
Treasury stock, at cost  (132)  (132)
Accumulated deficit  (122,903)  (122,563)
         
                   TOTAL STOCKHOLDERS’ DEFICIT  (5,450)  (5,562)
         
                   TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $2,366  $2,563 
 
 The accompanying notes are an integral part of these condensed consolidated financial statements.
         

F-21

 

GUIDED THERAPEUTICS INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in Thousands)
     
  

FOR THE THREE MONTHS

ENDED MARCH 31,

  2016 2015
REVENUE:        
          Sales – devices and disposables $262  $127 
          Cost of goods sold  68   107 
                                     Gross profit  194   20 
         
OPERATING EXPENSES:        
         Research and development  290   373 
         Sales and marketing  117   172 
         General and administrative  917   963 
                                   Total operating expenses  1,324   1,508 
         
                                   Operating loss  (1,130)  (1,488)
         
OTHER INCOME (EXPENSES):        
         Other income  23   21 
         Interest expense  (158)  (492)
         Change in fair value of warrants  1,395   714 
                                 Total other income  1,260   243 
         
INCOME (LOSS)  FROM OPERATIONS  130   (1,245)
         
PROVISION FOR INCOME TAXES  —     —   
         
NET INCOME (LOSS) $130  $(1,245)

 

PREFERRED STOCK DIVIDENDS

  (470)  (31)

 

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 $(340) $(1,276)
         
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS        
      BASIC $(0.11) $(1.31)
      DILUTED $(0.00) $(1.31)
         
WEIGHTED AVERAGE SHARES OUTSTANDING        
      BASIC  3,084   973 
      DILUTED  109,899   973 

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

F-22

 

GUIDED THERAPEUTICS INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in Thousands)
 
  

FOR THE THREE MONTHS

ENDED MARCH 31,

  2016 2015
CASH FLOWS FROM OPERATING ACTIVITIES:        
     Net income (loss) $130  $(1,245)
     Adjustments to reconcile net income (loss) to net cash used in operating activities:        
           Bad debt expense  17   —   
           Depreciation  54   72 
           Amortization  54   402 
           Stock based compensation  30   192 
           Change in fair value of warrants  (1,395)  (714)
 Changes in operating assets and liabilities:        
           Inventory  (135)  (20)
           Accounts receivable  (56)  31 
           Other current assets  271   47 
           Other assets  18   8 
           Accounts payable  153   (169)
           Deferred revenue  (151)  —   
           Accrued liabilities  55   508 
           Other long-term liabilities  —     262 
                         Total adjustments  (1,085)  619 
         
                         Net cash used in operating activities  (955)  (626)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
      Net proceeds from issuance of common stock and warrants, net  —     451 
      Proceeds from debt financing, net of discounts and debt issuance costs  1,029   62 
      Payments made on notes payable  (53)  (31)
         
                        Net cash provided by financing activities  976   482 
         
NET CHANGE IN CASH AND CASH EQUIVALENTS  21   (144)
CASH AND CASH EQUIVALENTS, beginning of year  35   162 
CASH AND CASH EQUIVALENTS, end of period $56  $18 
SUPPLEMENTAL SCHEDULE OF:        
Cash paid for:        
     Interest $1  $22 
NONCASH INVESTING AND FINANCING ACTIVITIES:        
  Issuance of common stock as debt repayment $125  $50 
  Dividends on preferred stock $470  $31 
         

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

F-23

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.   BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X by Guided Therapeutics, Inc. (formerly SpectRx, Inc.), together with its wholly owned subsidiary InterScan, Inc., (“Interscan”) (formerly Guided Therapeutics, Inc.), collectively referred to herein as the “Company”. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. These statements reflect adjustments, all of which are of a normal, recurring nature, and which are, in the opinion of management, necessary to present fairly the Company’s financial position as of March 31, 2016, results of operations for the three months ended March 31, 2016 and 2015, and cash flows for the three months ended March 31, 2016 and 2015. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results for a full fiscal year. Preparing financial statements requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2015.

On February 24, 2016, the Company implemented a 1:100 reverse stock split of its issued and outstanding common stock. The reverse stock split decreased the Company’s issued and outstanding shares of common stock from 237,101,702 shares of Common Stock to 2,371,007 shares as of that date. See Note 4, Stockholders’ Deficit. Unless otherwise specified, all per share amounts are reported on a post-stock split basis, as of March 31, 2016.

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, 2016, it had an accumulated deficit of approximately $122.9 million. Through March 31, 2016, the Company has devoted substantial resources to research and development efforts. The Company does not have significant experience in manufacturing, marketing or selling its products. The Company's development efforts may not result in commercially viable products and it may not be successful in introducing its products. Moreover, required regulatory clearances or approvals may not be obtained. The Company's products may not ever gain market acceptance and the Company may not ever achieve levels of revenue to sustain further development costs and support ongoing operations or achieve profitability. The development and commercialization of the Company's products will require substantial development, regulatory, sales and marketing, manufacturing and other expenditures. The Company expects operating losses to continue through the foreseeable future as it continues to expend substantial resources to complete development of its products, obtain regulatory clearances or approvals and conduct further research and development.

Going Concern

The Company’s consolidated financial statements have been prepared and presented on a basis assuming it will continue as a going concern. The factors below raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty. If the Company is unable to continue operations, it may have to the extent practicable, liquidate and/or file for bankruptcy protection.

Liquidity

At March 31, 2016, the Company had a working capital deficit of approximately $4.0 million and the stockholders’ deficit was approximately $5.5 million, primarily due to recurring net losses from operations and dividends on preferred stock, offset by proceeds from the exercise of options and warrants and proceeds from the sales of stock.

The Company’s plans with respect to its liquidity management include the following:

The Company has curtailed operations and reduced discretionary spending and staffing levels.
The Company is only pursuing activities where it has financial support. However, there can be no assurance that such external financial support will be sufficient to maintain even limited operations.
The Company is seeking additional capital in the private and/or public equity markets to continue operations and build sales, marketing, and distribution. The Company is currently evaluating additional equity and debt financing opportunities and may execute them when appropriate. However, there can be no assurances that the Company can consummate such a transaction, or consummate a transaction at favorable pricing.

F-24

The Company is seeking additional sources of cash flow with strategic businesses.
The Company had warrants exercisable for approximately 31.8 million shares of its common stock outstanding at March 31, 2016, with exercise prices of $0.09375 to $105.00 per share. Exercises of these warrants would generate a total of approximately $7.1 million in cash, assuming full exercise, although the Company cannot be assured that holders will exercise any warrants

2.   SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies were set forth in the audited financial statements and notes thereto for the year ended December 31, 2015 included in its annual report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”).

Use of Estimates

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

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Guided Therapeutics, Inc. and its wholly owned subsidiary.

Accounting Standard Updates

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, or ASU 2015-03. ASU 2015-03 amends current presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to the issuance of ASU 2015-03 debt issuance costs were required to be presented as an asset in the balance sheet. On January 1, 2016, the Company adopted the provisions of ASU 2015-03 and prior period amounts have been reclassified to conform to the current period presentation

Accounts Receivable

The Company performs periodic credit evaluations of its customers’ financial conditions and generally does not require collateral. The Company reviews all outstanding accounts receivable for collectability on a quarterly basis. An allowance for doubtful accounts is recorded for any amounts deemed uncollectable. The Company does not accrue interest receivable on past due accounts receivable.

Revenue Recognition

Revenue from the sale of the Company’s products is recognized upon shipment of such products to its customers. The Company recognizes revenue from contracts on a straight line basis, over the terms of the contract. The Company recognizes revenue from grants based on the grant agreement, at the time the expenses are incurred.  

During the three months ended March 31, 2016, the majority of the Company’s revenues were from four customers. Revenue from these customers totaled approximately $262,000 or 100% for the period ended March 31, 2016 and approximately $127,000 or 73% of total revenue for the period ended March 31, 2015. Accounts receivable due from those customers represents 59% for the period ended March 31, 2016.

Deferred Revenue

The Company defers payments received as revenue until earned based on the related contracts on a straight line basis, over the terms of the contract.

F-25

Inventory Valuation

All inventories are stated at lower of cost or market, with cost determined substantially on a “first-in, first-out” basis.  Selling, general, and administrative expenses are not inventoried, but are charged to expense when purchased. At March 31, 2016 and December 31, 2015, our inventories were as follows (in thousands):

  March 31, December 31,
  2016 2015
Raw materials $827  $686 
Work in process  256   186 
Finished goods  326   365 
Inventory reserve  (156)  (118)
       Total $1,253  $1,119 
         

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements are depreciated at the shorter of the useful life of the asset or the remaining lease term. Depreciation expense is included in general and administrative expense on the statement of operations. Expenditures for repairs and maintenance are expensed as incurred. Property and equipment are summarized as follows at March 31, 2016 and December 31, 2015 (in thousands):

  March 31, December 31,
  2016 2015
Equipment $1,377  $1,377 
Software  740   740 
Furniture and fixtures  124   124 
Leasehold Improvement  199   199 
   2,440   2,440 
Less accumulated depreciation  (2,174)  (2,122)
            Total $264  $318 
         

Accrued Liabilities

Accrued liabilities are summarized as follows (in thousands):

  

March 31,

2016

 December 31,
2014
Accrued compensation $1,249  $1,235 
Accrued professional fees  71   154 
   Deferred rent  31   36 
Accrued warranty  70   82 
Accrued vacation  190   177 
Accrued interest  33   —   
Accrued dividends  332   167 
Other accrued expenses  93   56 
            Total $2,069  $1,907 

F-26

Significant Customers

Research and Development

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

Income Taxes

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

The Company is current with its federal and applicable state tax returns filings. Although we have been experiencing recurring losses, we are obligated to file tax returns for compliance with Internal Revenue Service (“IRS”) regulations and that of applicable state jurisdictions. As December 31, 2015, the Company has approximately $28.0 million of net operating loss eligible to be carried forward for tax purposes at federal and applicable states level. A full valuation allowance has been recorded related the deferred tax assets generated from the net operating losses.

None of the Company’s federal or state income tax returns are currently under examination by the IRS or state authorities.

Uncertain Tax Positions

Effective January 1, 2007 the Company adopted ASC guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At March 31, 2016 and December 31, 2015 there were no uncertain tax positions.

Warrants

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

Stock Based Compensation

The Company records compensation expense related to options granted to non-employees based on the fair value of the award.

Compensation cost is recorded as earned for all unvested stock options outstanding at the beginning of the first year based upon the grant date fair value estimates, and for compensation cost for all share-based payments granted or modified subsequently based on fair value estimates.

For the three ended March 31, 2016 and 2015 share-based compensation for options attributable to employees, officers and Board members were approximately $30,053 and $191,570. These amounts have been included in the Company’s statements of operations. Compensation costs for stock options which vest over time are recognized over the vesting period.note. As of March 31, 2016,2018, the Company had approximately $202,000has fully amortized debt issuance costs $30,000 and original issue discount of unrecognized compensation costs related to granted stock options that will be recognized over the remaining vesting period of approximately three years.

3.   FAIR VALUE OF FINANCIAL INSTRUMENTS

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

F-27

·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, 2016. The fair value of the warrants was estimated using the Binomial Simulation model. Gains and losses from derivative contracts are included in net gain (loss) from derivative contracts in the statement of operations. The fair value of the Company’s derivative warrants is classified as a Level 3 measurement, since unobservable inputs are used in the valuation.

The following table presents the fair value for those liabilities measured on a recurring basis as of March 31, 2016 and December 31, 2015:

FAIR VALUE MEASUREMENTS (In Thousands)

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

  Fair Value at March 31, 2016
         
   Level 1   Level 2   Level 3   Total 
                 
Warrants issued in connection with the issuance of Series C preferred stock $         -  $-  $(70) $(70)
Warrants issued in connection with the issuance of Series B preferred stock  -   -   (612)  (612)
Warrants issued in connection with Senior Secured Debt  -   -   (906)  (906)
                 
            Total long-term liabilities at fair value $-  $-  $(1,588) $(1,588)
                 

  

 

Fair Value at December 31, 2015

         
   Level 1   Level 2   Level 3   Total 
                 
Warrants issued in connection with the issuance of Series C preferred stock $—    $—    $(1,145) $(1,145)
Warrants issued in connection with the issuance of Series B preferred stock  —     —     (1,461)  (1,461)
                 
            Total long-term liabilities at fair value $—    $—    $(2,606) $(2,606)
                 

The following is a summary of changes to Level 3 instruments during the three months ended March 31, 2016:

  

Fair Value Measurements Using Significant Unobservable

Inputs (Level 3)

    Senior Secured Debt   Series B Warrants   Series C Warrants   Total 
                  
                  
Balance, December 31, 2015  $—    $(1,461) $(1,145) $(2,606)
Warrants issued during the period   (377)  —     —     (377)
Change in fair value during the period   (529   849   1,075   1,395 
                  
Balance, March 31, 2016  $(906  $(612) $(70) $(1,588)
                  

F-28

$22,000. As of March 31, 2016,2018, the fair value of warrants was approximately $1.6 million. A net change of approximately $1.4 million has been recorded to the accompanying statement of operations for the three months ended.

4.  STOCKHOLDERS’ DEFICIT

Common Stock

The Company has authorized 1,000,000,000 shares of common stock with $0.001 par value, of which 5,322,003 were issued and outstanding as of March 31, 2016. For the year ended December 31, 2015, there were 1,000,000,000 authorized shares of common stock, of which 2,371,017 were issued and outstanding.

On February 24, 2016, the Company implemented a 1:100 reverse stock split of all of its issued and outstanding common stock. As a result of the reverse stock split, every 100 shares of issued and outstanding common stock of the Company were converted into 1 share. All fractional shares created by the reverse stock split were rounded to the nearest whole share. The number of the authorized shares did not change.

For the three months ended March 31, 2016, the Company issued 2,950,986 shares of common stock as listed below:

Series C Preferred Stock Conversions1,511,350
Series C Preferred Stock Dividends631,047
Convertible Debt Conversions808,589
                                                     Total2,950,986

Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock with a $.001 par value. The board of directors has the authority to issue these shares and to set dividends, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions. The board of directors designated 525,000 shares of preferred stock redeemable convertible preferred stock, none of which remain outstanding, 3,000 shares of preferred stock as Series B Preferred Stock, of which zero shares were issued and outstanding at both March 31, 2016 and December 31, 2015 and 9,000 shares of preferred stock as Series C Convertible Preferred Stock, of which 4,966 and 5,555 were issued and outstanding at March 31, 2016 and December 31, 2015, respectively.

On May 3, 2016, the board of directors designated 20,250 shares of preferred stock as Series C1 Convertible Preferred Stock. See Note 10, Subsequent Events.

Series C Convertible Preferred Stock

On June 29, 2015, the Company entered into a securities purchase agreement with certain accredited investors for the issuance and sale of an aggregate of 6,737 shares of Series C convertible preferred stock, at a purchase price of $750 per share and a stated value of $1,000 per share. On September 3, 2015 the Company entered into an interim agreement amending the securities purchase agreement to provide for certain of the investors to purchase an additional aggregate of 1,166 shares. Total cash and non-cash expenses were valued at $853,000, resulting in net proceeds of $3,698,000.

Pursuant to the Series C certificate of designations, shares of Series C preferred stock are convertible into common stock by their holder at any time, and may be mandatorily convertible upon the achievement of specified average trading prices for the Company’s common stock. At March 31, 2016, there were 4,966 shares outstanding with a conversion price of $0.09375 per share, such that each share of Series C preferred stock would convert into approximately 52,977,774 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.

F-29

Holders of the Series C preferred stock are entitled to quarterly cumulative dividends at an annual rate of 12.0% until 42 months after the original issuance date (the “Dividend End Date”), payable in cash or, subject to certain conditions, the Company’s common stock. In addition, upon conversion of the Series C Preferred Stock prior to the Dividend End Date, the Company will also pay to the converting holder a “make-whole payment” equal to the amount of unpaid dividends through the Dividend End Date on the converted shares. 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 1,247,737 shares of Company’s common stock. The warrants contain anti-dilution adjustments in the event that the Company issues shares of common stock, or securities exercisable or convertible into shares of common stock, at prices below the exercise price of such warrants. As a result of the anti-dilution protection, the Company is required to account for the warrants as a liability recorded at fair value each reporting period. At March 31, 2016, the exercise price per share was $0.09375.

Warrants

The following table summarizes transactions involving the Company’s outstanding warrants to purchase common stock for the quarter ended March 31, 2016:

Warrants

(Underlying Shares)

Outstanding, January 1, 20162,802,384
Issuances28,952,716
Canceled / Expired—  
Exercised—  
Outstanding, March 31, 201631,755,100

The Company had the following shares reserved for the warrants as of March 31, 2016:

Warrants
(Underlying Shares)

 

Exercise Price

Expiration Date

4,399(1)$68.00 per shareApril 1, 2016
2,852(2)$105.00 per shareNovember 20, 2016
18,581(3)$10.46 per shareMay 23, 2018
14,176,202(3)$0.09375 per shareMay 23, 2018
2,000(4)$50.00 per shareApril 23, 2019
5,618(4)$45.00 per shareMay 22, 2019
1,842(5)$38.00 per shareSeptember 10, 2019
3,255(6)$46.081 per shareSeptember 27, 2019
7,553(7)$28.13 per shareDecember 2, 2019
83,927(8)$9.00 per shareDecember 2, 2020
83,927(8)$11.00 per shareDecember 2, 2020
20,000(9)$25.50 per shareMarch 30, 2018
17,547(10)$11.88 per shareJune 29, 2020
526,421(11)$1.03 per shareJune 29, 2020
273,684(12)$1.03 per shareSeptember 4, 2020
289,737(13)$1.03 per shareSeptember 21, 2020
5,163(14)$11.88 per shareSeptember 4, 2020
157,895(15)$1.03 per shareOctober 23, 2020
5,163(16)$11.88 per shareOctober 23, 2020
16,069,333(17)$0.09375 per shareFebruary 12, 2021
31,755,100   

(1)Issued in February 2014 as part of a buy-back of a minority interest in Interscan in December 2012.
(2)Issued as part of a November 2011 private placement.

F-30

(3)

Issued in June 2015 in exchange for warrants originally issued as part of a May 2013 private placement.

These warrants have anti-dilution and price protection and adjust periodically as described later in the notes.

(4)Issued to a placement agent in conjunction with an April 2014 private placement.
(5)Issued to a placement agent in conjunction with a September 2014 private placement.
(6)Issued as part of a September 2014 Regulation S offering.
(7)Issued to a placement agent in conjunction with a 2014 public offering.
(8)Issued in June 2015 in exchange for warrants originally issued as part of a 2014 public offering.
(9)Issued as part of a March 2015 private placement.
(10)Issued to a placement agent in conjunction with a June 2015 private placement.
(11)    Issued as part of a June 2015 private placement.
(12)Issued as part of a June 2015 private placement.
(13)Issued as part of a June 2015 private placement.
(14)Issued to a placement agent in conjunction with a June 2015 private placement.
(15)  Issued as part of a June 2015 private placement.
(16)Issued to a placement agent in conjunction with a June 2015 private placement.
(17)

Issued to a placement agent and a senior secured convertible note holder.

These warrants have anti-dilution and price protection and adjust periodically as described later in the notes.

5.   STOCK OPTIONS

Under the Company’s 1995 Stock Plan (the “Plan”), a total of 26,616 shares remained available at March 31, 2016 and 98,451 shares were subject to stock options outstanding as of that date, bringing the total number of shares subject to stock options outstanding and those remaining available for issue to 132,552 shares of common stock as of March 31, 2016. The Plan allows the issuance of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price of options is determined by the Company’s board of directors, but incentive stock options must be 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 fair value of stock options granted in the period ended March 31, 2015 were estimated using the Black-Scholes option pricing model. No options were issued during the period ended March 31, 2016. 

Stock option activity for March 31, 2016 as follows: 

 2016
   

Weighted

Average

Exercise

 Shares Price
Outstanding at beginning of year 105,936  $45.00 
   Options granted —    $—   
   Options exercised —    $—   
   Options expired/forfeited (7,485) $43.00 
Outstanding at end of year 98,451  $45.00 

6.   LITIGATION AND CLAIMS

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

As of March 31, 2016 and December 31, 2015, there was no accrual recorded for any potential losses related to pending litigation.

7.   NOTES PAYABLE

F-31

Short Term Notes Payable

At March 31, 2016 and December 31, 2015, the Company maintained notes payable and accrued interest to related parties totaling $241,000 and $682,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry an annual interest rate of between 5% and 10%.

At March 31, 2016, the Company maintained a note payable to Premium Assignment Corporation, an insurance premium financing company, of approximately $17,500. This note is 10 month straight-line amortizing loan dated June 24, 2015. The note carries annual interest of 5.2%. The balance due to on the Premium Assignmentinvestor for the December 28, 2016 note, was approximately $17,500 and $70,000 at March 31, 2016 and December 31, 2015, respectively.

Notes Payable in Default

At March 31, 2016, and December 31, 2015 the Company maintained notes payable and accrued interest to related and unrelated parties totaling $590,000 and $133,000, respectively. The notes carry interest at 5% to 10% and have default rates as high a 16.5%. As of March 31, 2016 the notes are accruing interest at the default rate.

8.is zero.

10.  CONVERTIBLE DEBT

IN DEFAULT

Secured Promissory Note.
On September 10, 2014, the Company sold a secured promissory note to an accredited investor with an initial principal amount of $1,275,000, for a purchase price of $700,000 (an original issue discount of $560,000). The Company may prepay the note at any time. The note is secured by the Company’s current and future accounts receivable and inventory, pursuant to a security agreement entered into in connection with the sale. On March 10, 2015, May 4, 2015, June 1, 2015, June 16, 2015, June 29, 2015, January 21, 2016, January 29, 2016, and February 12, 2016 the Company amended the terms of the note to extend the maturity ultimately until August 31, 2016. During the extension, interest accrues on the note at a rate of the lesser of 18% per year or the maximum rate permitted by applicable law. On February 11, 2016, the Company consented to an assignment of the note to two accredited investors. In connection with the assignment, the holders waived an ongoing event of default under the notes related to the Company’s minimum market capitalization, and agreed to eliminate the requirement going forward. Pursuant to the terms of the amended note, the holder may convert the outstanding balance into shares of common stock at a conversion price per share equal to the lower of (1) $25.0 or (2) 75% of the lowest daily volume weighted average price of the common stock during the five days prior to conversion. If the conversion price at the time of any conversion is lower than $15.00, the Company has the option of delivering the conversion amount in cash in lieu of shares of common stock. On March 7, 2016, the Company further amended the notesnote to eliminate the volume limitations on sales of common stock issued or issuable upon conversionconversion. On July 13, 2016, the Company consented to the assignment by one of the notes.

accredited investors of its portion of the note of to a third accredited investor.


The balance due related to thison the note was $591,244$159,698 and $685,864$184,245 at March 31, 20162018 and December 31, 2015,2017, respectively.

The balance was reduced by $306,863 as part of a debt restructuring on December 7, 2016.

Total debt issuance costs as originally capitalized waswere approximately $130,000. This amount was being amortized over sixnine months and iswas fully amortized as of MarchDecember 31, 2015. Total amortized expense for the three months ended March 31, 2015 was approximately $49,000. For the three months ended March 31, 2015, the Company recorded amortization of approximately $213,000 on the discount. The original issue discount of $560,000 was fully amortized as of MarchDecember 31, 2015.

On November 2, 2016, the Company entered into a lockup and exchange agreement with GHS Investments, LLC, holder of approximately $221,000 in outstanding principal amount of the Company’s secured promissory note and all the outstanding shares of the its Series C preferred stock. Pursuant to the agreement, upon the effectiveness of the 1:800 reverse stock split and continuing for 45 days after, GHS and its affiliates were prohibited from converting any portion of the secured promissory note or any of the shares of Series C preferred stock or selling any of the Company’s securities that they beneficially owned. The Company agreed that, upon consummation of its next financing, the Company would use $260,000 of net cash proceeds first, to repay GHS’s portion of the secured promissory note and second, with any remaining amount from the $260,000, to repurchase a portion of GHS’s shares of Series C preferred stock. In addition, GHS has agreed to exchange the stated value per share (plus any accrued but unpaid dividends) of its remaining shares of Series C preferred stock for new securities of the same type that the Company separately issue in the next qualifying financing it undertakes, on a dollar-for-dollar basis in a private placement exchange.
Senior Secured Promissory Note
On February 11, 2016, the Company entered into a securities purchase agreement with an accredited investorGPB Debt Holdings II LLC for the issuance and sale on February 12, 2016 of $1.4375 million in aggregate principal amount of a senior secured convertible note for an aggregate purchase price of $1.15 million (a 20% original issue discount of $287,500) and a discount for debt issuance costs paid at closing of $121,000 for a total of $408,500. In addition, the investorGPB received a warrant exercisable to purchase an aggregate of approximately 1,796,875 million2,246 shares of the Company’s common stock. The Company allocated proceeds totaling 359,555$359,555 to the fair value of the warrants at issuance. This was recorded as an additional discount on the debt. The convertible note matures on the second anniversary of issuance and, in addition to the 20% original issue discount, accrues interest at a rate of 17% per year. The Company willis required to pay monthly interest coupons and beginning sixnine months after issuance, willthe Company is required to pay amortized quarterly principal payments. If the Company does not receive, on or before the first anniversary after issuance, an aggregate of at least $3.0 million from future equity or debt financings or non-dilutive grants, then the holder will have the option of accelerating the maturity date to the first anniversary of issuance. The Company may prepay the convertible note, in whole or in part, without penalty, upon 20 days’ prior written notice. Subject to resale restrictions under Federal securities laws and the availability of sufficient authorized but unissued shares of the Company’s common stock, the convertible note is convertible at any time, in whole or in part, at the holder’s option, into shares of the Company’s common stock, at a conversion price equal to the lesser of $0.80 per share or 70% of the average closing price per share for the five trading days prior to issuance, subject to certain customary adjustments and anti-dilution provisions contained in the convertible note. As of March 31,On May 28, 2016, in exchange for an additional $87,500 in cash from GPB to the Company, the principal balance was increased by the same amount. The Company is currently in default as they are past due on the convertible debt was $676,110 (net of debt issuance costs of $44,540 and debt discount of $716,850).

F-32

The convertible note includes customaryrequired monthly interest payments. In the event of default, provisions andthe Company shall accrue interest at a default interest rate of the lesser of 22% or the maximum amount permitted by law. The Company has accrued $117,000 for past due interest payments at December 31, 2016. Upon the occurrence of an event of default, the holder may require the Company to redeem the convertible note at 120% of the outstanding principal balance.balance (but as of March 31, 2018, had not done so). As of March 31, 2018, the balance due on the convertible debt was $2,136,863 as the Company has fully amortized debt issuance costs of $47,675 and the debt discount of $768,055 and recorded a 20% penalty totaling $305,000. In addition, the Company has accrued $451,031 of interest expense. The convertible note is secured by a lien on all of the Company’s assets, including its intellectual property, pursuant to a security agreement entered into by the Company and GPB in connection with the transaction.

GPB.


The warrant is exercisable at any time, pending availability of sufficient authorized but unissued shares of the Company’s common stock, at an exercise price per share equal to the conversion price of the convertible note, subject to certain customary adjustments and anti-dilution provisions contained in the warrant. The warrant has a five-year term. As of March 31, 2016,2018, the exercise price had been adjusted to $0.09375$0.00228 and the number of common stock shares exchangeable for was 15,333,333.630,482,456. As of March 31, 2016,2018, the effective interest rate considering debt costs was 29%.

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

In connection with the transaction, on February 12, 2016, the Company and the investorGPB entered into a four-year consulting agreement, pursuant to which the investor will provide management consulting services to the Company in exchange for a royalty payment, payable quarterly, equal to 3.5% of the Company’s revenues from the sale of products. As of March 31, 2016 the investor2018, GPB had earned approximately $3,000$29,000 in royalties.
Debt Restructuring
On December 7, 2016, the Company entered into an exchange agreement with GPB with regard to the $1,525,000 in outstanding principal amount of royalties.

9.senior secured convertible note originally issued to GPB on February 11, 2016, and the $306,863 in outstanding principal amount of the Company’s secured promissory note that GPB holds (see “—Secured Promissory Note”). Pursuant to the exchange agreement, upon completion of the next financing resulting in at least $1 million in cash proceeds, GPB will exchange both securities for a new convertible note in principal amount of $1,831,863. The new convertible note will mature on the second anniversary of issuance and will accrue interest at a rate of 19% per year. The Company will pay monthly interest coupons and, beginning one year after issuance, will pay amortized quarterly principal payments. Subject to resale restrictions under Federal securities laws and the availability of sufficient authorized but unissued shares of the Company’s common stock, the new convertible note will be convertible at any time, in whole or in part, at the holder’s option, into shares of common stock, at a conversion price equal to the price offered in the qualifying financing that triggers the exchange, subject to certain customary adjustments and anti-dilution provisions contained in the new convertible note. The new convertible note will include customary event of default provisions and a default interest rate of the lesser of 21% or the maximum amount permitted by law. Upon the occurrence of an event of default, GPB will be entitled to require the Company to redeem the new convertible note at 120% of the outstanding principal balance. The new convertible note will be secured by a lien on all the Company’s assets, including its intellectual property, pursuant to the security agreement entered into by the Company and GPB in connection with the issuance of the original senior secured convertible note. Additionally, the Company further agreed to amend the warrant issued with the original senior secured convertible note, to adjust the number of shares issuable upon exercise of the warrant to equal the number of shares that will initially be issuable upon conversion of the new convertible note (without giving effect to any beneficial ownership limitations set forth in the terms of the new convertible note). As an inducement to GPB to enter into these transactions, the Company agreed to increase the royalty payable to GPB pursuant to its consulting agreement with us on December 7, 2016 from 3.5% to 3.85% of revenues from the sales of the Company’s products.

On August 7, 2017, the Company entered into a forbearance agreement with GPB, with regard to the senior secured convertible note. Under the forbearance agreement, GPB has agreed to forbear from exercising certain of its rights and remedies (but not waive such rights and remedies), arising as a result of the Company’s failure to pay the monthly interest due and owing on the note. In consideration for the forbearance, the Company agreed to waive, release, and discharge GPB from all claims against GPB based on facts existing on or before the date of the forbearance agreement in connection with the note, or the dealings between the Company and GPB, or the Company’s equity holders and GPB, in connection with the note. Pursuant to the forbearance agreement, the Company has reaffirmed its obligations under the note and related documents and executed a confession of judgment regarding the amount due under the note, which GPB may file upon any future event of default by the Company. During the forbearance period, the Company must continue to comply will all the terms, covenants, and provisions of the note and related documents.

The “Forbearance Period” shall mean the period beginning on the date hereof and ending on the earliest to occur of: (i) the date on which Lender delivers to Company a written notice terminating the Forbearance Period, which notice may be delivered at any time upon or after the occurrence of any Forbearance Default (as hereinafter defined), and (ii) the date Company repudiates or asserts any defense to any Obligation or other liability under or in respect of this Agreement or the Transaction Documents or applicable law, or makes or pursues any claim or cause of action against Lender; (the occurrence of any of the foregoing clauses (i) and (ii), a “Termination Event”). As used herein, the term “Forbearance Default” shall mean: (A) the occurrence of any Default or Event of Default other than the Specified Default; (B) the failure of Company to timely comply with any material term, condition, or covenant set forth in this Agreement; (C) the failure of any representation or warranty made by Company under or in connection with this Agreement to be true and complete in all material respects as of the date when made; or (D) Lender’s reasonable belief that Company: (1) has ceased or is not actively pursuing mutually acceptable restructuring or foreclosure alternatives with Lender; or (2) is not negotiating such alternatives in good faith. Any Forbearance Default will not be effective until one (1) Business Day after receipt by Company of written notice from Lender of such Forbearance Default. Any effective Forbearance Default shall constitute an immediate Event of Default under the Transaction Documents.
11.  INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per share attributable to common stockholders amounts are computed by dividing the net income (loss) plus preferred stock dividends and deemed dividends on preferred stock by the weighted average number of shares outstanding during the period.

year.

Diluted net income (loss) per share attributable to common stockholders amounts are computed by dividing the net income (loss) plus preferred stock dividends, deemed dividends on preferred stock, after-tax interest on convertible debt and convertible dividends by the weighted average number of shares outstanding during the period,year, plus Series C convertible preferred stock, convertible debt, convertible preferred dividends and warrants convertible into common stock shares.

10.

The following table sets forth pertinent data relating to the computation of basic and diluted net loss per share attributable to common shareholders.
 
 
Three months ended March 31,
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
Net Income (loss)
 $1,027 
 $(206)
Basic weighted average number of shares outstanding
  88,577 
  946 
Net income (loss) per share (basic)
 $0.012 
 $(0.22)
Diluted weighted average number of shares outstanding
  1,994,293 
  946 
Net income (loss) per share (diluted)
  0.001 
  (0.22)
 
    
    
Dilutive equity instruments (number of equivalent units):
    
    
Stock options
  — 
  — 
Preferred stock
  410,357 
  — 
Convertible debt
  950,338 
  — 
Warrants
  545,041 
    
Total Dilutive instruments
  1,905,736 
  — 
12. SUBSEQUENT EVENTS



During April and May 2018, the Company entered into short-term convertible notes similar to those detailed in Note 9 - Short-Term Convertible Debt. The note with Power-Up was for $103,000 and K2 Medical of $5,000. The Company also received $42,000 from Shandong Medical as part of their agreement with the Company.

GUIDED THERAPEUTICS, INC. 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2017 AND 2016
Report of Independent Registered Public Accounting Firm72
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2017 and December 31, 201673
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 201674
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 201675
Consolidated Statement of Stockholders’ equity (deficit) for the Years Ended December 31, 2017 and 201676
Notes to Consolidated Financial Statements77

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Guided Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Guided Therapeutics, Inc., Inc. (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively, the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ UHY LLP
UHY LLP
We have served as the Company’s auditor since 2007.
Sterling Heights, Michigan
April 17, 2018

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
AS OF DECEMBER 31,
ASSETS
 
2017
 
 
2016
 
CURRENT ASSETS:
 
 
 
 
 
 
    Cash and cash equivalents
 $1 
 $14 
    Accounts receivable, net of allowance for doubtful accounts of $160 and $279 at December 31, 2017 and 2016, respectively
  3 
  - 
    Inventory, net of reserves of $716 and $278 at December 31, 2017 and 2016, respectively
  265 
  773 
    Other current assets
  111 
  259 
                    Total current assets
  380 
  1,046 
 
    
    
    Property and equipment, net
  49 
  126 
    Other assets
  60 
  320 
                    Total noncurrent assets
  109 
  446 
 
    
    
                    TOTAL ASSETS
  489 
  1,492 
 
    
    
LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
    
CURRENT LIABILITIES:
    
    
    Notes payable in default, including related parties
  1,091 
  1,008 
    Short-term notes payable, including related parties
  447 
  197 
    Convertible notes in default
  2,321 
  2,361 
    Convertible notes payable, net
  783 
  468 
    Accounts payable
  3,019 
  2,600 
    Accrued liabilities
  4,247 
  2,670 
    Deferred revenue
  21 
  34 
                    Total current liabilities
  11,929 
  9,338 
 
    
    
    Warrants, at fair value
  7,962
  1,420 
 
    
    
                    TOTAL LIABILITIES
  19,891
  10,758 
 
    
    
COMMITMENTS & CONTINGENCIES (Note 8)
    
    
 
    
    
STOCKHOLDERS’ DEFICIT:
    
    
  Series C convertible preferred stock, $.001 par value; 9.0 shares authorized, 0.9 and 1.6 shares issued and outstanding as of December 31, 2017 and 2016, respectively. (Liquidation preference of $970 and $1,643 at December 31, 2017 and 2016, respectively).
  355 
  601 
  Series C1 convertible preferred stock, $.001 par value; 20.3 shares authorized, 4.3 shares issued and outstanding as of December 31, 2017 and 2016, respectively. (Liquidation preference of $4,312 at December 31, 2017 and 2016, respectively).
  701 
  701 
   Common stock, $.001 par value; 1,000,000 shares authorized, 49,563 and 669 shares issued and outstanding as of December 31, 2017 and 2016, respectively
  791 
  742 
   Additional paid-in capital
  117,416 
  116,380 
   Treasury stock, at cost
  (132)
  (132)
   Accumulated deficit
  (138,533)
  (127,558)
 
    
    
                   TOTAL STOCKHOLDERS’ DEFICIT
  (19,402)
  (9,266)
 
    
    
  TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 $489 
 $1,492 
The accompanying notes are an integral part of these consolidated statements.


GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
FOR THE YEARS ENDED DECEMBER 31,
 
 
2017
 
 
2016
 
REVENUE:
 
 
 
 
 
 
          Sales – devices and disposables, net
 $244 
 $605 
          Cost of goods sold
  530 
  493 
                Gross (loss) profit
  (286)
  112 
 
    
    
OPERATING EXPENSES:
    
    
 
    
    
         Research and development
  334 
  733 
         Sales and marketing
  245 
  393 
         General and administrative
  2,256 
  2,806 
                  Total operating expenses
  2,835 
  3,932 
 
    
    
                  Operating loss
  (3,121)
  (3,820)
 
    
    
OTHER INCOME (EXPENSES):
    
    
          Other income
  18 
  68 
          Interest expense
  (1,106)
  (1,895)
          Change in fair value of warrants
  (6,487)
  1,677 
                  Total other income (expenses)
  (7,575)
  (150)
 
    
    
LOSS FROM OPERATIONS
  (10,696)
  (3,970)
 
    
    
PROVISION FOR INCOME TAXES
  - 
  - 
 
    
    
NET LOSS
  (10,696)
  (3,970)
 
    
    
DEEMED DIVIDENDS
  - 
  - 
 
    
    
PREFERRED STOCK DIVIDENDS
  (278)
  (1,025)
 
    
    
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
 $(10,974)
 $(4,995)
 
    
    
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
 $(1.29)
 $(24.62)
 
    
    
WEIGHTED AVERAGE SHARES OUTSTANDING
  8,479 
  203 
 
 
 
 
The accompanying notes are an integral part of these consolidated statements.
 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands)
 
 
Preferred Stock
Series C
 
 
Preferred Stock Series C1
 
 
 
Common Stock
 
 
Additional Paid-In
 
 
 
Treasury
 
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Stock
 
 
Deficit
 
 
TOTAL
 
BALANCE, January 1, 2016
  6 
 $2,052 
  - 
 $- 
  3 
 $236 
 $114,845 
 $(132)
 $(122,563)
 $(5,562)
Preferred dividends
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (191)
  (191)
Issuance of common stock and warrants
  - 
  - 
  - 
  - 
  - 
  - 
  54 
  - 
  - 
  54 
Conversion of Series C preferred stock to common stock
  (2)
  (750)
  - 
  - 
  531 
  456 
  1,128 
  - 
  (834)
  - 
Conversion of debt into common stock
  - 
  - 
  - 
  - 
  53 
  20 
  238 
  - 
  - 
  258 
Issuance of common stock due to Series B, Tranche B warrants exchanged for shares and rights to shares
  - 
  - 
  - 
  - 
  19 
  12 
  (12)
  - 
  - 
  - 
Series C preferred stock exchanged for Series C1 preferred stock
  (2)
  (751)
  4 
  701 
  23 
  18 
  (18)
  - 
  - 
  - 
Issuance of common stock for cash
  - 
  - 
  - 
  - 
  40 
  - 
  50 
  - 
  - 
  50 
Stock-based compensation
    
    
    
    
  - 
  - 
  95 
  - 
  - 
  95 
Net Loss
    
    
    
    
  - 
  - 
  - 
  - 
  (3,970)
  (3,970)
 
BALANCE, December 31, 2016
  2 
 $601 
  4 
 $701 
  669 
 $742 
 $116,380 
 $(132)
 $(127,558)
 $(9,266)
 
    
    
    
    
    
    
    
    
    
    
Preferred dividends
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (2)
  (2)
Conversion of Series C preferred stock to common stock
  (1)
  (246)
  - 
  - 
  17,272 
  17 
  506 
  - 
  (277)
  - 
 
Conversion of debt into common stock
  - 
  - 
  - 
  - 
  31,572 
  32 
  436 
  - 
  - 
  468 
 
Issuance of common stock for note agreement
  - 
  - 
  - 
  - 
  50 
  - 
  35 
  - 
  - 
  35 
 
Stock-based compensation
    
    
    
    
  - 
  - 
  59 
  - 
  - 
  59 
 
Net Loss
    
    
    
    
  - 
  - 
  - 
  - 
  (10,696)
  (10,696)
 
BALANCE, December 31, 2017
  1 
 $355 
  4 
 $701 
  49,563 
 $791 
 $117,416 
 $(132)
 $(138,533)
 $(19,402)
The accompanying notes are an integral part of these consolidated statements.

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
 
 
2017
 
 
2016
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
     Net loss
 $(10,696)
 $(3,970)
     Adjustments to reconcile net loss to net cash used in operating activities:
    
    
        Bad debt expense
  174 
  221 
        Depreciation and amortization
  213 
  1,223 
        Stock-based compensation
  59 
  95 
        Change in fair value of warrants
  6,487
  (1,677)
    Changes in operating assets and liabilities:
    
    
        Accounts receivable
  (9)
  (31)
        Inventory
  508 
  345 
        Other current assets
  152 
  519 
        Other assets
  260 
  (247)
        Accounts payable
  420 
  775 
        Deferred revenue
  (13)
  (183)
        Accrued liabilities
  1,301 
  1,128 
                Total adjustments
  9,552
  2,168 
 
    
    
                Net cash used in operating activities
  (1,144)
  (1,802)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
      Net proceeds from issuance of common stock and warrants
  1,572 
  50 
      Proceeds from debt financing, net of discount and debt issuance costs
  - 
  1,958 
      Payments on notes
  (441)
  (227)
 
    
    
                Net cash provided by financing activities
  1,131 
  1,781 
 
    
    
NET CHANGE IN CASH AND CASH EQUIVALENTS
  (13)
  (21)
 
    
    
CASH AND CASH EQUIVALENTS, beginning of year
  14 
  35 
 
    
    
CASH AND CASH EQUIVALENTS, end of year
 $1 
 $14 
 
    
    
SUPPLEMENTAL SCHEDULE OF:
    
    
Cash paid for:
    
    
        Interest
 $46 
 $- 
NONCASH INVESTING AND FINANCING ACTIVITIES:
    
    
   Issuance of common stock as debt repayment
 $468 
 $258 
   Dividends on preferred stock
 $278 
 $1,025 
 
The accompanying notes are an integral part of these consolidated statements.

GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
1. ORGANIZATION, BACKGROUND, AND BASIS OF PRESENTATION
Guided Therapeutics, Inc. (formerly SpectRx, Inc.), together with its wholly owned subsidiary, InterScan, Inc. (formerly Guided Therapeutics, Inc.), collectively referred to herein as the “Company”, is a medical technology company focused on developing innovative medical devices that have the potential to improve healthcare. The Company’s primary focus is the continued commercialization of its LuViva non-invasive cervical cancer detection device and extension of its cancer detection technology into other cancers, including esophageal. The Company’s technology, including products in research and development, primarily relates to biophotonics technology for the non-invasive detection of cancers.
Basis of Presentation
All information and footnote disclosures included in the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
A 1:800 reverse stock split of all of the Company’s issued and outstanding common stock was implemented on November 7, 2016. As a result of the reverse stock split, every 800 shares of issued and outstanding common stock was converted into 1 share of common stock. All fractional shares created by the reverse stock split were rounded to the nearest whole share. The number of authorized shares of common stock did not change. The reverse stock split decreased the Company’s issued and outstanding shares of common stock from 453,694,400 shares to 570,707 shares as of that date. See Note 4, Stockholders’ Deficit. Unless otherwise specified, all per share amounts are reported on a post-stock split basis, as of December 31, 2017. On February 24, 2016, the Company had also implemented a 1:100 reverse stock split of its issued and outstanding common stock.
The Company’s prospects must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate. The Company has experienced net losses since its inception and, as of December 31, 2017, it had an accumulated deficit of approximately $138.5 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 December 31, 2017, the Company had a negative working capital of approximately $11.6 million, accumulated deficit of $138.5 million, and incurred a net loss of $10.7 million for the year then ended. Stockholders’ deficit totaled approximately $19.4 million at December 31, 2017, primarily due to recurring net losses from operations, deemed dividends on warrants and preferred stock, offset by proceeds from the exercise of options and warrants and proceeds from sales of stock.
The Company’s capital-raising efforts are ongoing. If sufficient capital cannot be raised during 2018, 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 294.1 million shares of its common stock outstanding at December 31, 2017, with exercise prices ranging between $0.005 and $40,000 per share. Exercises of these warrants would generate a total of approximately $6.2 million in cash, assuming full exercise, although the Company cannot be assured that holders will exercise any warrants. Management may obtain additional funds through the public or private sale of debt or equity, and grants, if available. However, please refer to Footnote 11 - CONVERTIBLE DEBT IN DEFAULT in the paragraph: Debt Restructuring for more information regarding our warrants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant areas where estimates are used include the allowance for doubtful accounts, inventory valuation and input variables for Black-Scholes, Monte Carlo simulations and binomial calculations. 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Distributors (Topic 606),” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with distributors and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model requires revenue recognition to depict the transfer of promised goods or services to distributors in an amount that reflects the consideration a company expects to receive. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Deferral of the Effective Date”, which amends ASU 2014-09. As a result, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with Distributors (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” (“ASU 2016-08”); ASU 2016-10, “Revenue from Contracts with Distributors (Topic 606), Identifying Performance Obligations and Licensing,” (“ASU 2016-10”); ASU 2016-12, “Revenue from Contracts with Distributors (Topic 606) Narrow-Scope Improvements and Practical Expedients,” (“ASU 2016-12”); and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Distributors,” (“ASU 2016-20”), which are intended to provide additional guidance and clarity to ASU 2014-09. The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 along with ASU 2014-09 (collectively, the “New Revenue Standards”). The New Revenue Standards may be applied using one of two retrospective application methods: (1) a full retrospective approach for all periods presented, or (2) a modified retrospective approach that presents a cumulative effect as of the adoption date and additional required disclosures. The Company has evaluated the adoption of this guidance and will take a modified retrospective approach to the presentation of revenue from contracts with distributors. The Company adopted this standard on January 1, 2018, using the modified retrospective method, with no impact on its 2017 financial statements. The cumulative effect of initially applying the new guidance had no impact on its financial statements in future periods. However, additional disclosures will be included in future reporting periods in accordance with requirements of the new guidance.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 requires inventory be measured at the lower of cost and net realizable value and options that currently exist for market value be eliminated. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. The Company has adopted this guidance during the year ended December 31, 2017 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the period ended December 31, 2017.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” that requires lessees to recognize on the balance sheet the assets and liabilities associated with the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance or operating lease. The update is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact adoption of this guidance will have on determination or reporting of its financial results.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815),” (“ASU 2016-05”). ASU 2016-05 provides guidance clarifying that novation of a derivative contract (i.e., a change in counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The effective date was the first quarter of fiscal year 2017, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2017 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the period ended December 31, 2017.
In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815),” (“ASU 2016-06”). ASU 2016-06 simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by clarifying that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. The effective date was the first quarter of fiscal year 2017, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2017 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the year ended December 31, 2017.
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” (“ASU 2016-09”). ASU 2016-09 is intended to simplify several aspects related to how share-based payments are accounted for and presented in the financial statements, such as requiring all income tax effects of awards to be recognized in the income statement when the awards vest or are settled and allowing a policy election to account for forfeitures as they occur. In addition, all related cash flows resulting from share-based payments will be reported as operating activities on the statement of cash flows. ASU 2016-09 could result in increased volatility of the Company’s provision for income taxes and earnings per share, depending on the Company’s share price at exercise or vesting of share-based awards compared to grant date. The effective date was the first quarter of fiscal year 2017, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2017 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the year ended December 31, 2017.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” (“ASU 2016-13”). ASU 2016-13 sets forth a “current expected credit loss” model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. The guidance in this new standard replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. The effective date will be the first quarter of fiscal year 2020. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments,” (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice in financial reporting by clarifying existing principles in ASC 230, “Statement of Cash Flows,” and provides specific guidance on certain cash flow classification issues. The effective date for ASU 2016-15 will be the first quarter of fiscal year 2018, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the year ended December 31, 2017.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” (“ASU 2016-18”). ASU 2016-18 requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-year and end-of-year total amounts shown on the statement of cash flows. The guidance is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the year ended December 31, 2017.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment. The effective date will be the first quarter of fiscal year 2020, with early adoption permitted in 2017. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting)” (“ASU 2017-09”) which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018 on a prospective basis. The adoption of this guidance did not have a significant impact on the operating results for the year ended December 31, 2017.
Except as noted above, the guidance issued by the FASB during the current year is not expected to have a material effect on the Company’s consolidated financial statements.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be a cash equivalent.
Accounts Receivable
The Company performs periodic credit evaluations of its 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. The Company does not accrue interest receivable on past due accounts receivable.
Concentrations of Credit Risk
The Company, from time to time during the years covered by these consolidated financial statements, may have bank balances in excess of its insured limits. Management has deemed this a normal business risk.
The Company performs periodic credit evaluations of its 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. The Company does not accrue interest receivable on past due accounts receivable.
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 December 31, 2017 and 2016, our inventories were as follows (in thousands):
 
 
Year Ended December 31,
 
 
 
2017
 
 
2016
 
Raw materials
 $789 
 $795 
Work in process
  82 
  115 
Finished goods
  27 
  141 
Consigned inventory
  83 
  - 
Inventory reserve
  (716)
  (278)
  Total
 $265 
 $773 

Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements are amortized at the shorter of the useful life of the asset or the remaining lease term. Depreciation and amortization expense is included in general and administrative expense on the statement of operations. Expenditures for repairs and maintenance are expensed as incurred. Property and equipment are summarized as follows at December 31, 2017 and 2016 (in thousands):
 
 
Year Ended December 31,
 
 
 
2017
 
 
2016
 
Equipment
 $1,378 
 $1,378 
Software
  740 
  740 
Furniture and fixtures
  124 
  124 
Leasehold Improvement
  199 
  199 
 
  2,441 
  2,441 
Less accumulated depreciation
  (2,392)
  (2,315)
            Total
 $49 
 $126 
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.
Other Assets
Other assets primarily consist of short- and long-term deposits for various tooling inventory that are being constructed for the Company.
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 $15,000 and $23,000 in 2017 and 2016, respectively.
Accrued Liabilities
Accrued liabilities are summarized as follows at December 31, 2017 and 2016 (in thousands):
 
 
Year Ended December 31,
 
 
 
2017
 
 
2016
 
Accrued compensation
 $2,122 
 $1,656 
Accrued professional fees
  223 
  161 
Accrued interest
  511 
  109 
Deferred rent
  - 
  13 
Accrued warranty
  39 
  58 
Accrued vacation
  152 
  175 
Accrued dividends
  291 
  296 
Stock subscription
  276 
  - 
Accrued expenses for licensee
  429 
  - 
Other accrued expenses
  204 
  202 
            Total
 $4,247 
 $2,670 

Revenue Recognition
Revenue from the sale of the Company’s products is recognized upon shipment of such products to its distributors. The Company recognizes revenue from contracts on a straight-line basis, over the terms of the contracts. The Company recognizes revenue from grants based on the grant agreements, at the time the expenses are incurred.
Significant Distributors
In 2017 and 2016, the majority of the Company’s revenues were from one and three distributors, respectively. Revenue from these distributors totaled approximately $216,000 or 89% and approximately $534,000 or 73% of gross revenue for the year ended December 31, 2017 and 2016, respectively. Accounts receivable due from those distributors represents 43% of unreserved accounts receivable as of December 31, 2016. There were no amounts due from these distributors as of December 31, 2017.
Deferred Revenue
The Company defers payments received as revenue until earned based on the related contracts on a straight-line basis, over the terms of the contract. As of December 31, 2017 and 2016, the Company has received prepayments for devices and disposables and deferred revenue in the amount of $21,000 and $34,000, 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 is currently delinquent with its federal and applicable state tax return filings, payments and certain Federal and State Unemployment Tax filings. Some of the federal income tax returns are currently under examination by the U.S. Internal Revenue Service (“IRS”). The Company has entered into an agreed upon payment plan with the IRS for delinquent payroll taxes. 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, 2017 and 2016, the Company has approximately $82.9 and $84.4 million of net operating losses, respectively. 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.
Corporate tax rates in the U.S. have decreased from 34% to 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, 2017 and 2016 there were no uncertain tax positions.
Warrants
The Company has issued warrants, which allow the warrant holder to purchase one share of stock at a specified price for a specified period of time. The Company records equity instruments including warrants issued to non-employees based on the fair value at the date of issue. The fair value of warrants classified as equity instruments at the date of issuance is estimated using the Black-Scholes Model. The fair value of warrants classified as liabilities at the date of issuance is estimated using the Monte Carlo Simulation or Binomial model.

Stock Based Compensation
The Company records compensation expense related to options granted to non-employees based on the fair value of the award.
Compensation cost is recorded as earned for all unvested stock options outstanding at the beginning of the first year based upon the grant date fair value estimates, and for compensation cost for all share-based payments granted or modified subsequently based on fair value estimates.
For the years ended December 31, 2017 and 2016, share-based compensation for options attributable to employees, officers and Board members were approximately $59,000 and $95,000, respectively. These amounts have been included in the Company’s statements of operations. Compensation costs for stock options which vest over time are recognized over the vesting period. As of December 31, 2017, the Company had approximately $50,000 of unrecognized compensation costs related to granted stock options to be recognized over the remaining vesting period of approximately two years.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, ASC820, Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy based upon observable and non-observable inputs as follow:
●
Level 1 – Quoted market prices in active markets for identical assets and liabilities;
●
Level 2 – Inputs, other than level 1 inputs, either directly or indirectly observable; and
●
Level 3 – Unobservable inputs developed using internal estimates and assumptions (there is little or no market date) which reflect those that market participants would use.
The Company records its derivative activities at fair value, which consisted of warrants as of December 31, 2017. The fair value of the warrants was estimated using the Binomial Simulation model. Gains and losses from derivative contracts are included in net gain (loss) from derivative contracts in the statement of operations. The fair value of the Company’s derivative warrants is classified as a Level 3 measurement, since unobservable inputs are used in the valuation.
The following table presents the fair value for those liabilities measured on a recurring basis as of December 31, 2017 and 2016:
FAIR VALUE MEASUREMENTS (In Thousands)
The following is summary of items that the Company measures at fair value on a recurring basis:
 
 
Fair Value at December 31, 2017
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrants issued in connection with Distributor Debt
  - 
  - 
  (114)
  (114)
Warrants issued in connection with Short-Term Loans
  - 
  - 
  (11)
  (11)
Warrants issued in connection with Senior Secured Debt
  - 
  - 
  (7,837)
  (7,837)
            Total long-term liabilities at fair value
 $- 
 $- 
 $(7,962)
 $(7,962)

 
 
Fair Value at December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrants issued in connection with Distributor Debt
 $— 
 $— 
 $(114)
 $(114)
Warrants issued in connection with Senior Secured Debt
  — 
  — 
  (1,306)
  (1,306)
            Total long-term liabilities at fair value
 $— 
 $— 
 $(1,420)
 $(1,420)
The following is a summary of changes to Level 3 instruments during the year ended December 31, 2017:
 
 
Fair Value Measurements Using Significant Unobservable
Inputs (Level 3)
 
 
 
Series C Warrants
 
 
Series B Warrants
 
 
Senior Secured Debt
 
 
Distributor Debt
 
 
Total
 
Balance, December 31, 2016
 $- 
 $- 
 $(1,306)
 $(114)
 $(1,420)
Warrants issued during the year
  - 
  - 
  (55)
  - 
  (55)
Change in fair value during the year
  - 
  - 
  (6,487)
  - 
  (6,487)
Balance, December 31, 2017
 $- 
 $- 
 $(7,848)
 $(114)
 $(7,962)
As of December 31, 2017, the fair value of warrants was approximately $8.0 million. A net change of approximately $6.5 million has been recorded to the accompanying statement of operations for the year ended.
4. STOCKHOLDER’S DEFICIT
Common Stock
The Company has authorized 1,000,000,000 shares of common stock with $0.001 par value, of which 49,562,810 were issued and outstanding as of December 31, 2017. For the year ended December 31, 2016, there were 1,000,000,000 authorized shares of common stock, of which 668,651 were issued and outstanding.
A 1:800 reverse stock split of all of our issued and outstanding common stock was implemented on November 7, 2016. As a result of the reverse stock split, every 800 shares of issued and outstanding common stock was converted into 1 share of common stock. All fractional shares created by the reverse stock split were rounded to the nearest whole share. The number of authorized shares of common stock did not change. On February 24, 2016, the Company had also implemented a 1:100 reverse stock split of its issued and outstanding common stock. The number of the authorized shares did not change.
For the year ended December 31, 2017, the Company issued 48,894,159 shares of common stock as listed below:
Series C Preferred Stock Conversions
11,906,931
Series C Preferred Stock Dividends
5,365,298
Convertible Debt Conversions
31,571,930
Issuance of shares for note agreement
50,000
Total
48,894,159

On January 22, 2017, the Company entered into a license agreement with Shandong Yaohua Medical Instrument Corporation, or SMI, pursuant to which the Company granted SMI an exclusive global license to manufacture the LuViva device and related disposables (subject to a carve-out for manufacture in Turkey) and exclusive distribution rights in the Peoples Republic of China, Macau, Hong Kong and Taiwan. In exchange for the license, SMI will pay a $1.0 million licensing fee, payable in five installments through November 2017, as well as a royalty on each disposable sold in the territories. As of December 31, 2017, SMI had paid $750,000. SMI will also underwrite the cost of securing approval of LuViva with the Chinese Food and Drug Administration, or CFDA. Pursuant to the SMI agreement, SMI must become capable of manufacturing LuViva in accordance with ISO 13485 for medical devices by the second anniversary of the SMI agreement, or else forfeit the license. Based on the agreement, SMI must purchase no fewer than ten devices (with up to two devices pushed to 2018 if there is a delay in obtaining approval from the CFDA). SMI purchased five devices in 2017 and have not purchased any in 2018. In the three years following CFDA approval, SMI must purchase a minimum of 3,500 devices (500 in the first year, 1,000 in the second, and 2,000 in the third) or else forfeit the license. As manufacturer of the devices and disposables, SMI will be obligated to sell each to us at costs no higher than our current costs. As partial consideration for, and as a condition to, the license, and to further align the strategic interests of the parties, the Company agreed to issue $1.0 million in shares of its common stock to SMI, in five installments through October 2017, at a price per share equal to the lesser of the average closing price for the five days prior to issuance and $1.25. These shares have not been issued as of December 31, 2017.
In order to facilitate the SMI agreement, immediately prior to its execution the Company entered into an agreement with Shenghuo Medical, LLC, regarding its previous license to Shenghuo (see Note 8, Commitments and Contingencies). Under the terms of the new agreement, Shenghuo agreed to relinquish its manufacturing license and its distribution rights in SMI’s territories, and to waive its rights under the original Shenghuo agreement, all for as long as SMI performs under the SMI agreement. As consideration, the Company agreed to split with Shenghuo the licensing fees and net royalties from SMI that the Company will receive under the SMI agreement. Should the SMI agreement be terminated, the Company have agreed to re-issue the original license to Shenghuo under the original terms. The Company’s COO and director, Mark Faupel, is a shareholder of Shenghuo, as well as Dr. John Imhoff, a director and another director, Richard Blumberg, is a managing member of Shenghuo.
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock with a $.001 par value. The board of directors has the authority to issue these shares and to set dividends, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions. The board of directors designated 525,000 shares of preferred stock as redeemable convertible preferred stock, none of which remain outstanding; 33,000 shares of preferred stock as Series B Preferred Stock, none of which remained outstanding, 9,000 shares of preferred stock as Series C Convertible Preferred Stock, of which 970 and 1,643 were issued and outstanding at December 31, 2017 and 2016, respectively, and 20,250 shares of Series C1 Convertible Preferred Stock, of which 4,312 were issued and outstanding at December 31, 2017 and 2016.
Series B Convertible Preferred Stock
Holders of the Series B Preferred Stock were entitled to quarterly dividends at an annual rate of 10.0%, payable in cash or, subject to certain conditions, common stock, at the Company’s option.
The Series B Preferred Stock were issued with Tranche A warrants to purchase 24 shares of common stock and Tranche B warrants purchasing 7,539 shares of common stock, at an exercise price of $8,364 and $75 per share, respectively.
At December 31, 2015, as a result of the operation of certain anti-dilution provisions, the Tranche B warrants were convertible into 1 shares of common stock. These warrants were re-measured based upon their fair value each reporting period and classified as a liability on the Balance Sheet. Between June 13, 2016 and June 14, 2016, the Company entered into various agreements with holders of the Company’s “Series B Tranche B” warrants, pursuant to which each holder separately agreed to exchange the warrants for either (1) shares of common stock equal to 166% of the number of shares of common stock underlying the surrendered warrants, or (2) new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered warrants.

Series C Convertible Preferred Stock
On June 29, 2015, the Company entered into a securities purchase agreement with certain accredited investors, including John Imhoff and Mark Faupel, members of the Board, for the issuance and sale of an aggregate of 6,737 shares of Series C convertible preferred stock, at a purchase price of $750 per share and a stated value of $1,000 per share. On September 3, 2015 the Company entered into an interim agreement amending the securities purchase agreement to provide for certain of the investors to purchase an additional aggregate of 1,166 shares. Total cash and non-cash expenses were valued at $853,000, resulting in net proceeds of $3,698,000.
Pursuant to the Series C certificate of designations, shares of Series C preferred stock are convertible into common stock by their holder at any time, and may be mandatorily convertible upon the achievement of specified average trading prices for the Company’s common stock. At December 31, 2017, there were 970 shares outstanding with a conversion price of $0.017 per share, such that each share of Series C preferred stock would convert into approximately 58,824 shares of the Company’s common stock, subject to customary adjustments, including for any accrued but unpaid dividends and pursuant to certain anti-dilution provisions, as set forth in the Series C certificate of designations. The conversion price will automatically adjust downward to 80% of the then-current market price of the Company’s common stock 15 trading days after any reverse stock split of the Company’s common stock, and 5 trading days after any conversions of the Company’s outstanding convertible debt.
Holders of the Series C preferred stock are entitled to quarterly cumulative dividends at an annual rate of 12.0% until 42 months after the original issuance date (the “Dividend End Date”), payable in cash or, subject to certain conditions, the Company’s common stock. In addition, upon conversion of the Series C preferred stock prior to the Dividend End Date, the Company will also pay to the converting holder a “make-whole payment” equal to the amount of unpaid dividends through the Dividend End Date on the converted shares. At December 31, 2017, the “make-whole payment” for a converted share of Series C preferred stock would convert to 24,706 shares of the Company’s common stock. The Series C preferred stock generally has no voting rights except as required by Delaware law. Upon the Company’s liquidation or sale to or merger with another corporation, each share will be entitled to a liquidation preference of $1,000, plus any accrued but unpaid dividends.
In addition, the purchasers of the Series C preferred stock received, on a pro rata basis, warrants exercisable to purchase an aggregate of approximately 150 shares of Company’s common stock. The warrants contain anti-dilution adjustments in the event that the Company issues shares of common stock, or securities exercisable or convertible into shares of common stock, at prices below the exercise price of such warrants. As a result of the anti-dilution protection, the Company is required to account for the warrants as a liability recorded at fair value each reporting period. At December 31, 2017, the exercise price per share was $640.
On May 23, 2016, an investor canceled certain of these warrants, exercisable into 903 shares of common stock. The same investor also transferred certain of these warrants, exercisable for 150 shares of common stock, to two investors who also had participated in the 2015 Series C financing.
Series C1 Convertible Preferred Stock
Between April 27, 2016 and May 3, 2016, the Company entered into various agreements with certain holders of Series C preferred stock, including directors John Imhoff the chairman of the Company’s board of directors,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 9,60012 (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 18,396,80022,996 shares of common stock.

At December 31, 2017, there were 4,312 shares outstanding with a conversion price of $0.017 per share, such that each share of Series C preferred stock would convert into approximately 58,824 shares of the Company’s common stock.


The Series C1 preferred stock has terms that are substantially the same as the Series C preferred stock, except that the Series C1 preferred stock does not pay dividends (unless and to the extent declared on the common stock) or at-the-market “make-whole payments.” Separately, on April 27, 2016,payments” and, while it has the Company entered into a Rollover and Amendment Agreement with another holder ofsame anti-dilution protections afforded the Series C preferred stock, pursuant to which the holder agreed to roll over any sharesit does not automatically reset in connection with a reverse stock split or conversion of Series C preferred stock (stated value plus make-whole dividend), as well as any remaining principal and accrued interest onour outstanding convertible debt.
Warrants
The following table summarizes transactions involving the Company’s convertible promissory note the holder holds, into the Company’s next financing, all on a dollar-for-dollar basis, as long as the next financing involves at least $1 million in cash from investors unaffiliated with the holder. The holder also agreedoutstanding warrants to return to the Company for cancelation warrants exercisable for 7,148,813 shares of the Company’spurchase common stock that it holds. Exceptfor the year ended December 31, 2017:
Warrants
(Underlying Shares)
Outstanding, January 1, 2017
4,349,762
Issuances
289,739,376
Exercised
-
Canceled / Expired
-
Outstanding, December 31, 2017
294,089,138
The Company had the following shares reserved for the warrants as of December 31, 2017:
Warrants(Underlying Shares) Exercise Price
 
Expiration Date
23(1)$8,368.00 per share
 
May 23, 2018
7,538(2)$75.00 per share
 
June 14, 2021
3(3)$40,000.00 per share
 
April 23, 2019
7(4)$36,000.00 per share
 
May 22, 2019
4(5)$30,400.00 per share
 
September 10, 2019
2(6)$36,864.80 per share
 
September 27, 2019
9(7)$22,504.00 per share
 
December 2, 2019
105(8)$7,200.00 per share
 
December 2, 2020
105(9)$8,800.00 per share
 
December 2, 2020
25(11)$20,400.00 per share
 
March 30, 2018
22(12)$9,504.00 per share
 
June 29, 2020
145(10)$640.00 per share
 
June 29, 2020
150(11)$640.00 per share
 
September 4, 2020
362(12)$640.00 per share
 
September 21, 2020
6(13)$9,504.00 per share
 
September 4, 2020
1(14)$640.00 per share
 
October 23, 2020
6(15)$9,504.00 per share
 
October 23, 2020
279,669,261(16)$0.00514 per share
 
June 14, 2021
13,424,125(17)$0.00514 per share
 
February 21, 2021
17,239(18)$13.92 per share
 
June 6, 2021
200,000(19)$0.00514 per share
 
February 13, 2022
20,000(20)$0.18 per share
 
May 16, 2022
550,000(21)$0.019 per share
 
November 16, 2020
200,000(22)$0.029 per share
 
December 28, 2020
294,089,138*  
 
 
* However, please refer to Footnote 11 - CONVERTIBLE DEBT IN DEFAULT in the paragraph: Debt Restructuring for more information regarding our warrants.

(1)Issued in June 2015 in exchange for warrants originally issued as part of a May 2013 private placement.
(2)Issued in June 2015 in exchange for warrants originally issued as part of a May 2013 private placement.
(3)Issued to a placement agent in conjunction with an April 2014 private placement.
(4)Issued to a placement agent in conjunction with a September 2014 private placement.
(5)Issued as part of a September 2014 Regulation S offering.
(6)Issued to a placement agent in conjunction with a 2014 public offering.
(7)Issued in June 2015 in exchange for warrants originally issued as part of a 2014 public offering.
(8)Issued as part of a March 2015 private placement.
(9)Issued to a placement agent in conjunction with a June 2015 private placement.
(10)Issued as part of a June 2015 private placement.
(11)    Issued as part of a June 2015 private placement.
(12)Issued as part of a June 2015 private placement.
(13)Issued to a placement agent in conjunction with a June 2015 private placement.
(14)Issued as part of a June 2015 private placement.
(15)Issued to a placement agent in conjunction with a June 2015 private placement.
(16)Issued as part of a February 2016 private placement.
(17)Issued to a placement agent in conjunction with a February 2016 private placement.
(18)
(19)
Issued pursuant to a strategic license agreement.
Issued as part of a February 2017 private placement.
(20)Issued as part of a May 2017 private placement.
(21)Issued to investors for a loan in November 2017.
(22)Issued to investors for a loan in December 2017.
All outstanding warrant agreements provide for anti-dilution adjustments in the event of an additional $50,000 cash investment by the holdercertain mergers, consolidations, reorganizations, recapitalizations, stock dividends, stock splits or other changes in the Company’s next financing,corporate structure; except for (9). In addition, warrants subject to footnotes (2) and (10)-(12), (14), and (16) – (22) in the holder has agreedtable above are subject to execute a customary “lockup” agreement in connection with the financing. Finally, the holder, as the holder of a majority of the outstanding Series C preferred stock, agreed to amend the Series C stock purchase agreement to eliminate any participation rights held by the Series C shareholders and to waive operation of certain“lower price issuance” anti-dilution provisions ofthat automatically reduce the Series C that would otherwise be triggered by the transactions. 

F-33

On May 5, 2016 and May 9, 2016 respectively, Jonathan Niloff, age 62, and Linda Rosenstock, age 65, formally announced their decisions not to stand for reelection to the Company’s board of directors at the Company’s 2016 annual meeting of stockholders. Dr. Niloff was appointed to the board in 2010 and Dr. Rosenstock was appointed in 2012. Both of their decisions to resign were for personal reasons and were not a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. 

F-34

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses and costs incurred or to be incurred by us in connection with the sale of the shares of common stock offered hereby, other than selling commissions, which will be borne by the selling stockholders. All the amounts shown are estimated except the SEC registration fee.

Expense Dollar Amount
SEC filing fee $504 
Legal fees and expenses  250,000 
Accounting fees and expenses  25,000 
Blue sky and related expenses  5,800 
Miscellaneous  8,696 
Total $290,000 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article VII of our certificate of incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. Article VII of our bylaws provides for the indemnification of officers, directors and third parties acting on our behalf if such person acted in good faith and in a manner reasonably believed to be in and not opposed to our best interest and, with respect to any criminal action or proceeding, if the indemnified party had no reason to believe his conduct was unlawful.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On February 24, 2016, we implemented a 1:100 reverse stock split of all of our issued and outstanding common stock. As a result of the reverse stock split, every 100 shares of issued and outstanding common stock was converted into 1 share of common stock. In this Item 15, all share and per share amounts for transactions occurring prior to this date are reported on a pre-stock split basis.

November 2013 Warrant Exchange Program. In November 2013, we completed a warrant exchange program pursuant to which we exchanged warrants exercisable for a total of 3,573,691 shares of common stock, or 99.5%exercise price of the warrants eligible(and, in the cases of warrants subject to participate, for new warrants exercisable forfootnote (2), (16) and (17) in the sametable above, increase the number of shares of common stock but with a reduced exercise price of $0.40 per share and a shortened exercise period ending on November 27, 2013.

Simple Interest Notes. On February 20, 2014, our President and CEO, Gene Cartwright, advanced us $50,000, in cash, for a 10% simple interest note. On October 23, 2014, August 4, 2014, and May 21, 2014, he advanced us $30,000, $200,000, and $100,000, respectively, in cash for 5% simple interest notes. On December 30, 2015, he advanced us $10,000 in cash for a 6% simple interest note. On October 24, 2014, October 7, 2014, and August 26, 2014, our Senior Vice President of Engineering, Richard Fowler, advanced us $6,100, $20,000 and $75,000, respectively, in cash for 6% simple interest notes. On October 7, 2014, our Director of Marketing advanced us $10,000 in cash for a 6% simple interest note. On November 4, 2014, Richard Blumberg, one of our stockholders, advanced us $100,000 in cash for a note for $106,500 in aggregate principal and interest due November 30, 2014. On February 20, 2014, directors Michael James, Linda Rosenstock, and John Imhoff advanced us $50,000, $50,000, $50,000, and $25,000 in cash, respectively, for 10% simple interest notes.

April 2014 Senior Convertible Note Financing. On April 23, 2014, we entered into a securities purchase agreement with Magna Equities II, LLC (formerly known as Hanover Holdings I, LLC). Pursuantissuable upon exercise), to the purchase agreement, we sold Magnaoffering price in a subsequent issuance of the Company’s common stock, unless such subsequent issuance is exempt under the terms of the warrants.

For the warrants to footnote (16), the Company further agreed to amend the warrant issued with the original senior secured convertible note, with a principal amountto adjust the number of $1.5 million, for a purchase price of $1.0 million (an approximately 33.3% original issue discount). As partshares issuable upon exercise of the sale, we also issued Magna 321,820warrant to equal the number of shares that will initially be issuable upon conversion of common stock. Additionally, pursuant to the purchase agreement, Magna purchased on May 23, 2014 an additional seniornew convertible note with(without giving effect to any beneficial ownership limitations set forth in the terms of the new convertible note).
The warrants subject to footnote (2) are subject to a principal amountmandatory exercise provision. This provision permits the Company, subject to certain limitations, to require exercise of $2.0 million and an 18-month term, for a fixed purchase price of $2.0 million. We had the rightsuch warrants at any time to redeem all or a portionfollowing (a) the date that is the 30th day after the later of the total outstanding amount then remainingCompany’s receipt of an approvable letter from the U.S. FDA for LuViva and the date on which the notes, at a 25% premium. As of June 30, 2015, the notes are no longer outstanding. The notes accrued interest at an annual rate of 6.0% and were convertible into shares of our common stock achieves an average market price for 20 consecutive trading days of at a conversionleast $1,040.00 with an average daily trading volume during such 20 consecutive trading days of at least 250 shares, or (b) the date on which the average market price equalof the common stock for 20 consecutive trading days immediately prior to the lesserdate the Company delivers a notice demanding exercise is at least $129,600 and the average daily trading volume of $0.55 per share andthe common stock exceeds 250 shares for such 20 consecutive trading days. If these warrants are not timely exercised upon demand, they will expire. Upon the occurrence of certain events, the Company may be required to repurchase these warrants, as well as the warrants subject to footnote (2) in the table above.
The warrants subject to footnote (5) in the table above are also subject to a discount frommandatory exercise provision. This provision permits the lowest daily volume-weightedCompany, subject to certain limitations; to require the exercise of such warrants should the average trading price of ourits common stock over any 30 consecutive day trading period exceed $92.16.
The warrants subject to footnote (7) in the fivetable above are also subject to a mandatory exercise provision. This provision permits the Company, subject to certain limitations, to require exercise of 50% of the then-outstanding warrants if the trading days prior to conversion.

II-1

Regulation S Offering. On September 2, 2014, we accepted a subscription agreement with ITEM Medikal Teknolojileri LTD STI, a Turkish corporation, referred to as ITEM, pursuant to we sold 651,042 sharesprice of ourits common stock and a warrant to purchase an additional 325,521 shares, for an aggregate purchase price of $200,000. The warrant is immediately exercisable, has an exercise price per share of $0.4608, and expires five years fromat least two times the date of issuance.

Secured Note Offering. On September 10, 2014, we entered into a note purchase agreement with Tonaquint, Inc., pursuant to which we sold a secured promissory note with an initial principal amount of $1,275,000, for a purchase price of $700,000 (an original issue discount of $560,000). We may prepay the note at any time. The note is secured by our current and future accounts receivable and inventory, pursuant to a security agreement entered into in connection with the note purchase agreement. As a result of a series of amendments to the note (since assigned to two accredited investors), the maturity date currently is August 31, 2016, and has been accruing interest at a rate of the lesser of 18% per year or the maximum rate permitted by applicable law. Pursuant to the amendments, the holders may convert the outstanding balance into shares of our common stock, at a conversion price per share equal to the lower of (1) $0.25 and (2) 75% of the lowest daily volume weighted average price per share of our common stock during the five business days prior to conversion. If the conversion price at the time of any conversion request would be lower than $0.15 per share, we have the option of delivering the conversion amount in cash in lieu of shares of our common stock.

March 2015 Private Placement. In March 2015, we entered into subscription agreements with certain accredited investors, pursuant to which we sold an aggregate of 4.0 million shares of our common stock and warrants to purchase an additional 2.0 million shares, for an aggregate purchase price of $720,000.

2015 Series B Warrant Exchanges. In order to secure the consent to an amendment to the terms of our Series B preferred stock, effective June 19, 2015 we agreed with each Series B holder to reduce the exercise price on certain “Tranche A” and “Tranche B” warrants, originally issued to the Series B holders on May 21, 2013. We reduced the “Tranche A” warrant exercise price per share from $1.08 to $0.10455, andfor any 20-day trading period. Further, in the “Tranche B”event that the trading price of the Company’s common stock is at least 2.5 times the initial warrant exercise price per share from $0.10455 to $0.09. We further agreed to grantfor any 20-day trading period, the Series B holdersCompany will have the right to participaterequire the immediate exercise of 50% of the then-outstanding warrants. Any warrants not exercised within the prescribed time periods will be canceled to the extent of the number of shares subject to mandatory exercise.


The holders of the warrants subject to footnote (2) in our next capital-raising transaction by exchanging theirthe table above have agreed to surrender the warrants, upon consummation of a qualified public financing, for new warrants exercisable for 200% of the number of shares of underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered warrants.
Series B preferred stock forTranche B Warrants
As discussed in Note 3, Fair Value Measurements, between June 13, 2016 and June 14, 2016, the securities to be offered in any such transaction. Separately, we informed all other holders of outstanding “Tranche A” and “Tranche B” warrants that we had lowered the exercise prices per share for those warrants to $0.10455 and $0.09, respectively.

Public Offering Warrant Exchanges. On June 25 and 26, 2015, weCompany entered into various agreements with holders of the Company’s “Series B Tranche B” warrants, originally issued in December 2014, pursuant to which each holder separately agreed to exchange its warrant for two new warrants that, unlike the original warrant, do not contain any price- or share-reset provisions. Each new warrant is exercisable for the same number of shares of our common stock as the original warrant, at any time beginning December 2, 2015 and ending December 2, 2020. The exercise price of the first new warrant is $0.09 per share and the second new warrant is $0.11 per share but, aside from the exercise price, the new warrants are identical in terms to each other. As additional consideration, we agreed to issue an aggregate of approximately 3.1 million shares of our common stock to the holders, pro rata based on the amount of shares underlying their original warrants. The holders further agreed to amend to the securities purchase agreement, dated December 2, 2014 that governed (among other things) the issuance of the original warrants.

In connection with the agreement with one of the holders, Magna Equities II, LLC, on June 25, 2015 we also agreed to exchange an outstanding senior convertible note held by Magna for a new note, in stated principal amount equal to the then-outstanding principal on the original note. The new note had the same terms as the original note, except that, among other things, Magna was temporarily prohibited from converting any of the balance into shares of our common stock. On June 30, 2015, we paid in full the entire balance of the new note.

Series C Financing. On June 29, 2015, we entered into a securities purchase agreement with certain accredited investors, amended on September 3, 2015, for the issuance and sale of shares of an aggregate of 7,903 shares of our Series C preferred stock, at a purchase price of $750 per share and an initial conversion price of $0.095 per share, and five-year warrants exercisable to purchase an aggregate of approximately 124.8 million shares of our common stock at an initial exercise price of $0.095 per share, subject to certain customary adjustments and anti-dilution provisions.

II-2

Senior Secured Convertible Note. On February 11, 2016, we entered into a securities purchase agreement with GPB Debt Holdings II LLC for the issuance and sale on February 12, 2016 of approximately $1.4 million in aggregate principal amount of a senior secured convertible note for an aggregate purchase price of $1.15 million (a 20% original issue discount). The note matures on the second anniversary of issuance and, in addition to the 20% original issue discount, accrues interest at a rate of 17% per year. Subject to certain restrictions, it is convertible at any time, in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price equal to $0.80 per share, subject to certain customary adjustments and anti-dilution provisions. In addition, the investor received a five-year warrant exercisable to purchase an aggregate of approximately 1.79 million shares of our common stock with an exercise price of $0.80 per share, subject to certain customary adjustments and anti-dilution provisions. On March 17, 2016, our placement agent for the transaction received a warrant with similar terms exercisable for 86,250 shares. In connection with the transaction, on February 12, 2016, we and the investor entered into a four-year consulting agreement, pursuant to which the investor will provide management consulting services to us in exchange for a royalty payment, payable quarterly, equal to 3.5% of our revenues from the sale of products.

Series C Exchanges.Between April 27, 2016 and May 3, 2016, we entered into various agreements with certain holders of our Series C preferred stock, including John Imhoff, one of our directors, pursuant to which those holders separately agreed to exchange each share of Series C preferred stock held for 2.25 shares of our newly created Series C1 preferred stock and 9,600 shares of our common stock. In connection with these exchanges, each holder also agreed to exchange the $1,000 stated value per share of the holder’s shares of Series C1 preferred stock for new securities that we issue in the next qualifying financing we undertake on a dollar-for-dollar basis. We expect this offering will be a qualifying financing. Finally, each holder agreed, except in the event of an additional $50,000 cash investment in the financing by the holder, to execute a customary “lockup” agreement in connection with the qualifying financing. In total, for 1,916 shares of Series C preferred stock surrendered, we issued 4,311 shares of Series C1 preferred stock and 18,396,800 shares of common stock. The Series C1 preferred stock has terms that are substantially the same as the Series C preferred stock, except that the Series C1 preferred stock does not pay dividends (unless and to the extent declared on the common stock) or at-the-market “make-whole payments.”

Separately, on April 27, 2016, we entered into a rollover and amendment agreement with another holder of Series C preferred stock, Aquarius Opportunity Fund, pursuant to which Aquarius agreed to exchange any shares of Series C preferred stock (stated value plus make-whole dividend), as well as any remaining principal and accrued interest on our convertible promissory note Aquarius holds, for new securities that we issue in our next financing, all on a dollar-for-dollar basis, as long as the next financing involves at least $1 million in cash from investors unaffiliated with Aquarius. We expect this offering will be a qualifying financing. Aquarius also agreed to return to us for cancelation warrants exercisable for 7,148,813 shares of our common stock that it held. Except in the event of an additional $50,000 cash investment by Aquarius in the qualifying financing, Aquarius has agreed to execute a customary “lockup” agreement in connection with the financing. Finally, Aquarius, as the holder of a majority of the outstanding Series C preferred stock, agreed to amend the Series C stock purchase agreement to eliminate any participation rights held by the Series C shareholders and to waive operation of certain anti-dilution provisions of the Series C that would otherwise be triggered by the transactions described above.

Shenghuo License Agreement.On June 5, 2016, we entered into a license agreement with Shenghuo Medical, LLC pursuant to which we 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 our exclusive distributor in China, Macau and Hong Kong, and the license extends 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, we have agreed to issue a convertible note to Shenghuo, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment to Shenghuo of $240,000, due upon consummation of any capital raising transaction by us within 90 days and with net cash proceeds of at least $1.0 million. Absent such a transaction, the payment will increase to $300,000 and will be payable by December 31, 2016. The note will accrue interest at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares of our common stock at a conversion price per share of $0.017402, subject to customary anti-dilution adjustment. The note will be unsecured, and is expected to provide for customary events of default. We will also issue Shenghuo a five-year warrant exercisable immediately for approximately 13.7 million shares of common stock at an exercise price equal to the conversion price of the note, subject to customary anti-dilution adjustment.

Warrant Restructuring. Between June 13, 2016 and June 14, 2016, we entered into various agreements with holders of certain warrants (including John Imhoff, the chairman of our board of directors) originally issued in May 2013, and with GPB Debt Holdings II LLC, holder of a warrant issued February 12, 2016, pursuant to which each holder separately agreed to exchange warrants for either (1) shares of common stock equal to 166% of the number of shares of common stock underlying the surrendered warrants, or (2) new warrants exercisable for 200% of the number of shares underlying the surrendered warrants, but without certain anti-dilution protections included with the surrendered warrants. As a result of the exchanges, we effectively eliminate any potential exponential increase in the number of underlying shares issuable upon exercise of our outstanding warrants. In total, for surrendered warrants then-exercisable for an aggregate of 94,828,8881,185,357 shares of common stock (but subject to exponential increase upon operation of certain anti-dilution provisions), wethe Company issued or areis obligated to issue 13,517,34216,897 shares of common stock and new warrants that, if exercised as of June 14, 2016,the date hereof, would be exercisable for an aggregate of 214,189,622216,707 shares of common stock.

II-3

As of December 31, 2017, the Company had issued 14,766 shares of common stock and rights to common stock shares for 2,131. In certain circumstances, in lieu of presently issuing all of the shares (for each holder that opted for shares of common stock), wethe Company and the holder further agreed that wethe Company will, subject to the terms and conditions set forth in the applicable warrant exchange agreement, from time to time, be obligated to issue the remaining shares to the holder. No additional consideration will be payable in connection with the issuance of the remaining shares.

The holders that elected to receive shares for their surrendered warrants have agreed that they will not sell shares on any trading day in an amount, in the aggregate, exceeding 20% of the composite aggregate trading volume of the common stock for that trading day.

The holders that elected to receive new warrants will be required to surrender their old warrants upon consummation of this offering.the Company’s next financing resulting in net cash proceeds to the Company of at least $1 million. The new warrants will have an initial exercise price equal to the exercise price of the surrendered warrants as of immediately prior to consummation of this offering,the financing, subject to customary “downside price protection” for as long as ourthe Company’s common stock is not listed on a national securities exchange, and will expire five years from the date of issuance.

5. INCOME TAXES
The saleCompany has incurred net operating losses ("NOLs") since inception. As of securitiesDecember 31, 2017, the company had NOL carryforwards available through 2036 of approximately $82.9 million to ITEMoffset its future income tax liability. The NOL carryforwards began to expire in 2008. The company has recorded deferred tax assets but reserved against, due to uncertainties related to utilization of NOLs as well as calculation of effective tax rate. Utilization of existing NOL carryforwards may be limited in future years based on significant ownership changes. The company is in the process of analyzing their NOL and has not determined if the company has had any change of control issues that could limit the future use of NOL.
Components of deferred taxes are as follow at December 31 (in thousands):
 
 
2017
 
 
2016
 
Deferred tax assets:
 
 
 
 
 
 
Warrant liability
 $1,990
 $697 
Accrued executive compensation
  447 
  540 
Reserves and other
  301
  255 
Net operating loss carryforwards
  20,726 
  27,958 
 
  23,464
  29,450 
  Valuation allowance
  (23,464)
  (29,450)
 
 $0 
 $0 

The following is a summary of the items that caused recorded income taxes to differ from taxes computed using the statutory federal income tax rate for the years ended December 31:
 
 
2017
 
 
2016
 
Statutory federal tax rate
  34%
  34%
State taxes, net of federal benefit
  4 
  4 
Nondeductible expenses
  - 
  - 
  Valuation allowance
  (38)
  (38)
 
  0%
  0%
On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. Among other things, the TCJA (1) reduces the U.S. statutory corporate income tax rate from 34% to 21% effective January 1, 2018 (2) eliminates the corporate alternative minimum tax (3) eliminates the Section 199 deduction (4) changes rules related to uses and limitations of net operating loss carryforwards beginning after December 31, 2017.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
The TCJA reduces the corporate tax rate to 21% effective January 1, 2018. The Company has recorded a provisional decrease in its deferred tax assets and liabilities for the year ended December 31, 2017. While the Company may be able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the TCJA.
The Company applies the applicable authoritative guidance which prescribes a comprehensive model for the manner in which a company should recognize, measure, present and disclose in its financial statements all material uncertain tax positions that the Company has taken or expects to take on a tax return. As of December 31, 2017, the Company has no uncertain tax positions. There are no uncertain tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months from December 31, 2017.
The Company files federal income tax returns and income tax returns in various state tax jurisdictions with varying statutes of limitations.
The provision for income taxes as of the dates indicated consisted of the following (in thousands) December 31:
 
 
2017
 
 
2016
 
Current
 $- 
 $- 
Deferred
  - 
  - 
Deferred provision
  - 
  - 
Impact of change in enacted tax rates
  12,139 
  - 
Change in valuation allowance
  (12,139)
  - 
Total provision for income taxes
 $- 
 $- 
In 2017, our effective tax rate differed from the U.S. federal statutory rate primarily due to re-measuring deferred income taxes at the new statutory tax rate and the related change of the valuation allowance over our deferred tax assets. At the date of enactment of the Tax Cuts and Jobs Act, we re-measured our deferred tax assets and liabilities using a rate of 21%, which is the rate expected to be in place when such deferred assets and liabilities are expected to reverse in the future. The re-measurement reduced our net deferred tax assets by $12,139,043.

6. STOCK OPTIONS
The Company’s 1995 Stock Plan (the “Plan”) has expired pursuant to its terms, so zero shares remained available for issuance at December 31, 2017 and 2016. The Plan allowed for the issuance of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price of options was madedetermined by the Company’s board of directors, but incentive stock options were granted at an exercise price equal to the fair market value of the Company’s common stock as of the grant date. Options historically granted have generally become exercisable over four years and expire ten years from the date of grant.
As of December 31, 2017, the Company has issued and outstanding options to purchase a non-U.S. persontotal of 116 shares of common stock pursuant to the Plan, at a weighted average exercise price of $37,090 per share.
The fair value of stock options granted in the year ended December 31, 2017 were estimated using the Black-Scholes option pricing model. No options were issued during the year ended December 31, 2017.
Stock option activity for December 31, 2017 and 2016 as follows:
 
 
2016   
 
 
 
 
 
 
Weighted Average  
 
 
 
Shares
 
 
Exercise Price   
 
Outstanding at beginning of year
  132 
 $36,000 
   Options granted
  - 
 $- 
   Options exercised
  - 
 $- 
   Options expired/forfeited
  (7)
 $74,160 
Outstanding at end of year
  125 
 $37,920 
Options available for issue
  - 
    
 
 
 2017    
 
 
 
 
 
 
 Weighted Average 
 
 
 
Shares
 
 
 Exercise Price 
 
Outstanding at beginning of year
  125 
 $37,920 
   Options granted
  - 
 $- 
   Options exercised
  - 
 $- 
   Options expired/forfeited
  (7)
 $48,613 
Outstanding at end of year
  118 
 $37,090 
Options available for issue
  - 
    
 
 
 
 
 
Weighted Average
 
 
 
Shares
 
 
Exercise Price
 
Options Vested as of December 31, 2016
  117 
 $38,640 
   Options vested in 2017
  - 
 $- 
Options vested as of December 31, 2017
  117 
 $38,640 
 
 
 
 
 Weighted Average
 
 
Shares
 
 
 Exercise Price 
 
Options Unvested as of December 31, 2016
  8 
 $39,200 
   Options vested in 2017
  (-)
 $- 
   Options expired/forfeited in 2017
  (7)
 $48,613 
Options Unvested as of December 31, 2017
  1 
    

7.   LITIGATION AND CLAIMS
From time to time, the Company may be involved in various legal proceedings and claims arising in the ordinary course of business. Management believes that the dispositions of these matters, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial condition. However, depending on the amount and timing of such disposition, an offshore offeringunfavorable 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 December 31, 2017 and 2016, there was no accrual recorded for any potential losses related to pending litigation.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
In December 2009, the Company moved its offices, which comprise its administrative, research and development, marketing and production facilities to 5835 Peachtree Corners East, Suite B, Norcross, 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 March 31, 2018; $8,022 each month for the period beginning April 1, 2018 and ending March 31, 2019; $8,268 each month for the period beginning April 1, 2019 and ending March 31, 2020; and $8,514 each month for the period beginning April 1, 2020 and ending March 31, 2021. The company recognizes the rent expense on a straight-line basis over the estimated lease term. Future minimum rental payments at December 31, 2017 under non-cancellable operating leases for office space and equipment are as follows (in thousands):
Year Amount
2018 114
2019 98
2020 101
2021 26
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 Regulation SISO 13485 for medical devices, Shenghuo would pay the Company a royalty equal to $2.00 or 20% of the distributor price (subject to a discount under certain circumstances), whichever is higher, per disposable distributed within Shenghuo’s exclusive territories. In connection with the license grant, Shenghuo was to underwrite the cost of securing approval of LuViva with Chinese Food and Drug Administration. At its option, Shenghuo also would provide up to $1.0 million in furtherance of the Company’s efforts to secure regulatory approval for LuViva from the U.S. Food and Drug Administration, in exchange for the right to receive payments equal to 2% of the Company’s future sales in the United States, up to an aggregate of $4.0 million. Pursuant to the license agreement, Shenghuo had the option to have a designee appointed to the Company’s board of directors (director Richard Blumberg is that designee). As partial consideration for, and as a condition to, the license, and to further align the strategic interests of the parties, the Company agreed to issue a convertible note to Shenghuo, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment to Shenghuo of $300,000, expected to be due the earlier of 90 days from issuance and consummation of any capital raising transaction by the Company with net cash proceeds of at least $1.0 million. The note will accrue interest at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares of the Company’s common stock at a conversion price per share of $13.92, subject to customary anti-dilution adjustment. The note will be unsecured, and is expected to provide for customary events of default. The Company will also issue Shenghuo a five-year warrant exercisable immediately for approximately 21,549 shares of common stock at an exercise price equal to the conversion price of the note, subject to customary anti-dilution adjustment. On January 22, 2017, the Company entered into a license agreement with Shandong Yaohua Medical Instrument Corporation, or SMI, pursuant to which the Company granted SMI an exclusive global license to manufacture the LuViva device and related disposables (subject to a carve-out for manufacture in Turkey) and exclusive distribution rights in the Peoples Republic of China, Macau, Hong Kong and Taiwan. In order to facilitate the SMI agreement, immediately prior to its execution the Company entered into an agreement with Shenghuo Medical, LLC, regarding its previous license to Shenghuo. Under the terms of the new agreement, Shenghuo agreed to relinquish its manufacturing license and its distribution rights in SMI’s territories, and to waive its rights under the Securities Act.original Shenghuo agreement, all for as long as SMI performs under the SMI agreement.

On September 6, 2016, the Company entered into a royalty agreement with one of its directors, John Imhoff, and another stockholder, Dolores Maloof, pursuant to which the Company sold to them a royalty of future sales of single-use cervical guides for LuViva. Under the terms of the royalty agreement, and for consideration of $50,000, the Company will pay them an aggregate perpetual royalty initially equal to $0.10, and from and after October 2, 2016, equal to $0.20, for each disposable that the Company sells (or that is sold by a third party pursuant to a licensing arrangement with the Company).
9.   NOTES PAYABLE
Notes Payable in Default
At December 31, 2017 and 2016, the Company maintained notes payable and accrued interest to both related and non-related parties totaling $1,091,000 and $1,008,000, respectively. These notes are short term, straight-line amortizing notes. The issuancesnotes carry annual interest rates between 5% and 10% and have default rates as high a 16.5%. The Company is accruing interest at the default rate of 16.5%.
Short Term Notes Payable
At December 31, 2017 and 2016, the Company maintained short term notes payable and accrued interest to both related and non-related parties totaling $354,000 and $127,000, respectively. These notes are short term, straight-line amortizing notes. The notes carry annual interest rates between 5% and 10%.
In July 2017, the Company entered into a premium finance agreement to finance its insurance policies totaling $206,293. The note requires monthly payments of $18,766, including interest at 4.89% and matures in May 2018. The balance due on this note totaled $93,000 at December 31, 2017.
In June 2016, the Company entered into a premium finance agreement to finance its insurance policies totaling $193,862. The note required monthly payments of $17,622, including interest at 4.87% and matured in April 2017.
10.  SHORT-TERM CONVERTIBLE DEBT
Related Party Convertible Note Payable – Short-Term
On June 5, 2016, the Company entered into a license agreement with a distributor pursuant to which the Company granted the distributor an exclusive license to manufacture, sell and distribute the Company’s LuViva Advanced Cervical Cancer device and related disposables in Taiwan, Brunei Darussalam, Cambodia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The distributor was already the Company’s exclusive distributor in China, Macau and Hong Kong, and the license will extend to manufacturing in those countries as well.
As partial consideration for, and as a condition to, the license, and to further align the strategic interests of the parties, the Company agreed to issue a convertible note to the distributor, in exchange for an aggregate cash investment of $200,000. The note will provide for a payment to the distributor of $240,000, due upon consummation of any capital raising transaction by the Company within 90 days and with net cash proceeds of at least $1.0 million. As of December 31, 2017, the Company had a note due of $417,160. The note accrues interest at 20% per year on any unpaid amounts due after that date. The note will be convertible into shares of the Company’s common stock at a conversion price per share of $13.92, subject to customary anti-dilution adjustment. The note will be unsecured, and is expected to provide for customary events of default. The Company will also issue the distributor a five-year warrant exercisable immediately for 17,239 shares of common stock at an exercise price equal to the conversion price of the note, subject to customary anti-dilution adjustment.

Convertible Note Payable – Short-Term
On February 13, 2017, the Company entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $170,000 in aggregate principal amount of a 12% convertible promissory note for an aggregate purchase price of $156,400 (representing a $13,600 original issue discount). On February 13, 2017, the Company issued the note to Auctus. Pursuant to the purchase agreement, the Company also issued to Auctus a warrant exercisable to purchase an aggregate of 200,000 shares of the Company’s common stock. The warrant is exercisable at any time, at an exercise price per share equal to $0.00514 (110% of the closing price of the common stock on the day prior to issuance), subject to certain customary adjustments and price-protection provisions contained in the warrant. The warrant has a five-year term. The note matured nine months from the date of issuance and, in addition to the original issue discount, accrues interest at a rate of 12% per year. The Company could have prepaid the note, in whole or in part, for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance to 180 days from issuance. After six months from the date of issuance, Auctus may convert the note, at any time, in whole or in part, into shares of the Company’s common stock, at a conversion price equal to the lower of the price offered in the Company’s next public offering or a 40% discount to the average of the two lowest trading prices of the common stock during the 20 trading days prior to the conversion, subject to certain customary adjustments and price-protection provisions contained in the note. The note includes customary events of default provisions and a default interest rate of 24% per year. Upon the occurrence of an event of default, Auctus may require the Company to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. In connection with the transaction, the Company agreed to reimburse Auctus for $30,000 in legal and diligence fees, of which we paid $10,000 in cash and $20,000 in restricted shares of common stock, valued at $0.40 per share (a 42.86% discount to the closing price of the common stock on the day prior to issuance). The Company allocated proceeds of $90,000 to the warrants and common stock issued in connection with the financing. As of December 31, 2017, the Company has net debt of $76,664.
On May 17, 2017, the Company entered into a securities purchase agreement with Eagle Equities, LLC, providing for the purchase by Eagle of two convertible redeemable notes in the aggregate principal amount of $88,000, with the first note being in the amount of $44,000, and the second note being in the amount of $44,000. The first note was fully funded on May 19, 2017, upon which the Company received $40,000 of net proceeds (net of a 10% original issue discount). The second note was issued on December 21, 2017 and was initially paid for by the issuance of an offsetting $40,000 secured note issued by Eagle. Eagle was required to pay the principal amount of its secured note in cash and in full prior to executing any conversions under the second note the Company issued. The notes bear an interest rate of 8%, and are due and payable on May 17, 2018. The notes may be converted by Eagle at any time after five months from issuance into shares of our common stock (as determined in the notes) calculated at the time of conversion, except for the second note, which also requires full payment by Eagle of the secured note it issued to us before conversions may be made. The conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which the Company receive 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. As of December 31, 2017, the Company has net debt of $41,322, including unamortized original issue discount of $5,214, unamortized and debt issuance costs of $11,160.
On May 17, 2017, the Company entered into a securities purchase agreement with Adar Bays, LLC, providing for the purchase by Adar of two convertible redeemable notes in the aggregate principal amount of $88,000, with the first note being in the amount of $44,000, and the second note being in the amount of $44,000. The first note was fully funded on May 19, 2017, upon which the Company received $40,000 of net proceeds (net of a 10% original issue discount). The second note was issued on December 21, 2017 and was initially paid for by the issuance of an offsetting $40,000 secured note issued by Adar. Adar was required to pay the principal amount of its secured note in cash and in full prior to executing any conversions under the second note the Company issued. The notes bear an interest rate of 8%, and are due and payable on May 17, 2018. The notes may be converted by Adar at any time after five months from issuance into shares of our common stock (as determined in the notes) calculated at the time of conversion, except for the second note, which also requires full payment by Adar of the secured note it issued to us before conversions may be made. The conversion price of the notes will be equal to 60% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which the Company receive 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. As of December 31, 2017, the Company has net debt of $42,216, including unamortized original issue discount of $5,214, unamortized and debt issuance costs of $11,160.

On May 18, 2017, the Company entered into a securities purchase agreement with GHS Investments, LLC, an existing investor, providing for the purchase by GHS of a convertible promissory note in the aggregate principal amount of $66,000, for $60,000 in net proceeds (representing a 10% original issue discount). The transaction closed on May 19, 2017. The note matures upon the earlier of our receipt of $100,000 from revenues, loans, investments, or any other means (other than the Eagle and Adar bridge financings) and December 31, 2017. In addition to the 10% original issue discount, the note accrues interest at a rate of 8% per year. The Company may prepay the note, in whole or in part, for 110% of outstanding principal and interest until 30 days from issuance, for 120% of outstanding principal and interest at any time from 31 to 60 days from issuance and for 140% of outstanding principal and interest at any time from 61 days to 180 days from issuance. The note may not be prepaid after 180 days. After six months from the date of issuance, the note will become convertible, at any time thereafter, in whole or in part, at the holder’s option, into shares of our common stock, at a conversion price equal to 60% of the lowest trading price during the 25 trading days prior to conversion. The note includes customary event of default provisions and a default interest rate of the lesser of 20% per year or the maximum amount permitted by law. Upon the occurrence of an event of default, the holder of the note may require us to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance. As of December 31, 2017, the Company has net debt of $66,000.
On August 18, 2017, the Company entered into a securities purchase agreement with Power Up Lending Group Ltd., providing for the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on May 19, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of December 31, 2017, the Company has a net debt of $46,405, including unamortized debt issuance costs of $6,595.
On October 12, 2017, the Company entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on July 20, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of December 31, 2017, the Company has a net debt of $47,288, including unamortized debt issuance costs of $5,722.
On December 11, 2017, the Company entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), providing for the purchase by Power Up from the Company of a convertible note in the aggregate principal amount of $53,000. The note bears an interest rate of 12%, and is due and payable on September 20, 2018. The note may be converted by Power Up at any time after 180 days from issuance into shares of Company’s common stock at a conversion price equal to 58% of the average of the lowest two-day trading prices of the common stock during the 15 trading days prior to conversion. The note may be prepaid in accordance with its terms, at premiums ranging from 15% to 40%, depending on the time of prepayment. The note contains certain representations, warranties, covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC, and provides for increases in principal and interest in the event of such defaults. As of December 31, 2017, the Company has a net debt of $45,565, including unamortized debt issuance costs of $7,435.
On December 28, 2016, the Company entered into a securities purchase agreement with an investor for the issuance and sale to investor of up to $330,000 in aggregate principal amount of 10% original issuance discount convertible promissory notes, for an aggregate purchase price of $300,000. On that date, the Company issued to the investor a note in the principal amount of $222,000, for a purchase price of $200,000. The note matures six months from their date of issuance and, in addition to the 10% original issue discount, accrue interest at a rate of 10% per year. The Company may prepay the notes, in whole or in part, for 115% of outstanding principal and interest until 30 days from issuance, for 125% of outstanding principal and interest at any time from 31 to 60 days from issuance, and for 130% of outstanding principal and interest at any time from 61 days from issuance until immediately prior to the maturity date. After six months from the date of issuance (i.e., if the Company fails to repay all principal and interest due under the notes at the maturity date), the investor may convert the notes, at any time, in whole or in part, into shares of the Company’s common stock, at a conversion price equal to 60% of the lowest volume weighted average price of our common stock during the 20 trading days prior to conversion, subject to certain customary adjustments and anti-dilution provisions contained in the note. As of December 31, 2017, the Company has fully amortized debt issuance costs $30,000 and original issue discount of $22,000. As of December 31, 2017, the balance due to the investor for the December 28, 2016 note, is zero.

11.  CONVERTIBLE DEBT IN DEFAULT
Secured Promissory Note.
On September 10, 2014, the Company sold a secured promissory note to an accredited investor with an initial principal amount of $1,275,000, for a purchase price of $700,000 (an original issue discount of $560,000). The Company may prepay the note at any time. The note is secured by the Company’s current and future accounts receivable and inventory, pursuant to a security agreement entered into in connection with the sale. On March 10, 2015, May 4, 2015, June 1, 2015, June 16, 2015, June 29, 2015, January 21, 2016, January 29, 2016, and February 12, 2016 the Company amended the terms of the note to extend the maturity ultimately until August 31, 2016. During the extension, interest accrues on the note at a rate of the lesser of 18% per year or the maximum rate permitted by applicable law. On February 11, 2016, the Company consented to an assignment of the note to two accredited investors. In connection with the assignment, the holders waived an ongoing event of default under the notes related to the Company’s minimum market capitalization, and agreed to eliminate the requirement going forward. Pursuant to the terms of the amended note, the holder may convert the outstanding balance into shares of common stock at a conversion price per share equal to the lower of (1) $25.0 or (2) 75% of the lowest daily volume weighted average price of the common stock during the five days prior to conversion. If the conversion price at the time of any conversion is lower than $15.00, the Company has the option of delivering the conversion amount in cash in lieu of shares of common stock. On March 7, 2016, the Company further amended the note to eliminate the volume limitations on sales of common stock issued or issuable upon conversion. On July 13, 2016, the Company consented to the assignment by one of the accredited investors of its portion of the note of to a third accredited investor.
The balance due on the note was $184,245 and $530,691 at December 31, 2017 and December 31, 2016, respectively. The balance was reduced by $306,863 as part of a debt restructuring on December 7, 2016.
Total debt issuance costs as originally capitalized were approximately $130,000. This amount was amortized over nine months and was fully amortized as of December 31, 2015. The original issue discount of $560,000 was fully amortized as of December 31, 2015.
On November 2, 2016, the Company entered into a lockup and exchange agreement with GHS Investments, LLC, holder of approximately $221,000 in outstanding principal amount of the Company’s secured promissory note and all of the outstanding shares of the its Series C preferred stock. Pursuant to the agreement, upon the effectiveness of the 1:800 reverse stock split and continuing for 45 days after, GHS and its affiliates were prohibited from converting any portion of the secured promissory note or any of the shares of Series C preferred stock or selling any of the Company’s securities that they beneficially owned. The Company agreed that, upon consummation of its next financing, the Company would use $260,000 of net cash proceeds first, to repay GHS’s portion of the secured promissory note and second, with any remaining amount from the $260,000, to repurchase a portion of GHS’s shares of Series C preferred stock. In addition, GHS has agreed to exchange the stated value per share (plus any accrued but unpaid dividends) of its remaining shares of Series C preferred stock for new securities of the same type that the Company separately issue in the next qualifying financing it undertakes, on a dollar-for-dollar basis in a private placement exchange.
Senior Secured Promissory Note
On February 11, 2016, the Company entered into a securities purchase agreement with GPB Debt Holdings II LLC for the issuance and sale on February 12, 2016 of $1.4375 million in aggregate principal amount of a senior secured convertible note for an aggregate purchase price of $1.15 million (a 20% original issue discount of $287,500) and a discount for debt issuance costs paid at closing of $121,000 for a total of $408,500. In addition, GPB received a warrant exercisable to purchase an aggregate of approximately 2,246 shares of the Company’s common stock. The Company allocated proceeds totaling $359,555 to the fair value of the warrants at issuance. This was recorded as an additional discount on the debt. The convertible note matures on the second anniversary of issuance and, in addition to the 20% original issue discount, accrues interest at a rate of 17% per year. The Company is required to pay monthly interest coupons and beginning nine months after issuance, the Company is required to pay amortized quarterly principal payments. If the Company does not receive, on or before the first anniversary after issuance, an aggregate of at least $3.0 million from future equity or debt financings or non-dilutive grants, then the holder will have the option of accelerating the maturity date to the first anniversary of issuance. The Company may prepay the convertible note, in whole or in part, without penalty, upon 20 days’ prior written notice. Subject to resale restrictions under Federal securities laws and the availability of sufficient authorized but unissued shares of the Company’s common stock, the convertible note is convertible at any time, in whole or in part, at the holder’s option, into shares of the Company’s common stock, at a conversion price equal to the lesser of $0.80 per share or 70% of the average closing price per share for the five trading days prior to issuance, subject to certain customary adjustments and anti-dilution provisions contained in the convertible note. On May 28, 2016, in exchange for an additional $87,500 in cash from GPB to the Company, the principal balance was increased by the same amount. The Company is currently in default as they are past due on the required monthly interest payments. In the event of default, the Company shall accrue interest at a rate the lesser of 22% or the maximum permitted by law. The Company has accrued $117,000 for past due interest payments at December 31, 2016. Upon the occurrence of an event of default, the holder may require the Company to redeem the convertible note at 120% of the outstanding principal balance (but as of December 31, 2017, had not done so). As of December 31, 2017, the balance due on the convertible debt was $2,136,863 as the Company has fully amortized debt issuance costs of $47,675 and the debt discount of $768,055 and recorded a 20% penalty totaling $305,000. In addition, the Company has accrued $424,011 of interest expense. The convertible note is secured by a lien on all of the Company’s assets, including its intellectual property, pursuant to a security agreement entered into by the Company and GPB.

The warrant is exercisable at any time, pending availability of sufficient authorized but unissued shares of the Company’s common stock, at an exercise price per share equal to the conversion price of the convertible note, subject to certain customary adjustments and anti-dilution provisions contained in the warrant. The warrant has a five-year term. As of December 31, 2017, the exercise price had been adjusted to $0.00514 and the number of common stock shares exchangeable for was 279,669,261. As of December 31, 2017, the effective interest rate considering debt costs was 29%.
The Company used a placement agent in connection with the transaction. For its services, the placement agent received a cash placement fee equal to 4% of the aggregate gross proceeds from the transaction and a warrant to purchase shares of common stock equal to an aggregate of 6% of the total number of shares underlying the securities sold in the transaction, at an exercise price equal to, and terms otherwise identical to, the warrant issued to the investor. Finally, the Company agreed to reimburse the placement agent for its reasonable out-of-pocket expenses.
In connection with the transaction, on February 12, 2016, the Company and GPB entered into a four-year consulting agreement, pursuant to which the investor will provide management consulting services to the Company in exchange for a royalty payment, payable quarterly, equal to 3.5% of the Company’s revenues from the sale of products. As of December 31, 2017, GPB had earned approximately $29,000 in royalties.
Debt Restructuring
On December 7, 2016, the Company entered into an exchange agreement with GPB with regard to the $1,525,000 in outstanding principal amount of senior secured convertible note originally issued to GPB on February 11, 2016, and the $306,863 in outstanding principal amount of the Company’s secured promissory note that GPB holds (see “—Secured Promissory Note”). Pursuant to the exchange agreement, upon completion of the next financing resulting in at least $1 million in cash proceeds, GPB will exchange both securities for a new convertible note in principal amount of $1,831,863. The new convertible note will mature on the second anniversary of issuance and will accrue interest at a rate of 19% per year. The Company will pay monthly interest coupons and, beginning one year after issuance, will pay amortized quarterly principal payments. Subject to resale restrictions under Federal securities laws and the availability of sufficient authorized but unissued shares of the Company’s common stock, the new convertible note will be convertible at any time, in whole or in part, at the holder’s option, into shares of common stock, at a conversion price equal to the price offered in the qualifying financing that triggers the exchange, subject to certain customary adjustments and anti-dilution provisions contained in the new convertible note. The new convertible note will include customary event of default provisions and a default interest rate of the lesser of 21% or the maximum amount permitted by law. Upon the occurrence of an event of default, GPB will be entitled to require the Company to redeem the new convertible note at 120% of the outstanding principal balance. The new convertible note will be secured by a lien on all of the Company’s assets, including its intellectual property, pursuant to the November 2013security agreement entered into by the Company and GPB in connection with the issuance of the original senior secured convertible note.Additionally, the Company further agreed to amend the warrant exchange program,issued with the Series Boriginal senior secured convertible note, to adjust the number of shares issuable upon exercise of the warrant exchanges,to equal the public offering warrant exchanges,number of shares that will initially be issuable upon conversion of the new convertible note (without giving effect to any beneficial ownership limitations set forth in the terms of the new convertible note). As an inducement to GPB to enter into these transactions, the Company agreed to increase the royalty payable to GPB pursuant to its consulting agreement with us from 3.5% to 3.85% of revenues from the sales of the Company’s products.
On August 7, 2017, the Company entered into a forbearance agreement with GPB, with regard to the senior secured convertible note. Under the forbearance agreement, GPB has agreed to forbear from exercising certain of its rights and remedies (but not waive such rights and remedies), arising as a result of the Company’s failure to pay the monthly interest due and owing on the note. In consideration for the forbearance, the Company agreed to waive, release, and discharge GPB from all claims against GPB based on facts existing on or before the date of the forbearance agreement in connection with the note, or the dealings between the Company and GPB, or the Company’s equity holders and GPB, in connection with the note. Pursuant to the forbearance agreement, the Company has reaffirmed its obligations under the note and related documents and executed a confession of judgment regarding the amount due under the note, which GPB may file upon any future event of default by the Company. During the forbearance period, the Company must continue to comply will all the terms, covenants, and provisions of the note and related documents.

The “Forbearance Period” shall mean the period beginning on the date hereof and ending on the earliest to occur of: (i) the date on which Lender delivers to Company a written notice terminating the Forbearance Period, which notice may be delivered at any time upon or after the occurrence of any Forbearance Default (as hereinafter defined), and (ii) the date Company repudiates or asserts any defense to any Obligation or other liability under or in respect of this Agreement or the Transaction Documents or applicable law, or makes or pursues any claim or cause of action against Lender; (the occurrence of any of the foregoing clauses (i) and (ii), a “Termination Event”). As used herein, the term “Forbearance Default” shall mean: (A) the occurrence of any Default or Event of Default other than the Specified Default; (B) the failure of Company to timely comply with any material term, condition, or covenant set forth in this Agreement; (C) the failure of any representation or warranty made by Company under or in connection with this Agreement to be true and complete in all material respects as of the date when made; or (D) Lender’s reasonable belief that Company: (1) has ceased or is not actively pursuing mutually acceptable restructuring or foreclosure alternatives with Lender; or (2) is not negotiating such alternatives in good faith. Any Forbearance Default will not be effective until one (1) Business Day after receipt by Company of written notice from Lender of such Forbearance Default. Any effective Forbearance Default shall constitute an immediate Event of Default under the Transaction Documents.
12.  INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share attributable to common stockholders amounts are computed by dividing the net income (loss) plus preferred stock dividends and deemed dividends on preferred stock by the weighted average number of shares outstanding during the year.
Diluted net income (loss) per share attributable to common stockholders amounts are computed by dividing the net income (loss) plus preferred stock dividends, deemed dividends on preferred stock, after-tax interest on convertible debt and convertible dividends by the weighted average number of shares outstanding during the year, plus Series C exchangesconvertible preferred stock, convertible debt, convertible preferred dividends and warrants convertible into common stock shares.
Diluted net loss per common share is the same as basic net loss per common share since the Company was operating in a loss position for 2017 and 2016. 
13.  SUBSEQUENT EVENTS
During February and March 2018, the Company entered into short-term convertible notes similar to those detailed in Note 10 - Short-Term Convertible Debt. The notes with Adar, Power-Up, Eagle and Auctus were for $87,000, $53,000, $66,000 and $150,000, respectively. Additionally, John Imhoff loaned the Company $150,000.


PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
UHY LLP is our current independent registered public accounting firm. Representatives of UHY LLP are expected to attend the annual meeting of stockholders, will have the opportunity to make a statement if they desire, and will be available to respond to appropriate questions.
We were billed by UHY LLP $147,000 and $176,000 during the fiscal years ended December 31, 2017 and 2016, respectively, for professional services, which include fees associated with the annual audit of financial statements and review of our quarterly reports on Form 10-Q, and other SEC filings.
   
 
2017
 
 
2016
 
Audit fees
 $116,000 
 $154,000 
Audit related fees
  24,000 
  15,000 
Tax fees
  7,000 
  7,000 
Total Fees
 $147,000 
 $176,000 
Audit Committee Pre-Approval Policy and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
Our Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Our independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with the pre-approval, and the warrant restructuring described above were exempt from registration underfees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
Item 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pursuant to Section 145 of the Delaware General Corporation Law, we have the power to indemnify any person made a party to any lawsuit by reason of being a director or officer of the Registrant, or serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Our Bylaws provide that the Registrant shall indemnify its directors and officers to the fullest extent permitted by Nevada law.
With regard to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of the Corporation in reliance upon Section 3(a)(9)the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the common shares being registered, we will, unless in the opinion of our counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act of 1933, as exchanges with existing securities holders exclusively where no commission or other remuneration was paid or given directly or indirectly for solicitingamended, and will be governed by the final adjudication of such exchanges. The remaining issuances of securities described above (as well as the issuances of common stock upon exercise of warrants received in the warrant exchange programs) were pursuant to private placements to accredited investors, and therefore were exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The securities described above are restricted securities for the purpose of the Securities Act. Any certificates representing the securities bear a restrictive legend providing that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or an exemption therefrom. All cash proceeds from these issuances were used in product development, working capital and other general corporate purposes.

case.

Item 15. RECENT SALES OF UNREGISTERED SECURITIES
N/A

ITEM 16. EXHIBITS

(a)Exhibits 

EXHIBIT INDEX

EXHIBIT NO.

DESCRIPTION

3.1Restated Certificate of Incorporation, as amended through MayNovember 3, 2016 (incorporated by reference to Exhibit 3.1 to the quarterly report on Form 10-Q for the quarter ended March 31, 2016, filed May 19, 2016)
3.2
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed March 23, 2012)
3.3*Form of Certificate of Designations (Series D)
4.1Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the amended registration statement on Form S-1/A (No. 333-22429) filed April 24, 1997)
4.2
Secured Promissory Note, dated September 10, 2014 (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed September 10, 2014)
4.3
Amendment #1 to Secured Promissory Note, dated March 10, 2015 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed March 19, 2015)
4.4
Amendment #2 to Secured Promissory Note, dated May 4, 2015 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed May 7, 2015)
4.5
Amendment #3 to Secured Promissory Note, dated June 1, 2015 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed June 5, 2015)
4.6
Amendment #4 to Secured Promissory Note, dated June 16, 2015 (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K filed June 30, 2015)
4.7
Amendment #5 to Secured Promissory Note, dated June 29, 2015 (incorporated by reference to Exhibit 10.5 to the current report on Form 8-K filed June 30, 2015)
4.8
Amendment #6 to Secured Promissory Note, dated January 20, 2016 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed February 16, 2016)
4.9
Amendment #7 to Secured Promissory Note, dated February 11, 2016 (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed February 16, 2016)
4.10
Amendment #8 to Secured Promissory Note, dated March 7, 2016 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed March 7, 2016)

II-4
4.11

4.11Senior Secured Convertible Note, dated February 12, 2016 (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed February 12,16, 2016)
4.12
Form of Exchange Note (GPB) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed December 7, 2016)
4.13
10% OID Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed December 30, 2016)
4.14
Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed February 16, 2017)
4.15
Form of Warrant (Standard Form) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K, filed September 14, 2010)
4.13
4.16
Form of Warrant (InterScan) (incorporated by reference to Exhibit 4.13 to the annual report on Form 10-K for the year ended December 31, 2013, filed March 27, 2014)
4.14
4.17
Form of Warrant (November 2011 Private Placement) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K/A, filed November 28, 2011)
4.15
4.18
Form of Warrant (Series B-Tranche A) (incorporated by reference to Exhibit 10.2 to amendment no. 1 to the current report on Form 8-K, filed May 23, 2013)
4.16
4.19
Form of Warrant (Series B-Tranche B) (incorporated by reference to Exhibit 10.3 to amendment no. 1 to the current report on Form 8-K, filed May 23, 2013)
4.17
4.20
Form of Warrant (Regulation S) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K, filed September 8, 2014)
4.18
4.21
Form of Warrant (2014 Public Offering Placement Agent) (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed December 4, 2014)

4.19
4.22
Form of Warrant (2014 Public Offering Warrant Exchanges) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed June 30, 2015)
4.20
4.23
Form of Warrant (Series C) (incorporated by reference to Exhibit 4.3 to the current report on Form 8-K filed June 30, 2015)
4.21
4.24
Form of Warrant (Senior Secured Convertible Note) (incorporated by reference to Exhibit 10.5 to the current report on Form 8-K filed February 12, 2016)
4.22
4.25
Form of Warrant (Series B-Tranche B Exchanges; GPB Exchange) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed June 14, 2016)
4.25*
4.26
Common Stock Purchase Warrant (Convertible Promissory Note) (incorporated by reference to Exhibit 4.2 to the current report on Form of Warrant (Series D)8-K filed February 16, 2017)
5.1*
5.1*
Opinion of Brunson Chandler & Jones, DayPLLC regarding validitylegality
10.11995 Stock Plan and form of Stock Option Agreement (Incorporated(incorporated by reference to Exhibit 10.2 to the registration statement on Form S-1 (No. 333-22429333-22429) filed February 27, 1997)
10.2
2005 Amendment to 1995 Stock Plan (incorporated by reference to Appendix 1 to the proxy statement on Schedule 14A, filed May 10, 2005)
10.3
2010 Amendment to 1995 Stock Plan (incorporated by reference to Exhibit 10.3 to the registration statement on Form S-8 (File No. 333-178261), filed December 1, 2011)
10.4
2012 Amendment to 1995 Stock Plan (incorporated by reference to Annex 1 to the proxy statement on Schedule 14A, filed April 30, 2012)
10.5
Agreement and Release, dated August 30, 2011 (incorporated by reference to 10.2 to the current report on Form 8-K, filed September 2, 2011)
10.6
Employment Agreement between the Company and Mark Faupel dated March 24, 2013 (incorporated by reference to Exhibit 10.10 to the annual report on Form 10-K for the year ended December 31, 2013, filed March 27, 2014)
10.7
Employment Agreement between the Company and Gene Cartwright, dated January 6, 2014 (incorporated by reference to Exhibit 10.11 to the annual report on Form 10-K for the year ended December 31, 2013, filed March 27, 2014).
10.8
Employment Agreement between the Company and Rick L. Fowler, automatically renewed on May 9, 2013 (incorporated by reference to Exhibit 10.12 to the annual report on Form 10-K for the year ended December 31, 2013, filed March 27, 2014)
10.9
Consulting Agreement between the Company and GPB Debt Holdings II LLC, dated February 12, 2016 (incorporated by reference to Exhibit 10.6 to the current report on Form 8-K filed February 12, 2016)
10.10
Securities Purchase Agreement (Magna Note), dated April 23, 2014, by and between the Company and Hanover Holdings I, LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed April 24, 2014).
10.11Registration Rights Agreement (Magna Note), dated April 23, 2014, by and between the Company and Hanover Holdings I, LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed April 24, 2014)
10.12
Standstill Agreement (Magna Note), dated as of November 6, 2014, by and between the Company and Magna Equities II, LLC (incorporated by reference to Exhibit 1910.19 to the registration statement on Form S-1 (No. 333-198733) filed November 10, 2014)
10.13
Exchange Agreement (Magna Note), dated as of June 25, 2015 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed June 30, 2015)
10.14
Subscription Agreement (Regulation S), accepted September 2, 2014 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed September 8, 2014)

II-5
10.15

10.15Form of Registration Rights Agreement (Regulation S), dated September 8, 2014 by and between the Company and the investor party thereto (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K, filed September 8, 2014)
10.16
Note Purchase Agreement (Secured Promissory Note), dated as of September 10, 2014, by and between the Company and Tonaquint, Inc. (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed September 10, 2014)
10.17
Security Agreement (Secured Promissory Note), dated as of September 10, 2014, by the Company and Tonaquint, Inc. (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K, filed September 10, 2014)
10.18
Form of Securities Purchase Agreement (2014 Public Offering) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed December 4, 2014)
10.19
Placement Agent Agreement (2014 Public Offering), by and between the Company and Olympus Securities, LLC (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed December 4, 2014)
10.20
Amendment to Securities Purchase Agreement (2014 Public Offering), dated as of June 26, 2015 (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed June 30, 2015)

10.21
Form of Letter Agreement (2014 Public Offering Warrant Exchanges) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed June 30, 2015)
10.22
Securities Purchase Agreement (Series C), dated June 29, 2015 (incorporated by reference to Exhibit 10.6 to the current report on Form 8-K filed June 30, 2015)
10.23
Registration Rights Agreement (Series C), dated June 29, 2015 (incorporated by reference to Exhibit 10.7 to the current report on Form 8-K filed June 30, 2015)
10.24
Form of Joinder Agreement (Series C) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed July 13, 2015)
10.25
Interim Securities Purchase Agreement (Series C), dated September 3, 2015 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed September 3, 2015)
10.26
Securities Purchase Agreement (Senior Secured Convertible Note), dated February 11, 2016 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed February 12, 2016)
10.27
Security Agreement (Senior Secured Convertible Note), dated February 11, 2016 (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K filed February 12, 2016)
10.28
Rollover and Amendment Agreement, dated April 27, 2016, by and between the Company and Aquarius Opportunity Fund (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed May 3, 2016)
10.29
Form of Letter Agreement (Series C Exchanges) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed May 3, 2016)
10.30
License Agreement, dated June 5, 2016 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed June 8, 2016)
10.31
Form of Warrant Exchange Agreement (Warrant-for-Shares) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed June 14, 2016)
10.32
Form of Warrant Exchange Agreement (Warrant-for-Warrant) (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed June 14, 2016)
10.33**
10.33
Royalty Agreement, dated September 6, 2016, between the Company and Imhoff and Maloof (incorporated by reference to Exhibit 10.1 to the current report on Form of 8-K filed September 8, 2016)
10.34
Lockup and Exchange Agreement, dated November 2, 2016, by the Company and GHS Investments, LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed November 4, 2016)
10.35
Exchange Agreement, dated December 7, 2016, between the Company and GPB Debt Holdings II LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed December 7, 2016)
10.36
Amendment to Consulting Agreement, dated December 7, 2016, between the Company and GPB Debt Holdings II LLC (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed December 7, 2016)
10.37
Securities Purchase Agreement, dated December 28, 2016, between the Company and RedDiamond (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed December 30, 2016)
10.34**
10.38
Placement Agent Agreement between Shandong Yaohua Medical Instrument Corporation and Guided Therapeutics, Inc., Confidential, Final 22 January 2017 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed January 26, 2017)
10.39
Guided Therapeutics-Shenghuo Medical Agreement, 22 Jan 2017 (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed January 26, 2017)
10.40
Securities Purchase Agreement, dated as of February 13, 2017, by and between Guided Therapeutics, Inc. and Auctus Fund, LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed February 16, 2017)
10.41
Securities Purchase Agreement, dated as of March 17, 2017, by and between Guided Therapeutics, Inc. and Eagle Equities LLC and Adar Bays LLC and on May 18, 2017 with GHS Investments LLC (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed May 24, 2017)
10.42
Forbearance Agreement, dated as of August 8, 2017, by and between Guided Therapeutics, Inc. and GPB Debt Holdings II LLC (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed August 14, 2017)
10.43
Securities Purchase Agreement, dated as of August 18, 2017, by and between Guided Therapeutics, Inc. and Power Up Lending Group LTD (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed August 24, 2017)
10.44
Securities Purchase Agreement, dated as of October 12, 2017, by and between Guided Therapeutics, Inc. and Power Up Lending Group LTD (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed October 25, 2017)
10.45*
Equity Financing Agreement dated March 1, 2018 by and between the Company and Ladenburg Thalmann & Co.GHS Investments LLC
10.46*
Form of Registration Rights Agreement dated March 8, 2018 by and between the Company and GHS Investments LLC
21.1
Subsidiaries (incorporated by reference to Exhibit 21.1 to the registration statement on Form S-1 (No. 333-169755) filed October 5, 2010)
23.1*
23.1*
Consent of UHY LLP.
23.2**Consent of Jones Day (included in Exhibit 5.1).
24.1Powers of Attorney (included at signature page).LLP
101.1*Interactive Data File
*Filed herewith
**To be filed via pre-effective amendment

II-6
 

*Filed herewith

ITEM 17. UNDERTAKINGS.

(a)

The undersigned registrant hereby undertakes:

(1)To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i)To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

(ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

(iii)To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2)That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(4)That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i)Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

(ii)Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

(iii)The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

(iv)Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

(b)

1.To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
i.To include any Prospectus required by section 10(a)(3) of the Securities Act of 1933;
ii.
To reflect in the Prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
iii.To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
2.
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
3.To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
4.That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
i.
Any Preliminary Prospectus or Prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
ii.Any free writing Prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
iii.
The portion of any other free writing Prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
iv.Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
5.That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: Each Prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than Prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or Prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or Prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or Prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons, of the registrant pursuant to the foregoing provisions, or otherwise, the registrant haswe have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrantus of expenses incurred or paid by a director, officer or controlling person of the registrantcorporation in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrantwe will, unless in the opinion of itsour counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by itus is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue.

II-7
case.
 


SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Norcross, State of Georgia, on June 28, 2016.

5, 2018.
  GUIDED THERAPEUTICS, INC.
  
 By:
Guided Therapeutics, Inc.
 /s/Gene S. Cartwright
 

/s/ Gene Cartwright
By: Gene Cartwright
Its: President, Chief Executive OfficerCEO and Acting

Chief Financial Officer

CFO

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gene S. Cartwright

In accordance with full power of substitution and resubstitution, as attorney-in-fact of the undersigned, for him and in his name, place and stead, to execute and file with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933 any and all amendments, supplements and exhibits to this Registration Statement (including pre-effective and post-effective amendments and supplements), to execute and file any and all other applications or other documents to be filed with the Commission, such attorney to have full power to act with or without the others, and to have full power and authority to do and perform, in the name and on behalf of the undersigned, every act whatsoever necessary, advisable or appropriate to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and approving the act of said attorney and any such substitute. 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has beenwas signed by the following persons in the capacities and on the dates indicated:

stated:
DATE SIGNATURE TITLE
     
June 28, 20165, 2018 /s/ Gene S. Cartwright President, Chief Executive Officer, Acting Chief Financial
Gene S. CartwrightOfficer (Principal Executive Officer and Principal Financial and Accounting Officer)
Gene S. Cartwright
     

June 28, 2016

5, 2018		 /s/ Michael C. James 

Chairman of the Board and Director

   Michael C. James  
     

June 28, 2016

5, 2018		  /s//s/ John E. Imhoff 

Director

   John E. Imhoff  

June 28, 2016

 /s/ Jonathan M. Niloff 

June 5, 2018/s/ Richard P. BlumbergDirector

  Jonathan M. NiloffRichard P. Blumberg  

June 28, 2016

 /s/ Linda Rosenstock 

June 5, 2018/s/ Mark FaupelChief Operating Officer and Director

  Linda Rosenstock Mark Faupel 

II-8 
    

EXHIBIT INDEX

EXHIBIT NO.

DESCRIPTION

3.1Restated Certificate of Incorporation, as amended through May 3, 2016 (incorporated by reference to Exhibit 3.1 to the quarterly report on Form 10-Q for the quarter ended March 31, 2016, filed May 19, 2016)
3.2Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed March 23, 2012)
3.3*Form of Certificate of Designations (Series D)
4.1Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the amended registration statement on Form S-1/A (No. 333-22429) filed April 24, 1997)
4.2Secured Promissory Note, dated September 10, 2014 (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed September 10, 2014)
4.3Amendment #1 to Secured Promissory Note, dated March 10, 2015 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed March 19, 2015)
4.4Amendment #2 to Secured Promissory Note, dated May 4, 2015 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed May 7, 2015)
4.5Amendment #3 to Secured Promissory Note, dated June 1, 2015 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed June 5, 2015)
4.6Amendment #4 to Secured Promissory Note, dated June 16, 2015 (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K filed June 30, 2015)
4.7Amendment #5 to Secured Promissory Note, dated June 29, 2015 (incorporated by reference to Exhibit 10.5 to the current report on Form 8-K filed June 30, 2015)
4.8Amendment #6 to Secured Promissory Note, dated January 20, 2016 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed February 16, 2016)
4.9Amendment #7 to Secured Promissory Note, dated February 11, 2016 (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed February 16, 2016)
4.10Amendment #8 to Secured Promissory Note, dated March 7, 2016 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed March 7, 2016)
4.11Senior Secured Convertible Note, dated February 12, 2016 (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed February 12, 2016)
4.12Form of Warrant (Standard Form) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K, filed September 14, 2010)
4.13Form of Warrant (InterScan) (incorporated by reference to Exhibit 4.13 to the annual report on Form 10-K for the year ended December 31, 2013, filed March 27, 2014)
4.14Form of Warrant (November 2011 Private Placement) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K/A, filed November 28, 2011)
4.15Form of Warrant (Series B-Tranche A) (incorporated by reference to Exhibit 10.2 to amendment no. 1 to the current report on Form 8-K, filed May 23, 2013)
4.16Form of Warrant (Series B-Tranche B) (incorporated by reference to Exhibit 10.3 to amendment no. 1 to the current report on Form 8-K, filed May 23, 2013)
4.17Form of Warrant (Regulation S) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K, filed September 8, 2014)
4.18Form of Warrant (2014 Public Offering Placement Agent) (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed December 4, 2014)
4.19Form of Warrant (2014 Public Offering Warrant Exchanges) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed June 30, 2015)
4.20Form of Warrant (Series C) (incorporated by reference to Exhibit 4.3 to the current report on Form 8-K filed June 30, 2015)
4.21Form of Warrant (Senior Secured Convertible Note) (incorporated by reference to Exhibit 10.5 to the current report on Form 8-K filed February 12, 2016)
4.22Form of Warrant (Series B-Tranche B Exchanges; GPB Exchange) (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed June 14, 2016)
4.25*Form of Warrant (Series D)
5.1**Opinion of Jones Day regarding validity
10.11995 Stock Plan and form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the registration statement on Form S-1 (No. 333-22429) filed February 27, 1997)
10.22005 Amendment to 1995 Stock Plan (incorporated by reference to Appendix 1 to the proxy statement on Schedule 14A, filed May 10, 2005)
10.32010 Amendment to 1995 Stock Plan (incorporated by reference to Exhibit 10.3 to the registration statement on Form S-8 (File No. 333-178261), filed December 1, 2011)
10.42012 Amendment to 1995 Stock Plan (incorporated by reference to Annex 1 to the proxy statement on Schedule 14A, filed April 30, 2012)
10.5Agreement and Release, dated August 30, 2011 (incorporated by reference to 10.2 to the current report on Form 8-K, filed September 2, 2011)
10.6Employment Agreement between the Company and Mark Faupel dated March 24, 2013 (incorporated by reference to Exhibit 10.10 to the annual report on Form 10-K for the year ended December 31, 2013, filed March 27, 2014)
10.7Employment Agreement between the Company and Gene Cartwright, dated January 6, 2014 (incorporated by reference to Exhibit 10.11 to the annual report on Form 10-K for the year ended December 31, 2013, filed March 27, 2014).
10.8Employment Agreement between the Company and Rick L. Fowler, automatically renewed on May 9, 2013 (incorporated by reference to Exhibit 10.12 to the annual report on Form 10-K for the year ended December 31, 2013, filed March 27, 2014)
10.9Consulting Agreement between the Company and GPB Debt Holdings II LLC, dated February 12, 2016 (incorporated by reference to Exhibit 10.6 to the current report on Form 8-K filed February 12, 2016)
10.10Securities Purchase Agreement (Magna Note), dated April 23, 2014, by and between the Company and Hanover Holdings I, LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed April 24, 2014).
10.11Registration Rights Agreement (Magna Note), dated April 23, 2014, by and between the Company and Hanover Holdings I, LLC (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed April 24, 2014)
10.12Standstill Agreement (Magna Note), dated as of November 6, 2014, by and between the Company and Magna Equities II, LLC (incorporated by reference to Exhibit 19 to the registration statement on Form S-1 (No. 333-198733) filed November 10, 2014)
10.13Exchange Agreement (Magna Note), dated as of June 25, 2015 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed June 30, 2015)
10.14Subscription Agreement (Regulation S), accepted September 2, 2014 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed September 8, 2014)
10.15Form of Registration Rights Agreement (Regulation S), dated September 8, 2014 by and between the Company and the investor party thereto (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K, filed September 8, 2014)
10.16Note Purchase Agreement (Secured Promissory Note), dated as of September 10, 2014, by and between the Company and Tonaquint, Inc. (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K, filed September 10, 2014)
10.17Security Agreement (Secured Promissory Note), dated as of September 10, 2014, by the Company and Tonaquint, Inc. (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K, filed September 10, 2014)
10.18Form of Securities Purchase Agreement (2014 Public Offering) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed December 4, 2014)
10.19Placement Agent Agreement (2014 Public Offering), by and between the Company and Olympus Securities, LLC (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed December 4, 2014)
10.20Amendment to Securities Purchase Agreement (2014 Public Offering), dated as of June 26, 2015 (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed June 30, 2015)
10.21Form of Letter Agreement (2014 Public Offering Warrant Exchanges) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed June 30, 2015)
10.22Securities Purchase Agreement (Series C), dated June 29, 2015 (incorporated by reference to Exhibit 10.6 to the current report on Form 8-K filed June 30, 2015)
10.23Registration Rights Agreement (Series C), dated June 29, 2015 (incorporated by reference to Exhibit 10.7 to the current report on Form 8-K filed June 30, 2015)
10.24Form of Joinder Agreement (Series C) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed July 13, 2015)
10.25Interim Securities Purchase Agreement (Series C), dated September 3, 2015 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed September 3, 2015)
10.26Securities Purchase Agreement (Senior Secured Convertible Note), dated February 11, 2016 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed February 12, 2016)
10.27Security Agreement (Senior Secured Convertible Note), dated February 11, 2016 (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K filed February 12, 2016)
10.28Rollover and Amendment Agreement, dated April 27, 2016, by and between the Company and Aquarius Opportunity Fund (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed May 3, 2016)
10.29Form of Letter Agreement (Series C Exchanges) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed May 3, 2016)
10.30License Agreement, dated June 5, 2016 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed June 8, 2016)
10.31Form of Warrant Exchange  Agreement (Warrant-for-Shares) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed June 14, 2016)
10.32Form of Warrant Exchange Agreement (Warrant-for-Warrant) (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed June 14, 2016)
10.33**Form of Securities Purchase Agreement
10.34**Placement Agent Agreement, by and between the Company and Ladenburg Thalmann & Co.
21.1Subsidiaries (incorporated by reference to Exhibit 21.1 to the registration statement on Form S-1 (No. 333-169755) filed October 5, 2010)
23.1*Consent of UHY LLP.
23.2**Consent of Jones Day (included in Exhibit 5.1).
24.1Powers of Attorney (included at signature page).
101.1*Interactive Data File
*Filed herewith
**To be filed via pre-effective amendment

104