Filed
pursuant to Rule 424(b)(4)
Registration No. 333-198733
PROSPECTUS
25,178,123 Shares of Common Stock
Consisting of:
16,785,415 Shares
of Common Stock
16,785,415 Warrants to Purchase up to 8,392,708 Shares of Common Stock
8,392,708 Shares of Common Stock Underlying the Warrants
of
Guided Therapeutics, Inc.
________________________
We are offering up to 25,178,123 shares
of our common stock, consisting of up to 16,785,415 shares of common stock, warrants to purchase up to 8,392,708 shares of our
common stock and 8,392,708 shares of common stock underlying such warrants. Each share of common stock we sell in the offering
will be accompanied by a warrant to purchase one-half of a share of common stock. Each share of common stock and warrant will be
sold at a combined price of $0.225. The common stock and warrants will be issued separately. We are not required to sell any specific
dollar amount or number of securities, but will use our best efforts to sell all of the securities being offered. This offering
will terminate on December 15, 2014 unless the offering is fully subscribed before that date or we decide to terminate the offering
prior to that date. The offering price for the common stock and warrants and the exercise price of the warrants will remain fixed
for the duration of the offering. All costs associated with the registration will be borne by us.
Our common stock is listed on the OTCQB
marketplace under the symbol “GTHP.” We do not intend to apply for listing of the warrants on any securities exchange
and we do not expect that the warrants will be quoted on the OTCQB marketplace. The last reported sale price of our common stock
on the OTCQB on November 14, 2014 was $0.25 per share.
|
|
Per Share (1) |
|
Total |
|
Public Offering Price |
|
$ |
0.225 |
|
$ |
3,776,716 |
|
Placement Agent’s Fees (2) |
|
$ |
0.014 |
|
$ |
233,792 |
|
Offering Proceeds, Before Expenses |
|
$ |
0.211 |
|
$ |
3,542,925 |
|
______________________
|
(1) |
Per share price represents the offering price for a share of common stock and a warrant to purchase one-half of a share of common stock. |
|
(2) |
We have agreed to issue to the placement agent a warrant to purchase shares of common stock equal to an aggregate of up to 4.5% of the total shares of common stock sold in the offering at an exercise price of 125% of the public offering price, and to reimburse the placement agent for certain fees incurred by its counsel, up to the lesser of $75,000 or 2% of the gross proceeds of the offering. The calculation of the number of warrants to be received by the placement agent will not be based on the number of shares of common stock which are underlying the warrants to be issued in this offering. |
Olympus Securities, LLC has agreed to
act as our placement agent in connection with this offering. The placement agent is not purchasing the securities offered by us,
and is not required to sell any specific number or dollar amount of securities, but will use its best efforts to sell the securities
offered. We have agreed to pay the placement agent a cash placement fee equal to the lesser of (1) $600,000 and (2) 8% of the aggregate
gross proceeds to us from the sale of the common stock in the offering, for those investors the placement agent introduces to us,
plus 4% of the aggregate gross proceeds of the offering, for those investors we provide to the placement agent. We estimate total
expenses of this offering, excluding the placement agent fees, will be approximately $315,000. Because there is no minimum offering
amount required as a condition to closing in this offering, the actual public offering amount, placement agent fees, and proceeds
to us, if any, are not presently determinable and may be substantially less than the total maximum offering amounts set forth above.
All 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. See “Plan of Distribution” beginning on page 14 of this prospectus for more information
on this offering and the placement agent arrangements.
Investing in our common stock involves
a high degree of risk. These risks are described under the caption “Risk Factors” that begins on page 4 of this prospectus.
You should rely only on the information
contained in this prospectus or a prospectus supplement or amendment thereto. We have not authorized anyone to provide you with
different information.
Neither the Securities and Exchange
Commission, or SEC, nor any state securities commission has approved or disapproved of the common stock that may be offered under
this prospectus, nor have any of these organizations determined if this prospectus is truthful or complete. Any representation
to the contrary is a criminal offense.
The date of this prospectus is November
26, 2014.
TABLE OF CONTENTS
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Page |
|
|
SUMMARY |
1 |
|
|
RISK FACTORS |
4 |
|
|
USE OF PROCEEDS |
13 |
|
|
CAPITALIZATION |
13 |
|
|
PLAN OF DISTRIBUTION |
14 |
|
|
DESCRIPTION OF CAPITAL STOCK |
16 |
|
|
DILUTION |
22 |
|
|
OUR BUSINESS |
24 |
|
|
PROPERTIES |
32 |
|
|
LEGAL PROCEEDINGS |
32 |
|
|
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS |
32 |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
33 |
|
|
DIRECTORS AND EXECUTIVE OFFICERS |
39 |
|
|
CORPORATE GOVERNANCE |
41 |
|
|
EXECUTIVE COMPENSATION |
43 |
|
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
45 |
|
|
LEGAL MATTERS |
45 |
|
|
EXPERTS |
45 |
|
|
WHERE YOU CAN GET MORE INFORMATION |
45 |
|
|
About
This Prospectus
You should rely
only on the information contained in this prospectus or a prospectus supplement. We have not authorized any 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 only the securities offered hereby, but only under circumstances and in jurisdictions where it is
lawful to do so. You should assume that the information appearing in this prospectus is accurate only as of the date hereof.
Our business, financial condition, results of operations and prospects may have changed.
The terms “Guided
Therapeutics,” “Company,” “our,” “we,” and “us,” as used in this prospectus,
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
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 approval from the FDA and corresponding
foreign agencies; |
| · | 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.
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,
before making an investment decision.
Our Company
We are a medical
technology company focused on developing innovative medical devices that have the potential to improve healthcare. Our primary
focus is the development of our LuViva™ Advanced Cervical Scan, our non-invasive cervical cancer detection device (referred
to as LuViva), and extension of our cancer detection technology into other cancers, including lung and esophageal. Our technology,
including products in research and development, primarily relates to biophotonics technology for the non-invasive detection of
cancers.
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.”
For the three
months ended September 30, 2014 and 2013, we reported net losses of $3.0 million and $1.4 million, respectively. For the years
ended December 31, 2013 and 2012, we reported net losses of $7.2 million and $4.4 million, respectively.
Non-Invasive Cervical
Cancer Detection
We believe LuViva
will provide a less invasive and painless alternative to conventional tests for cervical cancer detection. We also believe LuViva
can improve patient well-being and reduce healthcare costs, since it reduces or eliminates pain, is convenient to use and provides
rapid results at the point-of-care. We completed enrollment in our U.S. Food and Drug Administration (“FDA”) pivotal
trial of LuViva in 2008 and on November 18, 2010, the FDA accepted our completed premarket approval (“PMA”) application,
effective September 23, 2010, for substantive review. On March 7, 2011, we announced that the FDA had inspected two clinical trial
sites 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 FDA. On November
14, 2012 we filed an amended PMA with the FDA. On September 6, 2013, we received a letter from the FDA with additional questions,
and met with the FDA on May 8, 2014 to discuss our response. On July 25, 2014, we filed another amended PMA application. We expect
to hear back from the FDA regarding the submission by January 24, 2015 or sooner. If we receive a favorable result from the FDA
review, U.S. launch of LuViva could occur as early as the second half of 2015. However, we cannot be assured we will be able to
launch on this timetable, or at all. Internationally, we have had regulatory approval to sell LuViva in Europe since receipt of
our Edition 3 CE Mark in January 2014. LuViva has marketing approval from Health Canada, the Singapore Health Sciences Authority,
and Mexico’s Federal Commission for Protection Against Health Risks.
Other Cancers
We believe our
non-invasive cervical cancer detection technology can be applied to other cancers as well. To that end, from 2008 until early 2013
we had worked exclusively with Konica Minolta Opto, Inc., a subsidiary of Konica Minolta, Inc., a Japanese corporation based in
Tokyo (“Konica Minolta”), to adapt our cervical cancer detection technology primarily for the detection of esophageal
cancer. On February 6, 2013, we announced that we had terminated and replaced our existing agreements with Konica Minolta with
a new license agreement allowing us to manufacture and to develop a non-invasive esophageal cancer detection product from Konica
Minolta and based on our biophotonic technology platform (see “Our Business—Lung and Esophageal Cancer Detection—Konica
Minolta”).
Recent Developments
On
September 10, 2014, we entered into a note purchase agreement with Tonaquint, Inc., pursuant to which we sold a secured
promissory note to Tonaquint with an initial principal amount of $1,275,000, for a purchase price of $700,000 (an original
issue discount of $560,000). The note does not bear interest, and will be due six months from issuance. We may prepay the
note at any time, with the following discounts applied: if we prepay the note on or before the 70th day from the date of
issuance, a $420,000 reduction of the outstanding principal amount of the note will be applied, and if we prepay the note
after the 70th day, but on or before the 120th day from the date of issuance, a $210,000 reduction of the outstanding
principal amount of the note will be applied. 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. See
“Description of Securities—Secured Promissory Note.” In this prospectus, we refer to this transaction
as the secured note offering. We intend to offer Tonaquint the opportunity to participate in the offering, at least to the
extent of the then-outstanding principal and interest on the secured note, by extinguishing all or a portion of the debt on a
dollar-for-dollar basis.
On September 2,
2014, we entered into a subscription agreement with ITEM Medikal Teknolojileri LTD STI, a Turkish corporation, referred to as
ITEM, pursuant to which, on September 27, 2014 we sold l 651,042 shares of our common stock and a warrant to purchase an additional
325,521 shares, for an aggregate purchase price of $200,000 in a private placement pursuant to Regulation S promulgated under
the Securities Act. The warrant is immediately exercisable, has an exercise price per share of $0.4608, and expires five years
from the date of issuance. The warrant is subject to a mandatory exercise provision should the average trading price of our common
stock over any 30 consecutive day trading period exceed $0.9216. In this prospectus, we refer to this transaction as the Regulation
S offering.
On October 23,
2014 and May 21, 2014, our President and CEO, Gene Cartwright, advanced us $30,000 and $100,000, respectively, in cash for 5%
simple interest notes, and on August 4, 2014, Mr. Cartwright advanced us $200,000 in cash for a 5% 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. We intend to repay certain of the advances with proceeds from the offering. In this prospectus,
we refer to these advances as the bridge loans.
On July 17, 2014,
we announced that the U.S. Patent and Trademark Office granted a new patent with 22 claims that support the technology behind
LuViva. Patent number 8,781,560 B2 entitled “Method and Apparatus for Rapid Detection and Diagnosis of Tissue Abnormalities”
covers the use of two types of spectroscopy in conjunction with images of tissue to detect abnormalities in tissue.
On July 10, 2014,
we announced that LuViva was approved for sale in Mexico by the Federal Commission for Protection Against Health Risks.
On June 20, 2014,
we held our annual meeting of stockholders in Atlanta, Georgia. At the meeting, each of Mr. Cartwright, Ronald Hart, John Imhoff,
Michael James, Jonathan Niloff, and Linda Rosenstock were re-elected as directors of the Company to serve until our annual meeting
in 2015 or until each such director’s successor has been elected. In addition, our stockholders approved an amendment to
our Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of common stock to a total of
195,000,000 shares, approved, on a non-binding basis, the compensation of our named executive officers, and ratified the appointment
of UHY LLP as our independent registered public accounting firm for the 2014 fiscal year.
On May 27, 2014,
we presented the results of a blinded clinical study, in which LuViva identified 100% of all cervical disease cases, at the International
Federation for Cervical Pathology and Colposcopy in London.
On April 23, 2014,
we entered into a securities purchase agreement with Magna Equities II, LLC (f/k/a Hanover Holdings I, LLC), an affiliate of Magna
Group, referred to as Magna. Pursuant to the purchase agreement, we sold Magna a 6% senior convertible note with an initial principal
amount of $1.5 million and an 18-month term, for a purchase price of $1.0 million (an approximately 33.3% original issue discount).
Additionally, pursuant to the purchase agreement, Magna purchased on May 23, 2014 an additional 6% senior convertible note with
a principal amount of $2.0 million and an 18-month term, for a fixed purchase price of $2.0 million. Pursuant to the terms of
the initial senior convertible note, $500,000 of the outstanding principal amount (together with any accrued and unpaid interest
with respect to such portion) was automatically extinguished upon satisfaction of certain conditions. Subject to certain limitations,
the senior convertible notes are convertible at any time, in whole or in part, at Magna’s option, into shares of our common
stock, at a conversion price equal to the lesser of $0.55 per share and a discount from the lowest daily volume-weighted average
price of our common stock in the five trading days prior to conversion. The discount is 20% if the conversion takes place on or
prior to December 19, 2014 (November 20, 2014 for the initial senior convertible note, pursuant to the November 6, 2014 agreement
described below), and 25% if after that date. We paid Magna a commitment fee for entering into the purchase agreement in the form
of 321,820 shares of common stock. See “Description of Securities—Senior Convertible Notes”. On November 6,
2014, Magna agreed to refrain from converting any portion of the senior convertible notes or selling any shares of our common
stock until after November 21, 2014, in exchange for an acceleration of the scheduled increase in the conversion discount on the
April 23, 2014 senior convertible note from December 19, 2014 to November 21, 2014. We intend to offer Magna the opportunity
to participate in the offering at least up to the extent of the then-outstanding principal and interest on the senior convertible
notes, by extinguishing all or a portion of the debt on a dollar-for-dollar basis.
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, Messrs. Cartwright and James, and Drs. Rosenstock and Imhoff, advanced
us $50,000, $50,000, $50,000, and $25,000 in cash, respectively, for 10% simple interest notes. 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.
The Offering
Securities offered |
Up to 25,178,123 shares of common stock, consisting of:
Up to 16,785,415
shares of common stock
Up to 16,785,415 Warrants
to purchase one-half of a share of common stock
Up to 8,392,708
shares of common stock issuable upon exercise of warrants |
Common stock outstanding prior to offering |
79,903,439
(1) |
Common stock to be outstanding after the offering |
96,688,854 (2) |
Use of proceeds |
We intend to apply any proceeds received
in connection with the offering to continue to seek FDA approval for LuViva, to repay certain of the bridge loans, 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. See “Use of Proceeds” on page 13.
|
Market
for the common stock |
Our common
stock is listed on the OTCQB marketplace under the symbol GTHP.” See “Market for our Common Stock and Related
Stockholder Matters” on page 32. |
|
|
Participation
rights |
Investors who purchase at least $2 million in the offering
will have the contractual right with us, for the 12 months immediately following the consummation of the offering, to participate
in any offerings of our common stock or securities exercisable for, or convertible into, our common stock (other than certain exempt
offerings), that we may conduct. This contractual right will be limited, for all qualifying investors in any particular offering,
to the aggregate purchase of up to 25% of securities offered in that offering. See "Plan of Distribution" on page 14.
|
Risk factors |
You should read “Risk Factors”
beginning on page 4 for an explanation of the risks of investing in our common stock and warrants.
|
___________________________
|
(1) |
Excludes 9,933,658 shares of our common stock reserved for issuance upon conversion
of our outstanding senior convertible notes, 5,815,118 shares reserved for issuance upon conversion of our Series B convertible
preferred stock, 1,172,913 shares reserved for issuance as dividends on the Series B convertible preferred stock, 16,590,141
shares reserved for issuance upon the exercise of outstanding warrants to purchase common stock, and 6,707,990 shares reserved
for issuance upon exercise of outstanding options awarded under our 1995 Stock Plan, all as of November 14, 2014. |
| (2) | Assumes the sale of all shares of our common stock covered by this prospectus, except (i) shares
of common stock that could be issued upon exercise of the warrants sold as part of this offering and (ii) the shares of common
stock underlying the warrants issuable to the placement agent in connection with this offering. |
Our principal executive
and operations facility is located at 5835 Peachtree Corners East, Suite D, Norcross, Georgia 30092, and our telephone number is
(770) 242-8723.
Risk
Factors
Your investment
in shares of our common stock and warrants involves substantial risks. In consultation with your own advisers, you should carefully
consider, among other matters, the factors set forth below before deciding whether an investment in shares of our common stock
and warrants is suitable for you. If 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. Some statements in this prospectus, including statements in
the following risk factors, constitute forward-looking statements. See “Forward-Looking Statements” in this prospectus.
Risks Related to Our Common Stock
and this Offering
You will
experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.
You will incur
immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of up to 16,785,415 shares
of common stock and warrants to purchase an additional 8,392,708 shares of our common stock, and after deducting placement agent
commissions and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $0.2325
per share, at the public offering price, assuming no exercise of the warrants.
The number
of shares of our common stock issuable upon the conversion of our outstanding senior convertible notes and Series B convertible
preferred stock or exercise of outstanding warrants and options is substantial.
As of November
14, 2014, the outstanding senior convertible notes were convertible into an aggregate of 9,933,658 shares of our common
stock and the outstanding shares of our Series B convertible preferred stock were convertible into an aggregate of 5,815,118 shares
of our common stock. In addition, as of that date we had warrants outstanding and issuable those are exercisable for an aggregate
of 16,590,141 shares and outstanding options for 6,707,990 shares. Together, the shares of common stock issuable upon conversion
or exercise of these securities constitute approximately 49% of the total number of shares of common stock then issued and outstanding.
Further, under the terms of our senior convertible notes and Series B convertible 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 “Risk Factors—Adjustments to the conversion price for our senior convertible notes or our Series B convertible
preferred stock, and the exercise price for certain of our warrants, will dilute the ownership interests of our existing stockholders.”
Substantial
future sales of shares of our common stock in the public market could cause our stock price to fall.
If our common stockholders
(including those persons who may become common stockholders upon conversion of our senior convertible notes or Series B convertible
preferred stock or exercise of our warrants) 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.
In addition, our
Series B convertible preferred stock and certain of our outstanding warrants contain anti-dilution provisions that may, under certain
circumstances, reduce the conversion or exercise price or increase the number of shares issuable, or both.
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
issuable and the applicable exercise price pursuant to the terms of the agreements under which we previously issued convertible
securities, as discussed in more detail under “Risk Factors—Adjustments to the conversion price for our senior convertible
notes or our Series B convertible preferred stock, and the exercise price for certain of our warrants, will dilute the ownership
interests of our existing stockholders.”
Adjustments
to the conversion price for our senior convertible notes or our Series B convertible preferred stock, and the exercise price for
certain of our warrants, will dilute the ownership interests of our existing stockholders.
Under the terms
of our senior convertible notes, the conversion price fluctuates with the 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 senior convertible
notes will increase, and may result in the issuance of a significant number of additional shares of our common stock upon conversion.
Under the terms
of our Series B convertible preferred stock and certain warrants issued with the Series B convertible preferred stock, subject
to certain exceptions, the conversion price for the Series B convertible preferred stock and the exercise price for the warrants
will be lowered if we issue common stock at a per share price below the then conversion price for the Series B convertible preferred
stock or the then exercise price for the warrants, respectively. Reductions in the conversion price for the Series B convertible
preferred stock and the exercise price for the warrants may result in the issuance of a significant number of additional shares
of our common stock upon conversion or exercise of these securities, which could result in dilution in the value of the shares
of our outstanding common stock and the voting power represented thereby.
Due to the
issuance of shares of common stock upon a recent conversion of our senior convertible notes, the conversion price of the Series
B convertible preferred stock has been lowered from $0.68 per share to $0.2196 per share, such that, as of such date, each share
was convertible into 4,554 shares of common stock, and one tranche of the warrants, previously exercisable for 1,858,089 shares
of common stock at $1.08 per share, was exercisable for 9,138,141 shares at $0.2196 per share.
The actual public offering amount, placement
agent fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the amounts set forth
above.
The actual public offering
amount, placement agent fees, and proceeds to us, if any, in this offering are not presently determinable and may be substantially
less than the maximum offering amounts set forth in this prospectus.
We will
have immediate and broad discretion over the use of the net proceeds from this offering and we may use these proceeds in ways
with which you may not agree.
We currently intend
to apply any proceeds received in connection with the offering to continue to seek FDA approval for LuViva, and to repay certain
of the bridge loans. See “Use of Proceeds.” However, we have considerable discretion in the application of the proceeds
of this offering. We may also use the money for other corporate purposes. You must rely on our judgment regarding the application
of the net proceeds of this offering. Our judgment may not result in positive returns on your investment and you will not have
an opportunity to evaluate the economic, financial, or other information upon which we base our decisions.
We are
significantly influenced by our directors, executive officers and their affiliated entities.
Our directors,
executive officers and entities affiliated with them beneficially owned an aggregate of about 19.28% of our outstanding
common stock as of November 14, 2014. 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.
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 listed on the OTCQB marketplace. 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. |
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.
Trading
in our common stock is subject to special sales practices and may be difficult to sell.
Our common stock
is subject to the SEC’s “penny stock” rule, which imposes special sales practice requirements upon broker-dealers
who sell such securities to persons other than established customers 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 the SEC, 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. |
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.
There is no public market for
the warrants being offered in this offering.
There is no established
public trading market for the warrants being offered in this offering, and we do not expect a market to develop. In addition, we
do not intend to apply for listing of warrants on any securities exchange or expect the warrants to trade on the OTCQB marketplace.
Without an active market, the liquidity of the warrants will be limited.
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 5 million shares of preferred stock. We have issued 2,527 shares
of Series B convertible preferred stock. We believe the terms of our Series B convertible preferred stock would not have a substantial
impact on the ability of a third party to effect a change in control. The remaining 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 delay, discourage or prevent us from being acquired or
effecting a change of control, or may make it more difficult or costly to be acquired 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 Business
Although
we will be required to raise additional funds during the fourth quarter of 2015, there is no assurance that such funds can be raised
on terms that we would find acceptable, or on a timely basis, or at all.
We estimate that,
assuming the sale of all securities in this offering, we will need to raise additional capital during the fourth quarter of 2015.
Such additional debt or equity financing will be required for us to continue as a going concern. We 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 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 further financing transactions or through new collaborative arrangements in order to execute our
plans to expand the launch of LuViva and to generate revenue from operations, 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,
2013, 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 $103.0 million at December 31, 2013, summarized
as follows:
Accumulated deficit from inception to fiscal year ended 2011: |
$85.0 million |
Net Loss for fiscal year 2012, ended 12/31/2011: |
$4.4 million |
Deemed dividends for fiscal year 2012, ended 12/31/2012: |
$2.7 million |
Accumulated deficit at fiscal year ended 12/31/2012: |
$92.1 million |
Net Loss for fiscal year 2013, ended 12/31/2013: |
$7.2 million |
Deemed dividends for fiscal year 2013, ended 12/31/2013: |
$3.7 million |
Accumulated deficit, from inception to 12/31/2013: |
$103.0 million |
We suffered
further losses from operations in the first nine months of 2014. For the nine months ended September 30, 2014, we had a net loss
of $3.0 million and our accumulated deficit at September 30, 2014 was approximately $109.8 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 will 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 private sale of preferred stock and debt securities, public and private sales of common stock,
funding from collaborative arrangements, and grants. We believe funds on hand as of the date of this prospectus, funds received
in connection with the offering, assuming that we receive 100% of the maximum proceeds of this offering, along with funds from
government contracts and grants, will be sufficient to support planned operations through the end of the fourth quarter of 2015,
but will not be sufficient to fund our planned operations to the point of full commercial introduction of LuViva. Any failure to
achieve adequate funding in a timely fashion would delay our development programs and could lead to abandonment of one or more
of our development initiatives. To the extent we cannot obtain additional funding, our ability to continue to develop and introduce
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 just begun the process of commercializing our cervical cancer detection technology.
Because limited historical information is available on our revenue trends and operations for our cancer detection programs 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.
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 development of our products, obtain regulatory clearances or approvals, build our
marketing, sales, manufacturing and finance organizations, and conduct further research and development. To date, we have engaged
primarily in research and development efforts. 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 $109.8 million at September 30, 2014.
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, which
can be expensive and uncertain and can cause lengthy delays before we can begin selling our products.
In the
United States, the FDA’s actions could delay or prevent our ability to sell our products, which would adversely affect our
growth and strategy plans.
In order for us
to market our products in the United States, we must obtain clearance or approval from the 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 |
| · | other significant difficulties and costs will not be encountered to obtain 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 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. Further, if we wish to modify a product after 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 FDA. Any request by the FDA for additional data, or any requirement by the FDA that we conduct additional clinical
studies, could result in a significant delay in bringing our products to market and substantial additional research and other expenditures.
Similarly, any labeling or other conditions or restrictions imposed by the FDA could hinder our ability to effectively market our
products. Any of the above actions by the FDA could delay or prevent altogether our ability to market and distribute our products.
Further, there may be new FDA policies or changes in FDA policies that could be adverse to us.
In foreign
countries, including European countries, we are also 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, we must maintain ISO 13485:2003 certification and CE mark certification, 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 and elsewhere.
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 FDA regulations regarding good manufacturing practice,
which include testing, control, and documentation requirements. We are subject to similar regulations in foreign countries. Ongoing
compliance with good manufacturing practice and other applicable regulatory requirements is strictly enforced in the United States
through periodic inspections by state and federal agencies, including the FDA, and in international jurisdictions by comparable
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.
Our success
largely depends on our ability to establish and protect the proprietary information on which we base our products.
Our success depends
in large part upon our ability to establish 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.
As of November
14, 2014, we have been issued, or have rights to, 21 U.S. patents (including those under license). In addition, we have filed
for, or have rights to, four 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.
Bringing this product to market is the main focus of our business. In order to complete product development and prepare for marketing
of the cervical cancer detection product, additional capital will be needed. We need to complete the FDA filing process for our
cervical cancer diagnostic product and obtain capital investment for product development and launch.
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 industry participants, 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.
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
little 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. To date,
our manufacturing activities have included since-discontinued products. We had substantial difficulties in establishing and maintaining
manufacturing for these 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 our products, any failure of those suppliers to perform would hurt our operations.
Several of the
components used in our current or planned products are available from only one supplier, and substitutes for these components cannot
be obtained easily or would require substantial design or manufacturing modifications. 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. The inclusion of substitute components must meet our product specifications
and could require us to qualify the new supplier with the appropriate government regulatory authorities.
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.
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, our Chief Scientific 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.
The loan
with Tonaquint is collateralized by a general security interest in our current and future inventory and accounts receivable. If
we were to default under the terms of the loan, Tonaquint would have the right to foreclose on these assets.
On September 10,
2014 we entered into the loan with Tonaquint, to support general working capital and operations. As collateral to secure our obligations
under the loan, we have granted Tonaquint a security interest in our current and future inventory and accounts receivable. When
the loan is repaid, the lender’s security interest on our current and future inventory and accounts receivable will be extinguished.
If an event of default occurs under the loan and security agreements prior to our repayment of the loan, the lender may exercise
its right to foreclose on these secured assets for the payment of these obligations. Any such default and resulting foreclosure
could have a material adverse effect on our business, financial condition and results of operations.
Use
Of Proceeds
We expect to receive
up to approximately $3.2 million in net proceeds from the sale of the securities in this offering, based on a combined price of
$0.225 per share and warrant, after deducting placement agent fees and estimated offering expenses payable by us and assuming the
sale of all of the securities offered in this offering. However, this is a best efforts offering with no minimum, and we may not
sell all or any of the securities at the assumed price or another price; as a result, we may receive significantly less in net
proceeds, and the net 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 of up to $289,103 in outstanding principal and interest on simple interest notes
from certain of our directors and up to $1,732,614 in outstanding principal and interest on the senior convertible notes. See “Summary—Recent
Developments.”
We intend to apply
any proceeds received in connection with the offering to continue to seek FDA approval for LuViva, as well as to repay certain
of the bridge loans, and to support general working capital and operations. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Recent Developments” for a description of the material terms of and
the use of proceeds from the bridge loans, the senior convertible notes and the secured note. However, we will retain broad discretion
over the use of the net proceeds and may use the money for other corporate purposes.
The following table summarizes
our currently estimated and intended use of proceeds if we receive the maximum amount of proceeds to be potentially obtained in
this offering, which we expect would provide funding for our operations for approximately three months. The data in the table set
forth below excludes any proceeds we could receive from the exercise of the warrants to be issued in this offering.
Expected Use for Proceeds | |
Expected Amount of Proceeds | |
Expected % of Proceeds |
Continue to seek FDA approval | |
$ | 50,000 | | |
| 4.1 | % |
Repay certain bridge loans | |
$ | 112,000 | | |
| 9.3 | % |
General working capital and operations | |
$ | 1,044,208 | | |
| 86.6 | % |
Total | |
$ | 1,206,208 | | |
| 100 | % |
If the net proceeds
of this offering are less than the maximum, we except to divide the proceeds for purposes listed above on a similar percentage
basis, except that we will repay the bridge loans in their entirety first.
If a warrant holder
elects to exercise the warrants issued in this offering, we may also receive proceeds from the exercise of the warrants. We cannot
predict when or if the warrants will be exercised. It is possible that the warrants may expire and may never be exercised.
capitalization
The following
table shows our cash and cash equivalents and our capitalization as of September 30, 2014:
| · | as
adjusted to give effect to the note issued to one of our stockholders in November 2014
and the bridge loans made in the third quarter of 2014 (see “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, 2013 and our quarterly report on Form 10-Q for the quarterly period ended September 30, 2014.
| |
As of September 30, 2014 |
| |
Actual | |
As Adjusted(a) | |
As Further Adjusted(b) |
| |
(in thousands) |
Cash and cash equivalents | |
$ | 42 | | |
$ | 214 | | |
$ | 1,308 | |
| |
| | | |
| | | |
| | |
Short-term notes payable, related parties | |
| 564 | | |
| 736 | | |
| 335 | |
Current portion of long-term debt | |
| 118 | | |
| 118 | | |
| 118 | |
Long-term debt, net | |
| 40 | | |
| 40 | | |
| 40 | |
Senior convertible note, net of discount | |
| 2,259 | | |
| 2,259 | | |
| 526 | |
Outstanding warrants, at fair value | |
| 1,247 | | |
| 1,247 | | |
| 1,247 | |
Short term notes payable, net of discount | |
| 851 | | |
| 851 | | |
| 851 | |
| |
| | | |
| | | |
| | |
Total Debt | |
| 5,079 | | |
| 5,251 | | |
| 3,117 | |
| |
| | | |
| | | |
| | |
Series B preferred stock | |
| 678 | | |
| 678 | | |
| 678 | |
Common stock | |
| 79 | | |
| 79 | | |
| 96 | |
Additional paid-in capital | |
| 105,268 | | |
| 105,268 | | |
| 108,479 | |
Treasury stock, at cost | |
| (132 | ) | |
| (132 | ) | |
| (132 | ) |
Accumulated deficit | |
| (109,838 | ) | |
| (109,838 | ) | |
| (109,838 | ) |
| |
| | | |
| | | |
| | |
Total stockholders’ surplus (deficit) | |
| (3,945 | ) | |
| (3,945 | ) | |
| (717 | ) |
| |
| | | |
| | | |
| | |
Total capitalization | |
$ | 1,134 | | |
$ | 1,306 | | |
$ | 2,400 | |
| |
| | | |
| | | |
| | |
___________________________________
|
(a) |
Reflects the $66,100 in net proceeds we received from the bridge
loans made in the third quarter of 2014 and the $106,500 note we issued to a stockholder in November 2014. |
|
(b) |
Assumes sale of all of the securities offered, except (i) shares of common stock that could be issued upon exercise of the warrants sold as part of this offering and (ii) the shares of common stock underlying the warrants issuable to the placement agent in connection with this offering, and assumes that each warrant offered is exercisable for one half of a share of common stock. Reflects receipt of the net proceeds from this offering prior to the application thereof. |
Plan
of Distribution
We are offering
up to 16,785,415 shares of our common stock and warrants to purchase up to 8,392,708 shares of our common stock for a combined
price of $0.225 per share and warrant, with aggregate gross proceeds of up to $3.8 million. The common stock and warrants
will be issued separately. There is no minimum offering amount required as a condition to closing and we may sell significantly
fewer shares of common stock and warrants in the offering. The offering will terminate on December 15, 2014, unless the offering
is fully subscribed before that date or we decide to terminate the offering prior to that date. 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, and 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.
In determining
the offering price of the common stock and the exercise price of the warrants, 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 common stock and the exercise price of the warrants will remain fixed for the duration of the offering. Investors who purchase
at least $2 million in the offering will have the contractual right with us, for the 12 months immediately following the consummation
of the offering, to participate in any offerings of our common stock or securities exercisable for, or convertible into, our common
stock (other than certain exempt offerings), that we may conduct. This contractual right will be limited, for all qualifying investors
in any particular offering, to the aggregate purchase of up to 25% of securities offered in that offering.
Olympus
Securities, LLC, referred to as the placement agent or Olympus, has entered into a placement agent agreement with us in which
it has agreed to act as exclusive placement agent in connection with the offering. The placement agent is not purchasing the
securities offered by us, and is not required to sell any specific number or dollar amount of securities, but will assist us
in this offering on a “best efforts” basis. Subject to the terms and conditions contained in the placement agent
agreement, the placement agent is using its best efforts to introduce us to selected institutional investors who will
purchase the shares. The placement agent has no obligation to buy any of the shares from us nor is it required to arrange the
purchase or sale of any specific number or dollar amount of the shares, but has agreed to use its reasonable best efforts to
arrange for the sale of all of the shares. The placement agent agreement terminates upon the earlier of December
15, 2014 or the closing of the offering, unless
earlier terminated upon satisfaction of certain conditions.
We have agreed
to pay the placement agent a cash placement fee equal to the lesser of (1) $600,000 and (2) 8% of the aggregate gross proceeds
to us from the sale of the common stock in the offering, for those investors the placement agent introduces to us, plus 4% of
the aggregate gross proceeds of the offering, for those investors we provide to the placement agent. Subject to compliance with
FINRA Rule 5110(f)(2)(D), we will also reimburse the placement agent for certain fees incurred by its counsel, up to the lesser
of $75,000 or 2% of the gross proceeds of the offering. We estimate total expenses of this offering, excluding the placement agent
fees, will be approximately $315,000. The following table shows the per share and total fees we will pay to the placement agent
assuming the sale of all of the shares offered pursuant to this prospectus.
|
Per share |
|
$ |
0.014 |
|
|
Total |
|
$ |
233.792 |
|
In addition
to the cash fees set forth above, we have agreed to issue to the placement agent a warrant to purchase shares of common stock
equal to an aggregate of up to 4.5% of the total shares of common stock sold in the offering, at an exercise price of 125% of
the public offering price. The calculation of the number of warrants to be received by the placement agent will not be based on
the number of shares of common stock which are underlying the warrants to be issued in this offering. The placement agent warrants
shall have substantially the same terms as the warrants offered by this prospectus, except that they will not be exercisable until
the first anniversary after their issuance and will have an exercise price per share as described above. In addition, the placement
agent warrants will be subject to certain FINRA rules, as follows. Pursuant to FINRA Rule 5110(f)(2)(G)(vi) and (vii), the placement
agent warrants will not have anti-dilution protections. Pursuant to FINRA Rule 5110(g)(1), neither the placement agent warrants
nor any shares of common stock issued upon exercise of the placement agent warrants may be sold, transferred, assigned, pledged,
or hypothecated, or be subject to any hedging, short sale, derivative, put, or call transaction that would result in the effective
economic disposition of such securities by any person for a period of 360 days immediately following the date of effectiveness
or commencement of sales of this offering, except the transfer of any security: (i) by operation of law or by reason of reorganization,
(ii) to any FINRA member firm participating in the offering and the officers and partners thereof, if all securities so transferred
remain subject to the lock-up restriction described above for the remainder of the time period, (iii) if the aggregate amount
of our securities held by the placement agent or related person does not exceed 1% of the securities being offered, (iv) 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 (v) 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. The warrants and the shares underlying the warrants issuable to the placement
agent in the offering are not being registered under the registration statement of which this prospectus forms a part and the
placement agent will not be entitled to registration rights. Because there is no minimum offering amount required as a condition
to closing, the actual total proceeds received by us and total offering commissions and warrants issuable to the placement agent,
if any, are not presently determinable and may be substantially less than the maximum amount set forth above.
We have agreed
to indemnify the placement agent against certain liabilities under the Securities Act of 1933, as amended. The placement agent
is an underwriter within the meaning of Section 2(a)(ii) of the Securities Act and any commissions received by it and any profit
realized on the sale of securities by them while acting as principal might be deemed to be underwriting discounts or commissions
under the Securities Act. The placement agent is required to comply with the requirements of the Securities Act and the Exchange
Act, including without limitation, Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the
timing of purchases and sales of shares of common stock and warrants to purchase shares of common stock by the placement agent.
Under these rules and regulations, the placement agent many not (i) engage in any stabilization activity in connection with our
securities or (ii) 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 they have completed their participation in the distribution. The placement
agent has informed us that it will not engage in overallotment, stabilizing transactions or syndicate covering transactions in
connection with this offering.
This is a
brief summary of the material provisions of the placement agent agreement and does not purport to be a complete statement of
its terms and conditions. The form of the placement agent agreement has been filed with the registration statement of which
this prospectus forms a part.
The placement
agent has performed similar services for us in the past. In April and May 2014, in connection with the sale of our senior convertible
notes, we issued the placement agent warrants exercisable for 200,000 shares of common stock at $0.50 per share with an expiration
date of April 23, 2019, and warrants exercisable for 561,798 shares at $0.45 per share with an expiration date of May 22, 2019.
In September 2014, in connection with the secured note offering, we issued the placement agent warrants exercisable for 184,211
shares at $0.38 per share with an expiration date of September 10, 2019. These warrants are deemed underwriting compensation under
FINRA rules and, accordingly, are subject to, among other things, certain FINRA rules, as follows. Pursuant to FINRA Rule 5110(f)(2)(G)(vi)
and (vii), these warrants do not have anti-dilution protections. Pursuant to FINRA Rule 5110(g)(1), neither these warrants nor
any shares of common stock issued upon exercise of these warrants may be sold, transferred, assigned, pledged, or hypothecated,
or be subject to any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition
of such securities by any person for a period of 360 days immediately following the date of effectiveness or commencement of sales
of this offering, except the transfer of any security: (i) by operation of law or by reason of reorganization, (ii) to any FINRA
member firm participating in the offering and the officers and partners thereof, if all securities so transferred remain subject
to the lock-up restriction described above for the remainder of the time period, (iii) if the aggregate amount of our securities
held by the placement agent or related person does not exceed 1% of the securities being offered, (iv) 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 (v)
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. These warrants and the shares underlying these warrants are not being registered under the
registration statement of which this prospectus forms a part and the placement agent is not entitled to registration rights.
State Blue
Sky Information
We intend to offer
and sell the common stock offered hereby to institutional investors in certain states. However, we will not make any offer of these
securities in any jurisdiction where the offer is not permitted or exempted.
Description
of capital stock
We are authorized
to issue 200 million shares of stock, in two classes: 195 million shares of common stock, par value $.001 per share, and 5 million
shares of preferred stock, including 3,000 shares of Series B convertible preferred stock, par value $.001 per share. As of November
14, 2014, there were 79,903,439 shares of common stock outstanding, which were held of record by 205 stockholders and 1,277
shares of preferred stock outstanding, consisting entirely of shares of Series B convertible preferred stock, which were held
of record by 7 stockholders.
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 rights with respect to such shares.
Preferred
Stock
Our board is authorized,
without further stockholder action, to issue preferred stock in one or more series and to fix the voting rights, liquidation preferences,
dividend rights, repurchase rights, conversion rights, redemption rights and terms, including sinking fund provisions, and certain
other rights and preferences, of the preferred stock.
Although there
is no current intention to do so, our board may, without stockholder approval, issue additional shares of series B convertible
preferred stock or shares of another class or series of preferred stock with voting and conversion rights that could adversely
affect the voting power or dividend rights of the holders of common stock and may have the effect of delaying, deferring or preventing
a change in control.
Series
B Convertible Preferred Stock
On May 24, 2013,
we issued and sold 2,527 shares of Series B convertible preferred stock at a price per share of $1,000, which, subject to adjustment
for stock splits, stock dividends or other similar occurrences, we refer to in this prospectus as the invested amount.
Dividends.
The holders of Series B convertible preferred stock are entitled to receive quarterly, at the end of each calendar quarter, out
of funds legally available therefor, dividends per share at the per annum rate of ten percent of the invested amount, prior and
in preference to any declaration or payment of any dividend on any stock ranking junior to the Series B convertible preferred stock.
Such dividends are cumulative and are compounded annually, and accrue whether or not declared by our board of directors. At our
election, dividends on the Series B convertible preferred stock may be paid by the issuance and delivery of whole shares of common
stock having an aggregate current market price at the time of issuance equal to the amount of dividends so paid, as long as such
shares of common stock are registered for resale under an effective registration statement or such shares are then eligible to
be sold without restriction under Rule 144 of the Securities Act. The shares of any class of our capital stock ranking equal to
the Series B convertible preferred stock as to dividends and the distribution of assets upon liquidation are referred to in this
prospectus as pari passu stock. If any dividend becomes due and payable to the holders of Series B convertible preferred
stock and there is also due and payable a dividend to the holders of pari passu stock, and we have insufficient funds to
make payment in full to all such holders of such respective dividends, then such funds as are available will be distributed among
the holders, ratably in proportion to the full amounts to which they would otherwise respectively be entitled.
Conversion.
Each share of Series B convertible preferred stock is convertible into the number of shares of common stock equal to the quotient
obtained by dividing (i) the sum of the invested amount plus all declared or accrued but unpaid dividends on such shares of Series
B convertible preferred stock, by (ii) the conversion price per share. The per share conversion price as of November 14,
2014 was $0.2196. The conversion price is subject to adjustment under certain circumstances to protect the holders of Series B
convertible 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.
The Series B convertible
preferred stock is convertible at any time, at the option of the holder. In addition, on any “automatic conversion date,”
each share of Series B convertible preferred stock then outstanding automatically will be converted into common stock at the then
effective conversion rate. An automatic conversion date, subject to certain additional limitations and requirements, will occur
upon the earlier of (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 closing price for 20 consecutive trading days of at least
$0.98 with an average daily trading volume during such 20 consecutive trading days of at least 25,000 shares, (b) the date on which
the common stock achieves an average closing price for 20 consecutive trading days of at least $1.16 with an average daily trading
volume during such 20 consecutive trading days of at least 25,000 shares, or (c) the date after May 24, 2015 on which the common
stock achieves an average closing price for 20 consecutive trading days of at least $0.82 with an average daily trading volume
during such 20 consecutive trading days of at least 25,000 shares.
Voting.
Each holder of a share of Series B convertible preferred stock is entitled to the number of votes equal to the number of shares
of common stock into which such share of Series B convertible preferred stock would be convertible under the circumstances described
above on the record date for the vote or consent of stockholders, and will otherwise have voting rights and powers equal to the
voting rights and powers of the common stock.
Holders of the
Series B convertible preferred stock have the right to vote on those matters which, under the General Corporation Law of the State
of Delaware, voting by classes of stock is required and, so long as at least 917 shares (such number subject to adjustment) of
Series B convertible preferred stock are outstanding, we may not, without the consent (given by vote in person or by proxy at a
meeting called for the purpose, or by written consent) of the holders of a majority of the shares of Series B convertible preferred
stock then outstanding:
| · | create or authorize any shares of any class or series of capital stock having a preference or priority
as to either dividends or distribution of assets upon liquidation equal or superior to any such preference or priority of the shares
of Series B convertible preferred stock, reclassify any existing securities into shares of such equal or superior stock or amend
the terms of any existing securities in a manner inconsistent with the foregoing restriction; |
| · | amend or repeal any provision of, or add any provision to, our certificate of incorporation or
bylaws, if such action would adversely alter or change the preferences, rights, privileges, or powers of, or restrictions provided
for the benefit of, the Series B convertible preferred stock; |
| · | declare, pay or set aside any dividends on any stock ranking junior to the Series B convertible
preferred stock, or redeem or repurchase any such junior ranking stock; |
| · | increase or decrease (other than in connection with a redemption or conversion) the authorized
number of shares of Series B convertible preferred stock; or |
| · | alter or change the rights, preferences or privileges of the Series B convertible preferred stock
in a manner different from each other class of pari passu stock. |
Further, and in
addition to the approval rights described above, we may not, without the consent of the holders of all of the shares of Series
B convertible preferred stock then outstanding, adversely amend or repeal any provision of, or add any provision to, the preferences,
rights, privileges or powers of the Series B convertible preferred stock, in respect of:
| · | the amount of dividends, or the timing of the required payment thereof; |
| · | the liquidation amount, or the timing of the required payment thereof; |
| · | the automatic conversion date; or |
| · | the conversion rights, including the conversion price. |
In addition, prior
to 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 closing price for 20 consecutive trading days of at least $0.98 with an
average daily trading volume during such 20 consecutive trading days of at least 25,000 shares, we may not, without the consent
of the holders of 66 2/3% of the shares of Series B convertible preferred stock then outstanding, incur or cause any of our subsidiaries
to incur indebtedness for borrowed money, or guarantee indebtedness for borrowed
money, that is (i) secured by our intellectual property; or (ii) in excess of $2,000,000.
Redemption.
Subject to certain conditions, we have the right to redeem, to the fullest extent permitted by law, all or any portion of the outstanding
Series B convertible preferred stock at the then-current redemption price, at any time after May 24, 2015. The redemption price
per share of Series B convertible preferred stock will be equal to the liquidation amount, including unpaid dividends up to and
including the date of redemption.
Liquidation.
In the event of our voluntary or involuntary liquidation, dissolution or winding up, referred to in this prospectus as a liquidation,
or a “sale or merger” (as described below), the holders of the outstanding shares of Series B convertible preferred
stock, at their election, will be entitled to receive in exchange for and in redemption of each share of their Series B convertible
preferred stock, prior and in preference to the holders of stock ranking junior to the Series B convertible preferred stock, (x)
in the case of a liquidation, from any funds legally available for distribution to stockholders, and (y) in the case of a sale
or merger, from the net proceeds therefrom, an amount equal to the greater of (i) the invested amount per share, plus the aggregate
amount of all declared or accrued, but unpaid, dividends per share, or (ii) the amounts to which such holders would have been entitled
if the shares were converted to shares of common stock immediately before the liquidation, or sale or merger as the case may be.
For purpose of
the Series B convertible preferred stock, a “sale or merger” includes, subject to exclusion by the vote of holders
of Series B convertible preferred stock constituting at least 66 2/3% of the total number of shares of such series outstanding,
voting separately as a class, (a) our merger, reorganization, or consolidation into or with another corporation in which our stockholders
immediately preceding such transaction own less than 50% of the voting securities of the surviving corporation, or (b) the sale,
transfer, or lease (other than a transfer or lease by pledge or mortgage to a bona fide lender) of all or substantially
all of our assets to any entity 50% or more of the voting securities of which are not beneficially owned by the beneficial owners
of our voting securities prior to such transaction.
Senior Convertible
Notes
On April 23, 2014,
we entered into a securities purchase agreement with Magna. Pursuant to the purchase agreement, we sold Magna a 6% senior convertible
note with a principal amount of $1.5 million, for a purchase price of $1.0 million (an approximately 33.3% original issue discount).
Additionally, pursuant to the purchase agreement, Magna purchased on May 23, 2014, an additional 6% senior convertible note with
a principal amount of $2.0 million and an 18-month term, for a fixed purchase price of $2.0 million.
Under the terms
of the purchase agreement, $200,000 of the outstanding principal amount of the initial senior convertible note (together with any
accrued and unpaid interest with respect to such portion of the principal amount) was automatically extinguished (without any cash
payment by us) upon our filing of a registration statement with the SEC on April 30, 2014 covering the resale by Magna of shares
of our common stock issued or issuable upon conversion of the senior convertible notes. Moreover, $300,000 of the outstanding principal
amount of the initial senior convertible note (together with any accrued and unpaid interest with respect to such portion of the
principal amount) was automatically extinguished (without any cash payment by us) upon declaration by the SEC of the effectiveness
of the resale registration statement on May 12, 2014.
The initial
senior convertible note matures on October 23, 2015 (subject to extension as provided in the initial senior convertible note)
and, in addition to the approximately 33.3% original issue discount, accrues interest at an annual rate of 6.0%. The additional
senior convertible note matures on November 23, 2015 and also accrues interest at an annual rate of 6.0%. Subject to certain limitations,
the senior convertible notes are convertible, in whole or in part, at Magna’s option, into shares of our common stock, at
a conversion price equal to the lesser of $0.55 per share and a discount from the lowest daily volume-weighted average price of
our common stock in the five trading days prior to conversion. The discount is 20% if the conversion takes place on or prior to
December 19, 2014, (November 20, 2014 for the initial senior convertible note, pursuant to the November 6, 2014 agreement described
below), and 25% if after that date. At no time will Magna be entitled to convert any portion of the senior convertible notes to
the extent that after such conversion, Magna (together with its affiliates) would beneficially own more than 9.99% of the outstanding
shares of our common stock as of such date.
The
senior convertible notes include customary event of default provisions and provide for a default interest rate of 16%. Upon the
occurrence of an event of default, Magna may require us to pay in cash the “Event of Default Redemption Price” which
is defined in the senior convertible notes to mean the greater of (i) the product of (A) the amount to be redeemed multiplied
by (B) 135% (or 100% if an insolvency related event of default) and (ii) the product of (X) the conversion price in effect at
that time multiplied by (Y) the product of (1) 135% (or 100% if an insolvency related event of default) multiplied by (2) the
greatest closing sale price of the common stock on any trading day during the period commencing on the date immediately preceding
such event of default and ending on the date we make the entire payment required to be made under this provision.
We have the right
at any time to redeem all or a portion of the total outstanding amount then remaining under the senior convertible notes in cash
at a 25% premium.
We paid Magna
a commitment fee for entering into the purchase agreement in the form of 321,820 shares of common stock. We also agreed to pay
$50,000 of reasonable attorneys’ fees and expenses incurred by Magna in connection with the transaction.
On November
6, 2014, Magna agreed to refrain from converting any portion of the senior convertible notes or selling any shares of our common
stock until after November 21, 2014, in exchange for an acceleration of the scheduled increase in the conversion discount on the
April 23, 2014 senior convertible note from December 19, 2014 to November 21, 2014.
Warrants and
Options
Warrants
Being Issued in this Offering
The following summary
of certain terms and provisions of the warrants that are being offered hereby is not complete and is subject to, and qualified
in its entirety by the provisions of the warrants, the form of which has been 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 8,392,708 shares of our
common stock at an exercise price of $0.225 per share (assuming we offer 16,785,415 shares of common stock at an assumed public
offering price of $0.225 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 common 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.
Anti-Dilution Protection.
The exercise price and the number of shares issuable upon exercise of the warrants is subject to appropriate adjustment in the
event of recapitalization events, 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.
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.
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.
Certain Events.
In the event that the FDA either provides us with a notice of a final, non-approvable denial of the LuViva Advanced
Cervical Scan or does not issue an “approvable letter” for the LuViva Advanced Cervical Scan prior to the second anniversary
of the issuance of the warrants, then the exercise price of the warrants will be reset to the higher of (a) the average of the
five lowest reported volume-weighted average prices of our common stock in the month immediately following the second anniversary
and (b) one-third of the exercise price of the warrants immediately prior to the adjustment, except that there will be no increase
to the exercise price. The placement agent warrants do not contain this provision.
Mandatory Exercise.
Provided that the warrants have not been adjusted to decrease the exercise price and increase the number of underlying
shares as described above and provided there is an effective registration statement for the issuance or resale of the shares underlying
the amounts (or such shares may be sold without restriction under Rule 144 under the Securities Act), we will have certain rights
to require mandatory exercise of the warrants. In the event that the trading price of our common stock is at least two 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. 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 placement agent warrants do not contain this provision.
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. A holder (together
with its affiliates) may not exercise any portion of the warrant to the extent that the holder would own more than 4.99% of the
outstanding common stock after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder
may increase the amount of ownership of outstanding stock after exercising the holder’s warrants up to 9.99% of the number
of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined
in accordance with the terms of the warrants.
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 the holders of
at least 66 2/3% of the then-outstanding warrants.
Outstanding
Warrants
We
have issued and will issue warrants to purchase our common stock from time to time in connection with certain financing arrangements.
As of November 14, 2014, there are warrants exercisable for an aggregate of 16,590,141 shares of common stock outstanding,
as follows:
Warrants
(Underlying Shares) |
Exercise
Price |
Expiration
Date |
|
|
|
3,590,522(1) |
$0.8000 per share |
March 1, 2015 |
6,790(2) |
$1.0100 per share |
September 10, 2015 |
439,883(3) |
$0.6800 per share |
March 31, 2016 |
285,186(4) |
$1.0500 per share |
November 20, 2016 |
1,858,089(5) |
$1.0800 per share |
May 23, 2018 |
9,138,141(5)(6) |
$0.2196 per share |
May 23, 2018 |
200,000(7) |
$0.5000 per share |
April 23, 2019 |
561,798(7) |
$0.4500 per share |
May 22, 2019 |
184,211(8) |
$0.3800 per share |
September 10, 2019 |
325,521(9) |
$0.4601 per share |
September 27, 2019 |
| (1) | Consists of outstanding warrants issued in conjunction with a June 2012 warrant exchange program. |
| (2) | Consists of outstanding warrants issued in conjunction with a September 2010 private placement. |
| (3) | Consists of outstanding warrants issued in conjunction with a buy-back of a minority interest in Interscan in December 2012,
which were issued in February 2014. The sale of the shares underlying these warrants is not covered by this prospectus. |
| (4) | Consists of outstanding warrants issued in conjunction with a November 2011 private placement. |
| (5) | Consists of outstanding warrants issued in conjunction with a May 2013 private placement. |
(6) | Underlying shares increased from 1,858,089 to 9,138,141, and
per share exercise price decreased from $1.08 to $0.2196, pursuant to the anti-dilution
provisions in the warrants, as a result of conversions of the senior convertible notes. |
(7) | Consists of warrants issued to the placement agent in connection with the private placement of our senior convertible
notes. |
(8) | Consists of outstanding warrants issued to a placement agent in conjunction with the secured note offering. |
(9) | Consists of outstanding warrants issued in conjunction with the Regulation S offering. |
| |
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.
The warrants identified
in the table above as issued in conjunction with the May 2013 private placement and having an exercise price of $0.2196
per share 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 25,000 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 $1.62 and the average daily trading volume of the common stock exceeds
25,000 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 other warrants issued
in conjunction with the May 2013 private placement.
As of November
14, 2014, we have issued options to purchase a total of 6,707,990 shares of our common stock pursuant to various equity incentive
plans, at a weighted average exercise price of $0.67 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.
Dilution
If you invest in
the securities offered in this offering, assuming that, of the 25,178,123 shares of common stock offered, 8,392,708 are reserved
for issuance upon exercise of the warrants offered, and assuming no value is attributed to the warrants, your interest will be
diluted immediately to the extent of the difference between the assumed public offering price per share of our common stock and
the as adjusted net tangible book value per share of our common stock after this offering. As of September 30, 2014, our net tangible
book value was approximately $(3,945,000), or $0.0497 per share of common stock based upon 79,377,404 shares outstanding. Our net
tangible book value per share is equal to total assets less intangible assets and total liabilities, divided by the number of shares
of our outstanding common stock.
Net tangible book
value dilution per share represents the difference between the amount per share of common stock paid by the new investors who purchase
securities in this offering and the pro forma net tangible book value per share in common stock immediately after completion of
this offering, assuming no value is attributed to the warrants.
Under the above
assumptions, after giving effect to our sale of up to 16,785,415 shares of common stock at a public offering price of $0.225 per
share, and after deducting placement agent commissions and estimated offering expenses payable by us, our pro forma as adjusted
net tangible book value as of September 30, 2014 would have been approximately ($717,000), or ($0.0075) per share based upon the
pro forma number of shares outstanding of 96,162,819. This represents an immediate increase of net tangible book value of $0.0042
per share to our existing shareholders and an immediate dilution in net tangible book value of $0.2325 per share to purchasers
of securities in this offering.
The following table illustrates
this per share dilution to new investors, assuming the sale of 25%, 50%, 75% and 100% of the assumed 16,785,415 shares being offered
hereby under the assumptions described above, after giving effect to the sale of our shares in this offering and the deduction
of estimated placement agent fees and estimated offering expenses payable by us. We have further assumed, in the scenarios presented
in the table, that, for each share of common stock purchased, investors would receive a warrant to purchase one half of a share
of common stock, representing 8.4 million shares issuable upon exercise of the warrants.
|
Adjusted,
assuming sale of
percentage of shares offered |
|
25% |
50% |
75% |
100% |
Assumed public offering price per share |
$0.2250 |
$0.2250 |
$0.2250 |
$0.2250 |
Net tangible book value per share as of September 30, 2014 |
($0.0497) |
($0.0497) |
($0.0497) |
($0.0497) |
Increase attributable to this offering |
$0.0294 |
$0.0341 |
$0.0383 |
$0.0422 |
Adjusted net tangible book value per share after this offering |
($0.0203) |
($0.0156) |
$(0.0114) |
($0.0075) |
Dilution in net tangible book value per share to new investors |
$0.2453 |
$0.2406 |
$0.2364 |
$0.2325 |
The above discussion
and table do not include the following:
|
· |
6,547,229 shares
of common stock reserved for future issuance under our 1995 Stock Plan. As of November 14, 2014, 6,707,990 shares were issuable
upon the exercise of outstanding options at a weighted average exercise price of $0.67 per share; |
|
· |
5,815,118 shares
of common stock reserved for issuance upon conversion of, and 1,172,913 shares reserved for issuance as dividends on, our
Series B convertible preferred stock, as of November 14, 2014; |
|
· |
16,590,141 shares
of common stock issuable upon the exercise of outstanding warrants at November 14, 2014, at exercise prices ranging from $0.2196
to $1.08 per share; and |
|
· |
Up to 8,392,708
shares of common stock issuable upon exercise of warrants at an exercise price of $0.225 per
share sold as part of this offering, and up to 755,344 shares of common stock issuable upon exercise of warrants
issued to the placement agent as part of this offering at an exercise price of 125% of the combined public offering price
per share and warrant. |
If we
assume that, for each share of common stock purchased, investors would receive a warrant to purchase three-fourths of a share
of common stock (thus decreasing the amount of shares to be issued in the offering) and 100% participation in the offering,
our pro forma net tangible book value as of September 30, 2014 would have been approximately $0.0132 per share based upon the
pro forma number of shares outstanding of 93,824,960 and if we assume that for each share of common stock purchased,
investors would receive a warrant to purchase one full share of common stock (decreasing further the shares to be issued in
the offering) and 100% participation in the offering, our pro forma net tangible book value as of September 30, 2014 would
have been approximately ($0.0178) per share based upon the pro forma number of shares outstanding of 92,058,737.
Our
Business
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 development of our LuViva non-invasive cervical cancer detection device and extension of our cancer detection technology
into other cancers, including lung and esophageal. Our technology, including products in research and development, primarily relates
to biophotonics technology for the non-invasive detection of cancers.
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.”
Non-Invasive
Cervical Cancer Detection
We believe
LuViva will provide a less invasive and painless alternative to conventional tests for cervical cancer detection. We also
believe LuViva can improve patient well-being and reduce healthcare costs, since it reduces or eliminates pain, is convenient
to use and provides rapid results at the point-of-care. We completed enrollment in our FDA pivotal trial of LuViva in 2008
and on November 18, 2010, the FDA accepted our completed PMA application, effective September 23, 2010, for substantive
review. On March 7, 2011, we announced that the FDA had inspected two clinical trial sites 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 FDA. On November 14, 2012 we filed an amended
PMA with the FDA. On September 6, 2013 we received a letter from the FDA with additional questions, and met with the FDA on
May 8, 2014 to discuss our response. On July 25, 2014, we filed another amended PMA application. The FDA has 180 days to
respond to our submission. Additional dialogue with the FDA is expected as we proceed toward PMA approval. We currently
anticipate a 2015 product launch in the United States, but cannot be assured we will be able to launch on that timetable, or
at all. Internationally, we have had regulatory approval to sell LuViva in Europe since receipt of our Edition 3 CE Mark in
January 2014. LuViva has marketing approval from Health Canada, the Singapore Health Sciences Authority, and Mexico’s
Federal Commission for Protection Against Health Risks.
Other Cancers
We believe our
non-invasive cervical cancer detection technology can be applied to other cancers as well. To that end, from 2008 until early 2013
we had worked exclusively with Konica Minolta Opto, Inc., a subsidiary of Konica Minolta, Inc., a Japanese corporation based in
Tokyo (“Konica Minolta”), to adapt our cervical cancer detection technology primarily for the detection of esophageal
cancer. On February 6, 2013, we announced that we had terminated and replaced our existing agreements with Konica Minolta with
a new license agreement allowing us to manufacture and to develop a non-invasive esophageal cancer detection product from Konica
Minolta and based on our biophotonic technology platform (see “—Lung and Esophageal Cancer Detection—Konica Minolta”).
Our Business Strategy
Our mission is
to build a profitable business that develops and commercializes medical products that improve people’s lives and increases
stockholder value. To achieve this mission, we have completed the FDA pivotal trial for LuViva, filed our PMA application with
the FDA, and have raised capital for the development and launch of LuViva. Development of our cancer diagnostic technology has
been financed to date through a combination of government grants, strategic partners and direct investment. Bringing LuViva to
market is the main focus of our business. In order to adequately finance the completion of the FDA review process, complete product
development, and prepare for marketing of LuViva, additional capital will be needed; however, we cannot be assured of the availability
of adequate capital (see “Risk Factors”).
We believe that
our technology, as developed for cervical cancer detection, can be modified and then applied to other cancers. Because development
of our technology for additional cancers is costly and resource intensive, we sought a strategic partner to help defray costs
and otherwise assist in the expansion of our cancer detection technology into other cancers. This resulted in our various collaborative
agreements with Konica Minolta, including past agreements related to the development of a prototype device specifically for esophageal
cancer detection and our current license agreement with Konica Minolta (see “—Lung and Esophageal Cancer Detection—Konica
Minolta”).
Industry Overview
Cervical Cancer Detection
Background
According to the
American Cancer Society, cancer is a group of many related diseases. All forms of cancer involve the out-of-control growth and
spread of abnormal cells. Normal body 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 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 technologies to cancer detection before
1997, when we initiated a market analysis for these uses. We concluded that our biophotonic technologies had applications for the
detection of a variety of cancers through the exposure of tissue to light. We selected cervical cancer and skin cancer from a list
of the ten most attractive applications as categories of cancer to pursue initially, and currently are focused primarily on the
development of our non-invasive cervical cancer detection product.
Cervical Cancer
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 Pap smear screening test, or 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.
Cervical Cancer Market
The National Cancer
Institute (“NCI”) estimated that in 2013, about 12,360 cases of invasive cervical cancer would be diagnosed and about
4,020 women would die from cervical cancer in the United States. According to published data, cervical cancer results in about
200,000 deaths annually worldwide, with 470,000 new cases reported each year.
We believe that
our major market opportunities related to cervical cancer are in diagnosis and screening. Since the introduction of better screening
and diagnostic methods, the number of cervical cancer deaths in the United States has declined dramatically, due mainly to the
increased use of the Pap test. However, over the last five years, the incidences have been increasing. Moreover, 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 sensitivity of 22% and specificity of 78% to sensitivity of 95% and specificity of 10%. About 60 million
Pap tests are given annually in the United States. The average price of a Pap test in the United States is about $26. New technologies
improving the sensitivity and specificity of the Pap test have recently been introduced and are finding acceptance in the marketplace.
After screening
for cervical cancer by use of a Pap test, if necessary, a visual examination of the cervix using a colposcope is usually followed
by a biopsy, or tissue sampling at one or more locations. 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.
In
2006, a new vaccine for certain strains of the human papilloma virus, or HPV, was approved by the FDA. Most cervical cancers are
associated with certain strains of HPV. The vaccine is administered in three doses, and according to guidelines, preferably to
girls before they become sexually active. The approved vaccine is effective against 70% of the strains of HPV thought to be responsible
for cervical cancer. Due to the limited availability and lack of 100% protection against all potentially cancer-causing strains
of HPV, we believe that the vaccine will have a limited impact on the cervical cancer screening and diagnostic market for many
years.
Our Non-invasive Cervical Cancer
Product
LuViva is a non-invasive
cervical cancer detection product, based on our proprietary biophotonic technology. The device 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 or emanating from the cervix. The information presented by the light would be used to indicate the likelihood of
cervical cancer or precancers and/or to produce a map or image of diseased tissue. This test, unlike the Pap test or biopsy, has
the potential to preserve the perspective and positional information of disease on the cervix, allowing for more accurate diagnosis.
Our system also could allow doctors to make intelligent choices in triaging patients for biopsy or treatment and potentially for
selecting biopsy sites that could be expanded for use in assisting in the detection of cancerous margins for cancer removal. 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. The product is expected to incorporate a single-use, disposable calibration
and alignment component. FDA approval of the intended use of our device is required and initial approval may be for a limited set
of the above potential capabilities. Our strategy is to continue our launch of LuViva in Canada, Turkey and Mexico, which we began
in the third quarter of 2013, while also continuing the launch in certain developed countries of Europe, which began in the last
quarter of 2013. In parallel with these international efforts we are continuing steps to procure FDA approval in the United States.
To date, more than
4,000 women have been tested with various LuViva prototype and commercial devices in multiple clinical settings. During 2000, we
conducted human clinical feasibility studies of laboratory prototypes at two U.S. research centers, detecting 31% more cervical
precancerous lesions than conventional Pap tests. The results were presented at the World Health Organization/European Research
Organization on Genital Infection and Neoplasia Joint Experts Conference in Paris in April 2000. The study population included
133 women scheduled for colposcopy and biopsy, if indicated. A total of 318 tissue-specific comparisons were made between our device
and colposcopy/biopsy results. Of the 318 patients included in this study, 20 had high-grade precancers, 36 had low-grade precancers,
146 had benign lesions and 116 had normal tissues. Compared to the Pap test, our product detected 31% more precancers and 25% more
high-grade precancers without increasing the false positive rate.
In 2005, we continued
to conduct our pivotal clinical trial, which had collected data on over 900 women by the end of the year. In 2005, we also completed
work on our commercial prototype. In 2006 and 2007, we continued to enroll subjects in our pivotal clinical trial and, by the end
of 2007, had enrolled 1,400 subjects.
In September 2006,
we announced that the National Cancer Institute (“NCI”) awarded a grant of approximately $690,000 for development of
our non-invasive cervical cancer detection technology. This grant was used to further the ongoing FDA pivotal clinical trial. In
2006 and 2007, we received approximately $523,000 and $398,000, respectively, of NCI grant funds. On October 5, 2009, we were awarded
a $2.5 million matching grant by the NCI to bring to market and expand the array features for LuViva. The award provided resources
to complete the regulatory process and begin manufacturing ramp up for LuViva and a single-patient-use disposable patient interface
for the device and will be received over a period of three years. Under the award, we recorded revenue of approximately $150,000
in 2013, $68,000 in 2012 and $912,000 in 2011.
Internationally,
on October 4, 2011, we announced that LuViva was selected for inclusion in a review of new technologies by the United Kingdom’s
NICE program. On January 10, 2014, we announced that we had successfully completed an audit of our quality system and were recertified
under ISO 13485:2003. As a result, we now have regulatory approval to sell LuViva in Europe upon receipt of our Edition 3CE Mark
in January 2014. LuViva has marketing approval from Health Canada, the Singapore Health Sciences Authority, and Mexico’s
Federal Commission for Protection Against Health Risks.
Sales
or leases of LuViva are expected to include a single-patient-use disposable patient interface. We expect the device itself to
be priced at approximately $20,000, with the disposable interface priced around $30 to $40. Profit margins on the disposable are
expected to be approximately 90%. In the United States, we plan on establishing and training a ten-person sales force during the
first year after launch, which will initially focus on early adopters in the larger population centers. Internationally, we plan
on contracting with country-specific or regional distributors. We believe that the international market will be larger than the
U.S. market. We have been in contact with more than 100 potential distributors, have formal distribution agreements in place covering
21 countries and expect to announce additional agreements over the next several months.
The market for
cervical cancer screening is currently dominated by lab-based cytological screening of samples obtained from patients. The market
for primary screening is dominated by Hologic, Inc., which markets the Thin Prep Pap test and Qiagen, Inc., which markets another
method of cervical cancer screening, HPV detection. Qiagen is attempting to gain permission to use its device for primary screening.
The Qiagen HPV test is already approved for use as a follow-up to ambiguous Pap test results and as an adjunct to the Pap test
for screening women aged 30 and over. We have conducted marketing research related to the cervical cancer market and the impact
of the growth of the lab-based cytological screening products. We are reviewing the impact of the changing competitive landscape
related to our product development pace and our initial and potential positioning. We will have to demonstrate clinical and commercial
effectiveness to be able to change current medical practice behavior and capture market share and cannot be sure that we will be
able to do so.
Lung and Esophageal Cancer
Detection
According to the
World Health Organization, there are 1.2 million cases of lung cancer diagnosed each year worldwide, with at least half of these
resulting in death. In the United States, lung cancer is the leading cause of death due to cancer, with 224,210 new cases and more
than 159,260 deaths annually, according to the NCI’s 2014 estimates. Lung cancer is also a serious health issue in other
parts of the world where cigarette smoking is endemic (Japan, for example, with more than 53,000 deaths annually). Despite this
enormous and tragic toll, no effective method of early screening has been able to improve upon these rates. Historically, chest
x-rays have been employed, but typically these identify later stage cancers, which are difficult to cure. Sputum tests to identify
cancer markers in at-risk individuals have not been widely adopted and CT or other scanning technology is likely to be too expensive
in the foreseeable future for screening or widespread use. Once a mass has been identified, usually by chest x-ray or physical
symptoms such as bloody sputum, a bronchoscopy with biopsy and histopathological diagnosis of the mass is performed.
Worldwide, new
cases of esophageal cancer are estimated at 410,000, with more than 18,170 new cases and 15,450 deaths in the United States alone,
according to the American Cancer Society’s 2014 estimates. A precursor to esophageal cancer is a condition known as Barrett’s
esophagus, which is caused by excessive acid reflux. Patients with this condition may be subjected to repeated and sometimes poorly
directed biopsies of areas of the esophagus thought to contain cancerous or preceancerous (neoplastic) cells. Because there may
be several areas of suspicion, the clinical challenge is to try to identify those areas of the esophagus with greatest likelihood
of neoplastic change. Endoscopic techniques, using regular white light, have only limited ability to accomplish this and defensively-minded
practitioners often resort to multiple biopsies that are expensive and painful in order to increase the odds of finding disease.
Since the processes
associated with cancer development show similarities between cervical cancer and other cancers, we believe our technology, if integrated
with an endoscopic system, may have the potential to more accurately, or in an earlier state, detect lung and esophageal cancers
and precancers. To that end, we have worked with Konica Minolta to adapt our cervical cancer detection technology for detection
of lung cancer and esophageal cancer (see “—Konica Minolta”). However, we are only in the early stages of clinical
trials to evaluate this potential. We recently announced that we had received Institutional Review Board approval for testing the
technology in humans and were granted a non-significant risk designation for the device. We have two clinics in the Atlanta, Georgia
metropolitan area where we have been conducting a small scale study. The goal of the study, completed in 2012, was to establish
feasibility of the product design and clinical implementation. As part of our feasibility study, qualified subjects underwent a
standard EGD (Esophago Gastro Duodenoscopy) procedure and measurements with our device. Biopsy samples were taken in accordance
with the standard of care.
Konica Minolta
From 2008 to early
2013, we worked with Konica Minolta to explore the feasibility of adapting our microporation and biophotonic cancer detection technologies
to other areas of medicine and to determine potential markets for these products in anticipation of a development agreement.
On April 28, 2009,
we signed a one-year exclusive negotiation and development agreement of optimization of our microporation system for manufacturing,
regulatory approval, commercialization and clinical utility with Konica Minolta. We renewed the agreement in 2010, 2011 and 2012
for additional one-year terms and changed the licensed technology to our biophotonic cancer detection technology. We received approximately
$750,000 in 2011 from Konica Minolta under this option to license agreements and received a total of $400,000 in 2012.
On January 28,
2010, we entered into another agreement with Konica Minolta for development of our biophotonic platform specific to the detection
of esophageal cancer. In this agreement, we provided Konica Minolta with technical, regulatory and clinical development of our
biophotonic platform device for esophageal cancer detection. In March 2011, we extended this agreement for an additional year,
effective May 1, 2011. We received approximately $1.72 million in 2011 from Konica Minolta under these development agreements and
received a total of $1.3 million for the third year of development (original period of May 1, 2012 to April 30, 2013). 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 have the right to seek new collaborative partners to further develop our technology.
Research, Development and Engineering
To date, we have
been engaged primarily in the research, development and testing of LuViva and our core biophotonic technologies, as well as our
since-discontinued glucose monitoring, diabetes detection and infant jaundice products. From inception in 1992 to June 30, 2014,
we have incurred about $59.6 million in research and development expenses, net of about $24.6 million reimbursed through collaborative
arrangements and government grants. Research and development costs were about $624,000 and 834,000 in the second quarter of 2014
and 2013, respectively, and about $2.7 million and $3.2 million in 2013 and 2012, respectively.
Since 2008, we
have focused our research and development and our engineering resources almost exclusively on development of our biophotonic cancer
detection technology, with only limited support of other programs funded through government contracts or third party funding. Because
we have not yet launched commercial versions of our technology, only prototypes of our cervical cancer detection product have been
tested. 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 commercial prototypes of our cancer detection products can
be produced.
Several of the
components used in our product 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.
Manufacturing, Sales Marketing
and Distribution
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 commercial levels. We will need to develop additional expertise in order to successfully manufacture market
and distribute any future 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
others patents and patent applications necessary to develop our products. As of November 14, 2014, we have 21 granted U.S.
patents relating to our biophotonic cancer detection technology and four pending U.S. patent applications. We also have three
granted patents that apply to our interstitial fluid analysis system.
Any of the patents
held directly by us or licensed by us from third parties, or any of the processes used in the manufacture of our products, may
be successfully challenged, invalidated or circumvented. Additionally, we may not otherwise be able to rely on these patents. In
addition, we cannot be sure that competitors, many of whom have substantial resources and have made substantial investments in
competing technologies, will not seek to 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 foreign markets. If any of our patents are successfully challenged,
invalidated or circumvented or our rights or ability to manufacture our products were to be proscribed or limited, our ability
to continue to manufacture and market our products could be adversely affected, which would likely have a material adverse effect
upon our business, financial condition and results of operations.
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 tests, primarily the Pap 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 MediSpectra, Inc. (since acquired by Spectrascience, Inc.). MediSpectra was granted a very limited FDA
approval in March 2006 to market its device for detection of cervical cancers. The limited approval limits use of the MediSpectra
device only after a colposcopy, as an adjunct. We will be required to develop devices that are more accurate, easier to use or
less costly to administer to have a competitive advantage.
In June 2006, the
FDA approved the HPV vaccine Gardasil from drug maker Merck & Co., Inc. 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.
Government Regulation
All of our products
are, or will be, regulated as medical devices. Medical device products are subject to rigorous FDA and other governmental agency
regulations in the United States and may be subject to regulations of relevant foreign agencies. 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.
The FDA regulates
the clinical testing, design manufacture, labeling, packaging, marketing, distribution and record-keeping for these products to
ensure that medical products distributed in the United States are safe and effective for their intended uses.
In the United States,
medical devices are classified into one of three classes on the basis of the controls deemed necessary by the FDA to reasonably
assure the devices’ safety and effectiveness. Under FDA regulations, Class I devices are subject to general controls, such
as labeling requirements, notification to the FDA before beginning marketing activities and adherence to specified good manufacturing
practices. Class II devices are subject to general and special controls, such as performance standards, surveillance after beginning
market activities, patient registries, and FDA guidelines. Generally, Class
III devices are those which must receive premarket approval from the FDA to ensure their safety and effectiveness. Examples of
Class III devices include life-sustaining, life-supporting and implantable devices, as well as new devices that have not been found
substantially equivalent to legally marketed Class I or II devices.
A medical device
manufacturer may seek clearance to market a medical device by filing a 510(k) premarket notification with the FDA if the manufacturer
establishes that a newly developed device is substantially equivalent to either a device that was legally marketed before May 28,
1976, the date upon which the Medical Device Amendments of 1976 were enacted, or to a device that is currently legally marketed
and has received 510(k) premarket clearance from the FDA. The 510(k) premarket notification must be supported by appropriate information,
which may include data from clinical trials to establish the claim of substantial equivalence. Commercial distribution of a device
for which a 510(k) premarket notification is required can begin only after the FDA determines the device to be substantially equivalent
to a legally marketed device. The FDA has recently been requiring a more rigorous demonstration of substantial equivalence than
in the past. It generally takes from three to 12 months from the date of submission to obtain clearance of a 510(k) submission,
but it may take substantially longer. The FDA may determine that a proposed device is not substantially equivalent to a legally
marketed device, or may require additional information.
An adverse determination
or a request for additional information could delay the market introduction of new products that fall into this category, such
as LuViva, which could have a material adverse effect on our business, financial condition and results of operations. For LuViva,
any of our future products that have to be cleared through the PMA or 510(k) process, including modifications or enhancements that
could significantly affect the safety or effectiveness of the device or that constitute a major change to the intended use of the
device will require new PMA application and approval or a 510(k) premarket notification. Any modified device for which a new PMA
or 510(k) premarket notification is required cannot be distributed until the PMA is approved or 510(k) clearance is obtained. We
may not be able to obtain PMA approval or 510(k) clearance in a timely manner, if at all, for LuViva or any future devices or modifications
to LuViva or such devices for which we may submit a PMA 510(k) application.
A PMA application
must be submitted if a proposed device is not substantially equivalent to a legally marketed Class I or Class II device or for
specified Class III devices. The application must contain valid scientific evidence to support the safety and effectiveness of
the device, which includes the results of clinical trials, all relevant bench tests, and laboratory and animal studies. The application
must also contain a complete description of the device and its components, as well as a detailed description of the methods, facilities
and controls used for its manufacture, including, where appropriate, the method of sterilization and its assurance. In addition,
the application must include proposed labeling, advertising literature and any required training methods. If human clinical trials
of a device are required in connection with an application and the device presents a significant risk, the sponsor of the trial
is required to file an application for an investigational device exemption before beginning human clinical trials. Usually, the
manufacturer or distributor of the device is the sponsor of the trial. The application must be supported by data, typically including
the results of animal and laboratory testing, and a description of how the device will be manufactured. If the application is reviewed
and approved by the FDA and one or more appropriate institutional review boards, human clinical trials may begin at a specified
number of investigational sites with a specified number of patients. If the device presents a non-significant risk to the patient,
a sponsor may begin clinical trials after obtaining approval for the study by one or more appropriate institutional review boards,
but FDA approval for the commencement of the study is not required. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study if the compensation received does not exceed the costs of manufacture, research, development
and handling. A supplement for an investigational device exemption must be submitted to and approved by the FDA before a sponsor
or an investigator may make a significant change to the investigational plan that may affect the plan’s scientific soundness
or the rights, safety or welfare of human subjects.
Upon receipt of
a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive
review. If the FDA makes this determination, it will accept the application for filing. Once the submission is accepted for filing,
the FDA begins an in-depth review of the application. An FDA review of a PMA application generally takes one to two years from
the date the application is accepted for filing. However, this review period is often significantly extended by requests for more
information or clarification of information already provided in the submission. During the review period, the submission may be
sent to an FDA-selected scientific advisory panel composed of physicians and scientists with expertise in the particular field. The FDA scientific
advisory panel issues a recommendation to the FDA that may include conditions for approval. The FDA is not bound by the recommendations
of the advisory panel. Toward the end of the PMA application review process, the FDA will conduct an inspection of the manufacturer’s
facilities to ensure that the facilities are in compliance with applicable good manufacturing practice. If the FDA evaluations
of both the PMA application and the manufacturing facilities are favorable, the FDA will issue a letter. This letter usually contains
a number of conditions, which must be met in order to secure final approval of the application. When those conditions have been
fulfilled to the satisfaction of the FDA, the agency will issue an approval letter authorizing commercial marketing of the device
for specified indications and intended uses.
The PMA application
review process can be expensive, uncertain and lengthy. A number of devices for which a premarket approval has been sought have
never been approved for marketing. The FDA may also determine that additional clinical trials are necessary, in which case the
premarket approval may be significantly delayed while trials are conducted and data is submitted in an amendment to the PMA application.
Modifications to the design, labeling or manufacturing process of a device that has received premarket approval may require the
FDA to approve supplements or new applications. Supplements to a PMA application often require the submission of additional information
of the same type required for an initial premarket approval, to support the proposed change from the product covered by the original
application. The FDA generally does not call for an advisory panel review for PMA supplements, though applicants may request one.
If any PMAs are required for our products, we may not be able to meet the FDA’s requirements or we may not receive any necessary
approvals. Failure to comply with regulatory requirements or to receive any necessary approvals 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 FDA and some foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must comply. FDA enforcement policy strictly prohibits the
marketing of approved medical devices for unapproved uses. Any products we manufacture or distribute under FDA clearances or approvals
are subject to pervasive and continuing regulation by the FDA. The 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 FDA requires
us to register as a medical device manufacturer and list our products. We are also subject to inspections by the FDA and state
agencies acting under contract with the 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 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.
We are also subject
to a variety of other controls that affect our business. Labeling and promotional activities are subject to scrutiny by the FDA
and, in some instances, by the Federal Trade Commission. The 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.
International
sales of our products are subject to the regulatory requirements of each country in which we market our products. The regulatory
review process varies from country to country. The European Union has promulgated rules that require medical products to affix
the CE mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical
directives. The appropriate ISO certification is one of the CE mark requirements. We maintain ISO 13485:2003 certification, which
allows us to issue a CE mark for our non-invasive cervical cancer detection device once development is complete and sell the device
in the European Union and other markets. Losing the right to affix the CE mark to our cervical cancer detection device or any
future products could have a material adverse effect on our business, financial condition and results of operations.
We will 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 November
14, 2014, we had 32 regular employees and consulting or other contract arrangements with 4 additional persons to provide services
to us on a full- or part-time basis. Of the 36 people employed or engaged by us, 12 are engaged in research and development activities,
7 are engaged in sales and marketing activities, 2 are engaged in clinical testing and regulatory affairs,9 are engaged in manufacturing
and development, and 6 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. Three 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.
Properties
Our corporate offices,
which also comprise our administrative, research and development, marketing and production facilities, are located at 5835 Peachtree
Corners East, Suite D, 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.
Market
for our Common Stock and Related Stockholder Matters
Our common stock is listed on the
OTCQB marketplace under the ticker symbol “GTHP.” The number of record holders of our common stock at November 14,
2014 was 205.
The high and low sales prices up
to November 14, 2014 and calendar years 2013 and 2012, as reported by the OTCQB, are as follows:
|
2014 |
2013 |
2012 |
|
High |
Low |
High |
Low |
High |
Low |
First Quarter |
$0.60 |
$0.46 |
$0.80 |
$0.66 |
$1.74 |
$0.69 |
Second Quarter |
$0.60 |
$0.40 |
$0.94 |
$0.68 |
$0.90 |
$0.64 |
Third Quarter (1) |
$0.50 |
$0.31 |
$0.73 |
$0.52 |
$0.94 |
$0.68 |
Fourth Quarter |
$0.34 |
$0.20 |
$0.68 |
$0.46 |
$0.76 |
$0.52 |
(1) For 2014, through November 14, 2014.
Dividend Policy
We have not paid
any dividends since our inception and do not intend to pay any dividends in the foreseeable future. The certificate of designations
pertaining to our Series B convertible preferred stock imposes certain restrictions on our ability to pay dividends on our common
stock. For information about these restrictions and the dividends to which holders of Series B convertible preferred stock are
entitled, see “Description of Securities—Preferred Stock.”
Securities
Authorized for Issuance Under Equity Compensation Plans
All the securities
we have provided our employees, directors and consultants have been issued under our stock option plans, which are approved by
our stockholders. We have issued common stock to other individuals that are not employees or 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 December 31, 2013:
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 | |
| 6,531,192 | | |
$ | 0.66 | | |
| 6,724,027 | |
Equity compensation plans not approved by security holders | |
| — | | |
| — | | |
| — | |
Total | |
| 6,531,192 | | |
$ | 0.66 | | |
| 6,724,027 | |
Management’s
Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be
read in conjunction with our financial statements and notes thereto accompanying this prospectus.
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 development of LuViva and extension of our cancer detection technology into other cancers, including lung and esophageal.
Our technology, including products in research and development, primarily relates to biophotonics technology for the non-invasive
detection of cancers.
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 private sale of preferred stock and debt securities, public and private sales of common stock,
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 September 30, 2014, we had an accumulated deficit of
about $109.8 million. To date, we have engaged primarily in research and development efforts. We do not have significant
experience in manufacturing, marketing or selling our products. Our development efforts may not result in commercially viable
products and we may not be successful in introducing 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 2014 as we continue to expend substantial resources to introduce LuViva, further the development of our other products, obtain
regulatory clearances or approvals, build our marketing, sales, manufacturing and finance organizations and conduct further research
and development.
Our product revenues
to date have been limited. In 2012, the majority of our revenues were from grants from the NCI and NHI and our collaborative arrangements
with Konica Minolta. In 2013, the majority of our revenues were from grants from the NCI and NHI and revenue from the sale of LuViva.
We expect that the majority of our revenue in 2014 will be derived from similar sources.
Recent Developments
On September 10,
2014, we entered into a note purchase agreement with Tonaquint, Inc., pursuant to which we sold a secured promissory note to Tonaquint
with an initial principal amount of $1,275,000, for a purchase price of $700,000 (an original issue discount of $560,000). The
note does not bear interest, and will be due six months from issuance. We may prepay the note at any time, with the following
discounts applied: if we prepay the note on or before the 70th day from the date of issuance, a $420,000 reduction of the outstanding
principal amount of the note will be applied, and if we prepay the note after the 70th day, but on or before the 120th day from
the date of issuance, a $210,000 reduction of the outstanding principal amount of the note will be applied. 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. See “Description of Securities—Secured Promissory Note.” We are using the proceeds
from the secured note offering to support general working capital and operations.
On September 2,
2014, we entered into a subscription agreement with ITEM Medikal Teknolojileri LTD STI, a Turkish corporation, referred to as
ITEM, pursuant to which, on September 27, 2014, we sold 651,042 shares of our common stock and a warrant to purchase an additional
325,521 shares, for an aggregate purchase price of $200,000 in a private placement pursuant to Regulation S promulgated under
the Securities Act. The warrant is immediately exercisable, has an exercise price per share of $0.4608, and expires five years
from the date of issuance. The warrant is subject to a mandatory exercise provision should the average trading price of our common
stock over any 30 consecutive day trading period exceed $0.9216. The proceeds will be used for efforts to achieve FDA approval
for LuViva, to increase manufacturing and international sales of LuViva, to enhance our intellectual property portfolio, and other
related corporate purposes.
On October
23, 2014 and May 21, 2014, our President and CEO, Gene Cartwright, advanced us $30,000 and $100,000, respectively, in cash for
5% simple interest notes, and on August 4, 2014, Mr. Cartwright advanced us $200,000 in cash for a 5% 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. We intend to repay the advances with proceeds from the offering.
On July 25, 2014,
we announced that we filed an amendment to our PMA application with the FDA for LuViva. The filing followed the face-to-face meeting
we had with the FDA in May 2014 and addressed questions raised in a September 6, 2013 not-approvable letter that we received from
the agency. The FDA has 180 days to respond to the amendment.
On July 17, 2014,
we announced that the U.S. Patent and Trademark Office granted a new patent with 22 claims that support the technology behind LuViva.
Patent number 8,781,560 B2 entitled “Method and Apparatus for Rapid Detection and Diagnosis of Tissue Abnormalities”
covers the use of two types of spectroscopy in conjunction with images of tissue to detect abnormalities in tissue.
On July 10, 2014,
we announced that LuViva was approved for sale in Mexico by the Federal Commission for Protection Against Health Risks.
On June 20, 2014,
we held our annual meeting of stockholders in Atlanta, Georgia. At the meeting, each of Mr. Cartwright, Ronald Hart, John Imhoff,
Michael James, Jonathan Niloff, and Linda Rosenstock were re-elected as directors of the Company to serve until our annual meeting
in 2015 or until each such director’s successor has been elected. In addition, our stockholders approved an amendment to
our Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of common stock to a total of
195,000,000 shares, approved, on a non-binding basis, the compensation of our named executive officers, and ratified the appointment
of UHY LLP as our independent registered public accounting firm for the 2014 fiscal year.
On May 27, 2014,
we presented the results of a blinded clinical study, in which LuViva identified 100% of all cervical disease cases, at the International
Federation for Cervical Pathology and Colposcopy in London.
On April 23,
2014, we entered into a securities purchase agreement with Magna Equities II, LLC (f/k/a Hanover Holdings I, LLC), an affiliate
of Magna Group, referred to as Magna. Pursuant to the purchase agreement, we sold Magna a 6% senior convertible note with an initial
principal amount of $1.5 million and an 18-month term, for a purchase price of $1.0 million (an approximately 33.3% original issue
discount). Additionally, pursuant to the purchase agreement, Magna purchased on May 23, 2014 an additional 6% senior convertible
note with a principal amount of $2.0 million and an 18-month term, for a fixed purchase price of $2.0 million. Pursuant to the
terms of the initial senior convertible note, $500,000 of the outstanding principal amount (together with any accrued and unpaid
interest with respect to such portion) was automatically extinguished upon satisfaction of certain conditions. Subject to certain
limitations, the senior convertible notes are convertible at any time, in whole or in part, at Magna’s option, into shares
of our common stock, at a conversion price equal to the lesser of $0.55 per share and a discount from the lowest daily volume-weighted
average price of our common stock in the five trading days prior to conversion. The discount is 20% if the conversion takes place
on or prior to December 19, 2014 (November 20, 2014 for the initial senior convertible note, pursuant to the November 6, 2014
agreement described below), and 25% if after that date. We paid Magna a commitment fee for entering into the purchase agreement
in the form of 321,820 shares of common stock. See “Description of Securities—Senior Convertible Notes”. On
November 6, 2014, Magna agreed to refrain from converting any portion of the senior convertible notes or selling any shares of
our common stock until after November 21, 2014, in exchange for an acceleration of the scheduled increase in the conversion discount
on the April 23, 2014 senior convertible note from December 19, 2014 to November 21, 2014.
On November
3, 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, Messrs. Cartwright and James, and Drs. Rosenstock and Imhoff, advanced
us $50,000, $50,000, $50,000, and $25,000 in cash, respectively, for 10% simple interest notes. 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.
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.
Currently, our policies that could require
critical management judgment are in the areas of revenue recognition, reserves for accounts receivable and inventory valuation.
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.
Stock Option Plan: We
measure the cost of employees services received in exchange for equity awards, including stock options, based on the grant date
fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards.
Warrants: We
have issued warrants, which allow the warrant holder to purchase one share of stock at a specified price for a specified period
of time. We record equity instruments, including warrants issued to non-employees, based on the fair value at the date of issue.
The fair value of the warrants, at date of issuance, is estimated using the Black-Scholes Model.
Allowance for Inventory
Valuation: We estimate losses from obsolete and damaged inventories quarterly and revise our reserves as a result.
Since the inventory is stated at the lower of cost or market, we also estimated an allowance for the potential losses on the sale
of inventory.
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.
Debt Issuance: Debt
issuance costs incurred in securing the Company’s financing arrangements are capitalized and amortized over the term of
the debt. Deferred financing costs are included in other long term assets.
Results of Operations
Comparison of the Three Months Ended September
30, 2014 and 2013
Contract and Grant Revenue: Contract
and grant revenue decreased to approximately $22,000 for the quarter ended September 30, 2014, from approximately $86,000 for
the same period in 2013, due to the termination of grant income from the National Cancer Institute in the fourth quarter of 2013.
Sales Revenue, Cost of Goods Sold and Gross
Loss from Devices and Disposables: Sales revenue from the sale of LuViva devices and disposables for the three months ended September
30, 2014, was approximately $262,000. Related costs of goods sold were approximately $260,000, which resulted in a gross profit
for the device and disposables of approximately $2,000. For the same period last year, sales revenue from the sale of LuViva devices
and disposables for the three months ended September 30, 2013, was approximately $58,000. Related costs of goods sold were approximately
$117,000, which resulted in a gross loss on the device and disposables of approximately $59,000.
Research and Development Expenses: Research
and development expenses increased to approximately $892,000 for the three months ended September 30, 2014, compared to $596,000
for the same period in 2013. The increase, of approximately $296,000, was primarily due to the cost of two contract
software engineers hired to enhance the software of the LuViva device, as we shift resources toward full line production.
Sales and Marketing Expenses: Sales
and marketing expenses were approximately $135,000 during the three months ended September 30, 2014, compared to $249,000 for
the same period in 2013. The decrease was primarily due to reduced marketing efforts, as the Company focused on limiting expenses.
General and Administrative
Expenses: General and administrative expenses increased to approximately $1.4 million during the three months
ended September 30, 2014, compared to approximately $822,000 for the same period in 2013. The increase, of
approximately $590,000 or 72.0%, is primarily related to increased employee-related expenses of approximately $125,000;
non-cash directors’ compensation accrual expenses of approximately $126,000; inventory write off for obsolescence of
approximately $124,00; accrued professional fees, in conjunction with the Company’s on-going financing efforts of
approximately $240,000, as well as clinical trial expenses for our product efficacy testing and travel expenses of
approximately $20,000, offset in part by overall reduction in other operating expenses, including marketing expenses.
Interest Expense: Interest expense
increased to approximately $371,000 for the three months ended September 30, 2014, as compared to approximately $11,000 for the
same period in 2013. The increase is primarily due to higher interest and amortized discount expenses on our 2014 financings,
for the three months ended September 30, 2014.
Net loss was approximately $3.0 million
during the three months ended September 30, 2014, compared to $1.4 million for the same period in 2013, for the reasons outlined
above.
Comparison of the nine Months Ended September 30,
2014 and 2013
Contract and Grant Revenue: Contract
and grant revenue decreased to approximately $52,000 for the nine months ended September 30, 2014, from approximately $474,000
for the same period in 2013. Contract revenue, for the nine months ended September 30, 2014, was lower than the comparable period
in 2013, due the termination of certain agreements with Konica Minolta as well as termination of grant income from the National
Cancer Institute, in the fourth quarter of 2013.
Sales Revenue, Cost of Goods Sold and Gross
Loss from Devices and Disposables: Sales revenue from the sale of LuViva devices and disposables for the nine months ended September
30, 2014, was approximately $586,000. Related costs of goods sold were approximately $723,000, which resulted in a gross loss
for the device and disposables of approximately $137,000. For the same period last year, sales revenue from the sale of LuViva
devices and disposables for the nine months ended September 30, 2013, was approximately $306,000. Related costs of goods sold
were approximately $394,000, which resulted in a gross loss on the device and disposables of approximately $88,000.
Research and Development Expenses: Research
and development expenses decreased to approximately $2.1 million for the nine months ended September 30, 2014, from approximately
$2.2 million for the same period in 2013. The decrease, of approximately $121,000, was primarily due to a shift of resources toward
marketing and production, offset in parts by the cost of two software engineers hired to enhance the software
of the LuViva device, as we shift resources toward full line production.
Sales and Marketing Expenses: Sales
and marketing expenses were approximately $762,000, during the nine months ended September 30, 2014, compared to $608,000 for
the same period in 2013. The increase, of approximately $154,000, was primarily due to a shift in resources toward marketing and
away from research and development, offset in part by reduced marketing efforts, as the Company focused on limiting expenses.
General and Administrative
Expenses: General and administrative expenses increased to approximately $3.6 million during the nine months ended
September 30, 2014, compared to approximately $2.8 for the same period in 2013. The increase, of approximately
$760,000 or 27.0%, is primarily related to increased employee-related expenses of approximately $258,000; non-cash directors’
compensation accrual expenses of approximately $140,000; inventory write off for obsolescence of approximately $128,000;
accrued professional fees, in conjunction with the Company’s on-going financing efforts of approximately $283,000, as
well as clinical trial expenses for our product efficacy testing and travel expenses of approximately $101,000, offset in
part by overall reduction in other operating expenses, including marketing expenses.
Interest Expense: Interest
expense increased to approximately $445,000 for the nine months ended September 30, 2014, as compared to approximately $35,000
for the same period in 2013. The increase is primarily due to higher interest expenses on our 2014 financings, for the nine
months ended September 30, 2014.
Net loss was approximately $6.7million
during the nine months ended September 30, 2014, compared to approximately $5.0 million during the nine months ended September
30, 2013.
Comparison of 2013 and 2012
General: Net loss
attributable to common stockholders increased to approximately $10.4 million or $0.16 per share in 2013, from $4.4 million or $0.08
per share in 2012.
Revenue from Grants
and other Agreements: Total revenues decreased to approximately $820,000 in 2013, from $3.3 million in 2012, primarily due to the
decrease in revenue associated with our prior collaborative agreements with Konica Minolta (terminated as of February 2013) to
zero in 2013 from approximately $2.5 million in 2012, partially offset by an increase in revenue from NCI and NHI grants to approximately
$688,000 in 2013 from $68,000 in 2012. There were no costs of sales associated with this revenue in 2013 and 2012.
Sales Revenue,
Cost of Sales and Gross Loss from Devices and Disposables: Revenues from the sale of LuViva devices for the year ended December
31, 2013 and 2012 were approximately $359,000 and $72,000, respectively. Related costs of sales and valuation allowances on the
Net Realizable Values were approximately $611,000 and $117,000, respectively, which resulted
in gross losses on the device of approximately $252,000 and $45,000, respectively.
Research and Development
Expenses: Research and development expenses decreased to approximately $2.7 million in 2013, compared to approximately $3.2 million
in 2012, due to a decrease in expenses associated with our esophageal cancer technology and LuViva devices in production mode.
Sales and Marketing
Expenses: Sales and marketing expenses increased to approximately $901,000 in 2013, compared to approximately $424,000 in 2012,
due to an increase in expenses associated with marketing efforts for LuViva.
General and Administrative
Expense: General and administrative expense decreased to approximately $3.5 million in 2013, from about $3.9 million in 2012. The
decrease was primarily related to a decrease in attorney and consulting expenses for the year ended December 31, 2013.
Other Income: Other
income was approximately $110,000 in 2013, compared to zero in 2012. The increase was primarily related to approximately $78,000
received from our insurance provider as a distribution, as well as a refund from one of our distributors of approximately $18,000.
Interest Expense:
Interest expense decreased to approximately $45,000 for the year ended December 31, 2013, as compared to expenses of approximately
$72,000 for the same period in 2012. The decrease was primarily due to a reduction in past due notes payable.
Fair Value of Warrants
Expense: Fair value of warrants expensed were approximately $674,000 for the year ended December 31, 2013, as compared to none
for the same period in 2012.
There was no income
tax benefit recorded for the years ended December 31, 2013 and 2012, 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 September 30, 2014, we had cash of approximately $42,000 and negative working capital of approximately
$2.0 million.
Our major cash flows in the quarter ended
September 30, 2014 consisted of cash out-flows of approximately $1.9 million from operations, including approximately $6.7 million
of net loss, cash outflow of $144,000 from investing activities and a net change from financing activities of $4.4 million, which
primarily represents the proceeds received from the sale of convertible notes and bridge notes, offset in part by cash utilized
for loan repayment.
On September 2, 2014, we entered into a
subscription agreement with ITEM Medikal Teknolojileri LTD STI, a Turkish corporation, referred to as ITEM, pursuant to which,
on September 27, 2014 we sold 651,042 shares of our common stock and a warrant to purchase an additional 325,521 shares, for an
aggregate purchase price of $200,000 in a private placement pursuant to Regulation S promulgated under the Securities Act. The
warrant is immediately exercisable, has an exercise price per share of $0.4608, and expires five years from the date of issuance.
The warrant is subject to a mandatory exercise provision should the average trading price of our common stock over any 30 consecutive
day trading period exceed $0.9216.
On September 10, 2014, we entered
into a note purchase agreement with Tonaquint, Inc., pursuant to which we sold a secured promissory note to Tonaquint with an
initial principal amount of $1,275,000, for a purchase price of $700,000 (an original issue discount of $560,000). The note does
not bear interest, and will be due six months from issuance. We may prepay the note at any time, with the following discounts
applied: if we prepay the note on or before the 70th day from the date of issuance, a $420,000 reduction of the outstanding principal
amount of the note will be applied, and if we prepay the note after the 70th day, but on or before the 120th day from the date
of issuance, a $210,000 reduction of the outstanding principal amount of the note will be applied. 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.
On
October 23, 2014, our President and CEO, Gene Cartwright, advanced the Company $30,000 in cash for a 5% simple interest note.
On October 24, 2014 and October 7, 2014, our Senior Vice President of Engineering, Richard Fowler, advanced the Company $6,100
and $20,000, respectively, in cash for 6% simple interest notes. On October 7, 2014, our Director of Marketing advanced the Company
$10,000 in cash for a 6% simple interest note. On November 4, 2014, one of our stockholders advanced the Company $100,000 in cash
for a lump sum repayment of $106,500 on or by November 30, 2014.
We will be required to raise
additional funds through public or private financing, additional collaborative relationships or other arrangements. We
believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the
third quarter of 2015. 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.
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.
Our financial statements have been prepared
and presented on a basis assuming we will continue as a going concern. However, we have experienced operating losses since
our inception and, as of September 30, 2014, had an accumulated deficit of approximately $109.8 million, negative working capital
of approximately $2.0 million and stockholders’ deficit of approximately $4.0 million. These 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 contained
in our annual report on Form 10-K for the year ended December 31, 2013.
Off-Balance Sheet Arrangements
We have no material
off-balance sheet arrangements; no special purpose entities; nor do activities that include non-exchange-traded contracts account
for at fair value.
Directors
and Executive Officers
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 November 14, 2014:
Name |
Age |
Position with Guided Therapeutics |
Gene S. Cartwright, Ph.D. |
60 |
Chief Executive Officer, Acting Chief Financial Officer, President and Director |
Richard L. Fowler |
58 |
Senior Vice President of Engineering |
Ronald W. Hart, Ph.D. |
72 |
Vice Chairman and Director |
John E. Imhoff, M.D. |
65 |
Director |
Michael C. James |
55 |
Chairman and Director |
Jonathan M. Niloff, M.D. |
60 |
Director |
Linda Rosenstock, M.D. |
63 |
Director |
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.
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, 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, CEO and Director will work with and advise
the board as to how we can successfully market and build the LuViva international sales.
Rick Fowler,
Mr. Fowler, Sr. VP 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, QA, sales, service, and finance). In addition,
Mr. Fowler is well versed in global medical device regulatory and product compliance requirements.
Ronald W. Hart,
Ph.D. has served as a member of our board since March 2007 and was elected Vice Chairman of the Board in 2011. He has published
over 600 peer-reviewed publications, has been appointed to a number of academic positions and is credited with developing the first
direct proof that DNA is causal in certain forms of cancer. He chaired a number of federal committees and task forces, including
the development and implementation of the Technology Transfer Act of 1986 and the White House Task Force on Chemical Carcinogenesis.
In 1980, Dr. Hart was appointed Director of the National Center for Toxicological Research, the research arm of the FDA, a position
he held until 1992. In 1992, Dr. Hart was the first ever Presidential Appointee to the position of Distinguished Scientist in Residence
for the US Public Health Service/FDA, a position he held until his retirement in 2000. Dr. Hart received his Ph.D. in physiology
and biophysics from the University of Illinois. Dr. Hart has helped in the development of business strategy for a number of start-up
companies.
Dr. Hart adds considerable value to
the board in at least four critical areas:
| (1) | As a former FDA bureau chief, he advises the Board and management on our FDA relationship and
strategy. |
| (2) | As an active participant in the venture community, he advises the Board on financing and other
opportunities. |
| (3) | As an expert in organizational matters, he advises the Board and management regarding company
strategy and potential strategic partnerships. |
| (4) | As an expert in international trade, he advises the Board and management on international partnering
and distribution agreements. |
John E. Imhoff,
M.D. has served as a member of our board 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 our company, especially as Dr. Imhoff can combine this knowledge with clinical applications. His experience
in the investment community also lends itself as invaluable to a public company that participates in equity transactions.
Michael C. James
has served as a member of our board since March 2007 and as Chairman of the Board since October 22, 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 as a director in April 2010. Dr. Niloff is Vice President and Chief Medical Officer of McKesson
Connected Care and Analytics, a division of McKesson Technology Solutions, a medical software company. Prior to that, Dr.
Niloff was the Founder, Chairman of the Board and Chief Medical Officer of MedVentive Inc. Prior to joining MedVentive, Dr. Niloff
served 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 MD 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 a Dean Emeritus and Professor of the University
of California, Los Angeles (UCLA) Fielding School of Public Health, a position she has held since 2000. She holds appointments
as Professor of Medicine and Environmental Health Sciences and is a recognized authority in broad areas of 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 also chairs the preventive services
for women committee of the institute of national academy of sciences 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 LuViva. 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.
CORPORATE
GOVERNANCE
Board Meetings and Committees
Our board of directors
held four meetings during the fiscal year ended December 31, 2013. No director attended fewer than 75% of the meetings of the board
of directors or the committees on which he served during the fiscal year ended December 31, 2013. We encourage our directors to
attend the annual meeting of stockholders. In 2013, all seven directors attended our annual meeting. The board of directors has
an audit committee, a compensation committee and a nomination committee. 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. Hart, 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, 5835 Peachtree Corners East, Suite D, Norcross, Georgia
30092.
The
audit committee selects and engages the independent registered public accounting firm to audit our annual financial statements
and pre-approves all allowable audit 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 currently consists of Mr. James (Chairman)
and Drs. Niloff and Rosenstock. The audit committee met four times during 2013. The board of directors has determined that 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 and Rosenstock
meet the criteria specified under applicable SEC regulations for an “audit committee financial expert” and that the
committee members are financially sophisticated.
The compensation
committee, in consultation with our Chief Executive Officer, sets the compensation for our officers, reviews management organization
and development, reviews significant employee benefit programs and establishes and administers executive compensation programs.
The compensation committee currently consists of Dr. Imhoff (Chairman) and Dr. Hart, each of whom is independent under NASDAQ listing
standards. The compensation committee met once during 2013.
The nomination
committee, in consultation with our Chief Executive Officer, reviews and recommends individuals to be nominated as directors. The
nomination committee currently consists of Dr. Hart (Chairman) and Dr. Rosenstock. The nomination committee met once during 2013.
The nomination committee has not yet established formal policies relating to the consideration of candidates for nomination to
our board. 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 been no stated minimum criteria for director nominees, although
our board has considered such other factors as it has deemed to be in the best interests 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 needs of the board 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 available on our web site, at www.guidedinc.com. The nomination
committee currently operates without a charter.
Board Leadership Structure and
Role in Risk Oversight
Dr. Cartwright,
our President and Chief Executive Officer, also serves as a director; our board is led by the Chairman, Mr. James, and Vice Chairman,
Dr. Hart, two 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. In addition, our 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). The audit committee 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 compensation committee 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
Generally,
non-employee directors receive payments of $3,000 per quarter, $1,000 per meeting attended in person or $500 if attended by
telephone, and $300 per committee meeting attended. None of our directors received any compensation or reimbursement in cash
for fiscal year ended December 31, 2013; however, they did receive common stock and stock options in lieu of cash for 2013
and 2012, in connection with their services as members of the board of directors and their service on board
committees.
Director Compensation Table, as
of December 31, 2013
Name and
Principal Position |
Common Stock
Awards
(#) |
Stock Option
Awards
(#) |
Total
(#) |
Ronald W. Allen, Former Chairman & Director |
40,625 |
31,250 |
71,875 |
Ronald W. Hart, Ph.D., Vice Chairman & Director |
42,188 |
31,250 |
73,438 |
John E. Imhoff, M.D., Director |
43,750 |
31,250 |
75,000 |
Michael C. James, Chairman and Director |
46,875 |
31,250 |
78,125 |
Jonathan M. Niloff, M.D., Director |
40,625 |
31,250 |
71,875 |
Linda Rosenstock, M.D., Director |
37,500 |
31,250 |
68,750 |
Outstanding Equity Awards to Directors at December 31, 2013
|
Option Awards |
Name and Principal Position |
Option Awards
(#) |
Exercise Price
($) |
Ronald W. Allen, Former Chairman and Director |
636,250 |
0.40 |
Ronald W. Hart, Ph.D., Director |
517,500 |
0.37 |
John E. Imhoff, M.D., Director |
303,750 |
0.78 |
Michael C. James, Current Chairman and Director |
107,500 |
0.78 |
Jonathan Niloff, M.D., Director |
142,917 |
0.74 |
Linda Rosenstock, M.D., Director |
125,000 |
0.80 |
Executive
Compensation
Summary Compensation Table
The following table
lists specified compensation we paid during each of the fiscal years ended December 31, 2013 and 2012 to the chief executive officer
and our two other most highly compensated executive officers, collectively referred to as the named executive officers, in 2013:
2013 and 2012 Summary Compensation
Table
Name and Principal Position | |
Year | |
Salary ($) | |
Bonus ($) | |
Option Awards ($)(1) | |
Total ($) |
Mark Faupel, Ph.D. | |
| 2013 | | |
| 243,000 | | |
| — | | |
| — | | |
| 243,000 | |
President, CEO, Acting CFO and Director (2) | |
| 2012 | | |
| 243,000 | | |
| — | | |
| 214,500 | | |
| 457,000 | |
Richard Fowler, | |
| 2013 | | |
| 197,000 | | |
| — | | |
| — | | |
| | |
Senior Vice President of Engineering | |
| 2012 | | |
| 195,000 | | |
| — | | |
| 6,250 | | |
| 195,000 | |
Shabbir Bambot, Ph.D. (3) | |
| 2013 | | |
| 80,222 | | |
| — | | |
| — | | |
| 80,222 | |
Vice President of Research and Development | |
| 2012 | | |
| 193,000 | | |
| — | | |
| 6,000 | | |
| 193,000 | |
| (1) | See Note 3 to the annual consolidated financial statements that accompany this prospectus. |
| (2) | Dr. Faupel currently serves as the Company’s Chief Scientific Officer, but is no longer an executive officer. |
| (3) | Dr. Bambot resigned from the Company on May 10, 2013. |
Dr. Faupel’s
2013 and 2012 compensation consisted of a base salary of $243,000, and usual and customary company benefits. As of December 31,
2013, Dr. Faupel’s remaining deferred salary was approximately $225,861. On July 2, 2012, Dr. Faupel was issued 153,846 shares
of common stock at $0.65, in partial repayment of debt.
Mr. Fowler’s
2013 and 2012 compensation consisted of a base salary of $197,000 and $195,000, respectively, and usual and customary company benefits.
He received no bonus and no stock options in 2013 and received 6,250 stock options in 2012. As of December 31, 2013, Mr. Fowler’s
total deferred salary was approximately $98,858.
Dr. Bambot’s
2013 and 2012 compensation consisted of a base salary of $193,000, and $193,000, respectively, and usual and customary company
benefits.
Outstanding Equity Awards to Officers
at December 31, 2013
|
Option Awards |
Name and Principal Position |
Number of
Securities
Underlying
Options
Exercisable
(#)(1) |
Number of Securities Underlying
Options Un-exercisable
(#) |
Equity Incentive
Plan
Awards: Number of Securities Under-
lying Un-exercised
Unearned Options
(#) |
Option
Exercise
Price
($)(2) |
Option
Expiration
Date |
Mark Faupel, Ph.D.
President, CEO & Acting CFO (3) |
1,878,244 |
— |
400,105 |
0.63 |
12/16/2021 |
Richard Fowler
Senior Vice President of Engineering |
405,062 |
— |
90,938 |
0.48 |
12/16/2021 |
| (1) | Represents fully vested options. |
| (2) | Based on all outstanding options. |
| (3) | Dr. Faupel currently serves as the Company’s Chief Scientific Officer, but is no longer an executive officer. |
Share Ownership of Directors, Officers
and Certain Beneficial Owners
The following
table lists information regarding the beneficial ownership of our common stock as of November 14, 2014 by (i) each person
whom we know to beneficially own more than 5% of the outstanding shares of our common stock (a “5% stockholder”),
(ii) each director, (iii) each officer named in the summary compensation table elsewhere in this prospectus, and (iv) 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, Norcross, Georgia 30092.
Name and Address of Beneficial
Owner |
|
Amount
and Nature of Beneficial Ownership (1) |
|
Percent
of
Class (2) |
|
|
|
|
|
|
|
John E. Imhoff (3) |
|
15,744,778 |
|
13.76% |
|
The Whittemore Collection, Ltd. / George Landegger (4) |
|
7,318,415 |
|
7.70% |
|
4 International Drive, Rye Brook, NY 10573 |
|
|
|
|
|
Michael C. James / Kuekenhof Equity Fund, LLP (5) |
|
685,092 |
|
* |
|
Ronald Hart (6) |
|
2,263,586 |
|
1.66% |
|
Gene S. Cartwright (7) |
|
2,101,458 |
|
2.45% |
|
Mark L. Faupel (8) |
|
2,609,158 |
|
3.0% |
|
Richard L. Fowler (9) |
|
656,355 |
|
* |
|
Linda Rosenstock (10) |
|
412,383 |
|
* |
|
Jonathan Niloff (11) |
|
482,383 |
|
* |
|
All directors and
executive officers as a group (7 persons) (12) |
|
22,345,826 |
|
19.28% |
|
|
|
|
|
|
|
|
|
(*) |
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 79,903,439 shares of common stock outstanding as of November 14, 2014. 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 currently exercisable options, warrants, convertible preferred stock or convertible
notes, or any such securities exercisable within 60 days after November 14, 2014, are deemed outstanding for purposes
of computing the percentage ownership of the person holding those options, but are not deemed outstanding for purposes of
computing the percentage ownership of any other person. |
(3) |
Consists
of 9,521,994 shares of common stock, 500 shares of Series B preferred stock convertible into 2,276,867 shares of common stock,
3,642,167 warrants to purchase common stock at an average price of $0.54 per share and 303,750 shares subject to stock options.
Dr. Imhoff has pledged 11,798,861_ shares of common stock to secure certain loans to him. Dr. Imhoff is on the board of directors. |
(4) |
Consists
of 6,598,078 shares of common stock and 720,337 warrants to purchase common stock at an average price of $0.64 per share. |
(5) |
Consists
of 471,881 shares of common stock and 107,500 shares subject to stock options held by Michael James; and 105,711 warrants
to purchase common stock at an average price of $0.80 per share held by Kuekenhof Equity Fund, LP, Michael James, managing
partners. Mr. James is on the board of directors. |
(6) |
Consists
of 1,426,997 shares of common stock and common equivalent, 130,307 warrants to purchase common stock at an average price of
$0.44 per share and 655,000 shares subject to stock options held by Ronald Hart;
and 51,282 warrants to purchase common stock at an average price of $0.22 per share
held by Hart Management, LLC. Dr. Hart is on the board of directors. |
(7) |
Consists of 2,000,000 market condition restricted common stock, as part of employment contract and 100,000 shares of common stock purchased on open market and 1,458 shares subject to stock options |
(8) |
Consists
of 267,476 shares of common stock and 2,341,682 shares subject to stock options.
Dr. Faupel no longer serves as an executive officer or director of the Company. |
(9) |
Consists
of 98,115 shares of common stock and 558,240 shares subject to stock options. |
(10) |
Consists of 287,174 shares of common stock and 125,000 shares subject to stock options held by Linda Rosenstock. Dr. Rosenstock is on the board of directors. |
(11) |
Consists of 339,466 shares of common stock and 142,917 shares subject to stock options held by Jonathan M. Niloff. Dr. Niloff is on the board of directors. |
(12) |
Consists
of 16,522,494 shares of common stock and common equivalent, 3,929,467 warrants to purchase common stock at an average price
of $0.54 per share and 1,893,865 shares subject to stock options. |
Certain
Relationships and Related Transactions
and Director Independence
Our board of directors
recognizes that related person transactions present a heightened risk of conflicts of interest. The audit committee of the board
has the authority to review and approve all related party transactions involving directors or executive officers of the Company.
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 Messrs. Allen and James, and Drs. Hart, Niloff, Rosenstock
and Imhoff are independent directors.
On August 26, 2014,
our Senior Vice President of Engineering, Richard Fowler, advanced us $75,000 in cash for a 6% simple interest note, on August
4, 2014, our President and CEO, Gene Cartwright, advanced us $200,000 in cash for a 5% simple interest note, and on May 21, 2014,
Mr. Cartwright advanced us $100,000 in cash for a 5% simple interest note. We intend to repay the advances with proceeds from the
offering.
On February 20,
2014, Messrs. Cartwright and James, and Drs. Rosenstock and Imhoff, advanced us $50,000, $50,000, $50,000, and $25,000 in cash,
respectively, for 10% simple interest notes. 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.
Dr. Imhoff invested
a total of $586,568 to exercise warrants for 1,466,420 shares of our common stock at $0.40 per share in November 2013. He also
invested $500,000 in our 2013 Series B preferred stock offering.
Legal
Matters
Jones Day, Atlanta, Georgia, passed
upon the validity of the shares of common stock offered by this prospectus.
Experts
Our consolidated
financial statements as of December 31, 2013 and 2012, 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 all of the information contained in the registration statement and its exhibits. We strongly encourage you to read
carefully the registration statement and its exhibits.
Any statement made
in this prospectus concerning the contents of any contract, agreement or other document is only a summary 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 of the document or matter involved.
We file annual,
quarterly and current reports; proxy statements and other information with the SEC. You may read and copy 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.
INDEX
TO FINANCIAL STATEMENTS
Annual Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm |
F-2 |
Consolidated Balance Sheets as of December 31, 2013 and 2012 |
F-3 |
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012 |
F-4 |
Consolidated Statements of Changes in Stockholders Equity (Deficit) for the Years Ended December 31, 2013 and 2012 |
F-5 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011 |
F-6 |
Notes to Consolidated Financial Statements |
F-7 |
Unaudited Condensed Consolidated Financial Statements |
|
Condensed Consolidated
Balance Sheet (Unaudited) September – 30, 2014 and December 31, 2013 |
F-19 |
Condensed Consolidated
Statements of Operations (Unaudited) – Three and nine months ended September 30, 2014 and 2013 |
F-20 |
Condensed Consolidated
Statements of Cash Flows (Unaudited) – Three and nine months ended September 30, 2014 and 2013 |
F-21 |
Notes to Consolidated Financial Statements (Unaudited) |
F-21 |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2013
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, 2013 and 2012, and the
related consolidated statements of operations, stockholders’ equity (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 audit 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, 2013 and 2012, 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 26, 2014
GUIDED THERAPEUTICS, INC. AND SUBSIDIARY |
CONSOLIDATED BALANCE SHEETS |
AS OF DECEMBER 31, 2013 AND 2012 |
(In Thousands) |
| |
| |
|
ASSETS | |
| 2013 | | |
| 2012 | |
CURRENT ASSETS: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 613 | | |
$ | 1,044 | |
Accounts receivable, net of allowance for doubtful accounts of $18 and $12 at December 31, 2013 and 2012, respectively | |
| 133 | | |
| 107 | |
Inventory, net of reserves of $184 and $52 at December 31, 2013 and 2012, respectively | |
| 1,193 | | |
| 524 | |
Other current assets | |
| 101 | | |
| 198 | |
Total current assets | |
| 2,040 | | |
| 1,873 | |
| |
| | | |
| | |
Property and equipment, net | |
| 920 | | |
| 1,274 | |
Other assets | |
| 356 | | |
| 331 | |
Total noncurrent assets | |
| 1,276 | | |
| 1,605 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 3,316 | | |
$ | 3,478 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Short-term notes payable | |
$ | 35 | | |
$ | 79 | |
Current portion of long term debt | |
| 109 | | |
| 4 | |
Notes payable – past due | |
| — | | |
| 419 | |
Accounts payable | |
| 891 | | |
| 765 | |
Accrued liabilities | |
| 723 | | |
| 1,038 | |
Deferred revenue | |
| 14 | | |
| 40 | |
Total current liabilities | |
| 1,772 | | |
| 2,345 | |
| |
| | | |
| | |
Warrants, at fair value | |
| 1,548 | | |
| — | |
Long-term debt, net | |
| 103 | | |
| — | |
Total long-term liabilities | |
| 1,651 | | |
| — | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 3,423 | | |
| 2,345 | |
| |
| | | |
| | |
COMMITMENTS & CONTINGENCIES (Note 5) | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS’ (DEFICIT) EQUITY: | |
| | | |
| | |
Series B convertible preferred stock, $.001 par value; 3 shares authorized,
2 and zero shares issued and outstanding as of December 31, 2013 and 2012, respectively (liquidation preference of $2.1
million and $0 at December 31, 2013 and 2012, respectively) | |
| 1,139 | | |
| — | |
Common stock, $.001 par value; 145,000 shares authorized, 70,479 and 62,282 shares issued and outstanding as of December 31, 2013 and 2012, respectively | |
| 71 | | |
| 62 | |
Additional paid-in capital | |
| 101,840 | | |
| 93,273 | |
Treasury stock, at cost | |
| (132 | ) | |
| (104 | ) |
Accumulated deficit | |
| (103,025 | ) | |
| (92,098 | ) |
TOTAL GUIDED THERAPEUTICS STOCKHOLDERS’ (DEFICIT) EQUITY | |
| (107 | ) | |
| 1,133 | |
| |
| | | |
| | |
TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY | |
| (107 | ) | |
| 1,133 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | |
$ | 3,316 | | |
$ | 3,478 | |
| |
| | |
The accompanying notes are an integral part of these consolidated statements. |
GUIDED THERAPEUTICS, INC. AND SUBSIDIARY |
CONSOLIDATED STATEMENTS OF OPERATIONS |
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 |
(In Thousands Except Per Share Data) |
| |
| |
|
| |
| 2013 | | |
| 2012 | |
REVENUE: | |
| | | |
| | |
Contract and grant revenue | |
$ | 820 | | |
$ | 3,338 | |
| |
| | | |
| | |
Sales – devices and disposables | |
| 359 | | |
| 72 | |
Cost of goods sold | |
| 611 | | |
| 117 | |
Gross loss | |
| (252 | ) | |
| (45 | ) |
| |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | |
| |
| | | |
| | |
Research and development | |
| 2,742 | | |
| 3,227 | |
Sales and marketing | |
| 901 | | |
| 424 | |
General and administrative | |
| 3,533 | | |
| 3,923 | |
Total operating expenses | |
| 7,174 | | |
| 7,574 | |
| |
| | | |
| | |
Operating loss | |
| (6,606 | ) | |
| (4,281 | ) |
| |
| | | |
| | |
OTHER INCOME (EXPENSES): | |
| | | |
| | |
Other income | |
| 110 | | |
| — | |
Interest expense | |
| (45 | ) | |
| (72 | ) |
Change in fair value of warrants | |
| (674 | ) | |
| — | |
Total other income | |
| (609 | ) | |
| (72 | ) |
| |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (7,215 | ) | |
| (4,353 | ) |
| |
| | | |
| | |
PROVISION FOR INCOME TAXES | |
| — | | |
| — | |
| |
| | | |
| | |
NET LOSS | |
| (7,215 | ) | |
| (4,353 | ) |
| |
| | | |
| | |
PREFERRED STOCK DIVIDENDS | |
| (3,175 | ) | |
| — | |
| |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | |
$ | (10,390 | ) | |
$ | (4,353 | ) |
| |
| | | |
| | |
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS | |
$ | (0.16 | ) | |
$ | (0.08 | ) |
| |
| | | |
| | |
WEIGHTED AVERAGE SHARES OUTSTANDING | |
| 65,884 | | |
| 57,429 | |
| |
| | | |
| | |
The accompanying notes are an integral part of these consolidated statements. |
| |
| | | |
| | |
GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2013 AND
2012
(In Thousands)
| |
Preferred Stock
Series B |
Common Stock | |
Additional
Paid-In | |
Treasury | |
Accumulated | |
Non-
Controlling | |
|
| |
Shares | |
Amount | |
Shares | |
Amount | |
Capital | |
Stock | |
Deficit | |
Interest | |
TOTAL |
BALANCE, January 1, 2012 | |
| — | | |
$ | — | | |
| 52,211 | | |
$ | 52 | | |
$ | 86,614 | | |
$ | (104 | ) | |
$ | (85,089 | ) | |
$ | 104 | | |
$ | 1,577 | |
Issuance of stock | |
| — | | |
| — | | |
| 195 | | |
| — | | |
| 162 | | |
| — | | |
| — | | |
| — | | |
| 162 | |
Exercise of warrants/options | |
| — | | |
| — | | |
| 9,876 | | |
| 10 | | |
| 3,092 | | |
| — | | |
| — | | |
| — | | |
| 3,102 | |
Stock-based compensation expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| 645 | | |
| — | | |
| — | | |
| — | | |
| 645 | |
Deemed dividends | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2,656 | | |
| — | | |
| (2,656 | ) | |
| — | | |
| — | |
Acquisition of minority interest | |
| | | |
| | | |
| | | |
| | | |
| 104 | | |
| — | | |
| — | | |
| (104 | ) | |
| — | |
Net Loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (4,353 | ) | |
| — | | |
| (4,353 | ) |
BALANCE, December 31, 2012 | |
| | | |
$ | — | | |
| 62,282 | | |
$ | 62 | | |
$ | 93,273 | | |
$ | (104 | ) | |
$ | (92,098 | ) | |
$ | — | | |
$ | 1,133 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of Series B preferred stock | |
| 3 | | |
| 1,341 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,341 | |
Deemed dividends on beneficial conversion feature of preferred stock | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,148 | | |
| — | | |
| (3,148 | ) | |
| — | | |
| — | |
Preferred dividends | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (27 | ) | |
| — | | |
| (27 | ) |
Conversion of preferred stock | |
| (1 | ) | |
| (202 | ) | |
| 878 | | |
| 1 | | |
| 201 | | |
| | | |
| — | | |
| — | | |
| — | |
Issuance of common stock | |
| — | | |
| — | | |
| 670 | | |
| 1 | | |
| 462 | | |
| — | | |
| — | | |
| — | | |
| 463 | |
Issuance of stock options | |
| — | | |
| — | | |
| — | | |
| — | | |
| 126 | | |
| — | | |
| — | | |
| — | | |
| 126 | |
Exercise of warrants and options | |
| — | | |
| — | | |
| 6,649 | | |
| 7 | | |
| 3,269 | | |
| — | | |
| — | | |
| | | |
| 3,276 | |
Stock-based compensation expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| 824 | | |
| — | | |
| — | | |
| — | | |
| 824 | |
Deemed dividends on replacement of warrants | |
| — | | |
| — | | |
| — | | |
| — | | |
| 537 | | |
| — | | |
| (537 | ) | |
| — | | |
| — | |
Acquisition of treasury stock | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (28 | ) | |
| — | | |
| — | | |
| (28 | ) |
Net Loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (7,215 | ) | |
| — | | |
| (7,215 | ) |
BALANCE, December 31, 2013 | |
| 2 | | |
$ | 1,139 | | |
| 70,479 | | |
$ | 71 | | |
$ | 101,840 | | |
$ | (132 | ) | |
$ | (103,025 | ) | |
$ | — | | |
$ | (107 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
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, 2013 AND 2012 |
(In Thousands) |
| |
2013 | |
2012 |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (7,215 | ) | |
$ | (4,353 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Bad debt (recovery) expense | |
| 7 | | |
| (3 | ) |
Depreciation | |
| 461 | | |
| 361 | |
Stock-based compensation | |
| 824 | | |
| 645 | |
Change in fair value of warrants | |
| 674 | | |
| — | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (33 | ) | |
| 13 | |
Inventory | |
| (669 | ) | |
| (4 | ) |
Other current assets | |
| 97 | | |
| (144 | ) |
Other assets | |
| (25 | ) | |
| 55 | |
Accounts payable | |
| 126 | | |
| (337 | ) |
Deferred revenue | |
| (26 | ) | |
| (413 | ) |
Accrued liabilities | |
| 223 | | |
| 513 | |
Total adjustments | |
| 1,659 | | |
| 299 | |
| |
| | | |
| | |
Net cash used in operating activities | |
| (5,556 | ) | |
| (3,666 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Additions to fixed assets | |
| (107 | ) | |
| (552 | ) |
| |
| | | |
| | |
Net cash used in investing activities | |
| (107 | ) | |
| (552 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Net proceeds from issuance of preferred stock and warrants | |
| 2,214 | | |
| — | |
Proceeds from debt financing | |
| 115 | | |
| 86 | |
Payments made on notes payable | |
| (374 | ) | |
| (125 | ) |
Proceeds from options and warrants exercised | |
| 3,276 | | |
| 3,102 | |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 5,231 | | |
| 3,063 | |
| |
| | | |
| | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | |
| (432 | ) | |
| (1,155 | ) |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, beginning of year | |
| 1,045 | | |
| 2,200 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, end of year | |
$ | 613 | | |
$ | 1,045 | |
| |
| | | |
| | |
SUPPLEMENTAL SCHEDULE OF: | |
| | | |
| | |
Cash paid for: | |
| | | |
| | |
Interest | |
$ | 31 | | |
$ | 48 | |
NONCASH INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
Acquisition of minority interest | |
$ | — | | |
$ | 104 | |
Conversion of accrued expenses into common stock / options | |
$ | 126 | | |
$ | 162 | |
Purchase of fixed assets by issuing notes payable | |
$ | — | | |
$ | 50 | |
Issuance of common stock as board compensation | |
$ | 463 | | |
$ | — | |
Deemed dividends in the form of warrants to purchase common stock. | |
$ | 537 | | |
$ | 2,656 | |
Deemed dividends on preferred stock | |
$ | 3,148 | | |
$ | — | |
The accompanying notes are
an integral part of these consolidated statements.
GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
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 development of its LuViva™ non-invasive cervical
cancer detection device and extension of its cancer detection technology into other cancers, including esophageal. The Company’s
technology, including products in research and development, primarily relates to biophotonics technology for the non-invasive detection
of cancers.
Basis of Presentation
All information and footnote disclosures included
in the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States.
The 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, 2013, it had an accumulated deficit of approximately $103.0 million. Through
December 31, 2013, the Company has devoted substantial resources to research and development efforts. The Company first generated
revenue from product sales in 1998, but does not have significant experience in manufacturing, marketing or selling its products.
The Company’s development efforts may not result in commercially viable products and it may not be successful in 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. Notwithstanding the foregoing, the Company believes it
has made progress in recent years in stabilizing its financial situation by execution of multiyear contracts from Konica Minolta
Opto, Inc., a subsidiary of Konica Minolta, Inc., a Japanese corporation based in Tokyo (“Konica Minolta”) and grants
from the National Cancer Institute (“NCI”), while at the same time simplifying its capital structure and significantly
reducing debt. However, the Company has replaced its prior agreements with Konica Minolta with a new licensing agreement, and therefore
will no longer receive direct payments from Konica Minolta, and will have to pay a royalty to Konica Minolta should the Company
sell any products licensed from Konica Minolta.
At December 31, 2013, the Company had working
capital of approximately $268,000, accumulated deficit of $103.0 million, and incurred a net loss of $7.2 million for the year
then ended. Stockholders’ deficit totaled approximately $107,000 at December 31, 2013, 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 by the end of the second quarter of 2014, the Company has plans to curtail
operations by reducing discretionary spending and staffing levels, and attempting to operate by only pursuing activities for which
it has external financial support and additional NCI, NHI or other grant funding. 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
11.3 million shares of its common stock outstanding at December 31, 2013, with exercise prices of $0.40, $0.80 and $1.08 per share.
Exercises of these warrants would generate a total of approximately $7.6 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 private sale
of preferred stock or debt securities, public and private sales of common stock, and grants, if available.
Assuming the Company receives FDA approval
for its LuViva cervical cancer detection device in 2014, the Company currently anticipates an early 2015 product launch in the
United States. Product launch outside the United States began in the second half of 2013.
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 calculations.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of Guided Therapeutics, Inc. and its wholly owned subsidiary. As disclosed in Note 4, the Company purchased
the remaining 49% interest in its subsidiary during December 2012.
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.
Concentrations of Credit Risk
The Company, from time to time during the years
covered by these consolidated financial statements, may have bank balances in excess of its insured limits. Management has deemed
this a normal business risk.
Inventory Valuation
All inventories are stated at lower of cost
or market, with cost determined substantially on a “first-in, first-out” basis. Selling, general, and administrative
expenses are not inventoried, but are charged to expense when purchased. At December 31, 2013 and December 31, 2012, our inventories
were as follows (in thousands):
| |
December 31, 2013 | |
December 31, 2012 |
Raw materials | |
$ | 1,013 | | |
$ | 518 | |
Work in process | |
| 268 | | |
| 21 | |
Finished goods | |
| 96 | | |
| 37 | |
Inventory reserve | |
| (184 | ) | |
| (52 | ) |
Total | |
$ | 1,193 | | |
$ | 524 | |
Property and Equipment
Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements
are depreciated at the shorter of the useful life of the asset or the remaining lease term. Depreciation expense is included in
general and administrative expense on the statement of operations. Expenditures for repairs and maintenance are expensed as incurred.
Property and equipment are summarized as follows at December 31, 2013 and 2012 (in thousands):
| |
Year Ended December 31, |
| |
2013 | |
2012 |
Equipment | |
$ | 1,277 | | |
$ | 1,196 | |
Software | |
| 737 | | |
| 730 | |
Furniture and fixtures | |
| 124 | | |
| 124 | |
Leasehold Improvement | |
| 189 | | |
| 170 | |
| |
| 2,327 | | |
| 2,220 | |
Less accumulated depreciation | |
| (1,407 | ) | |
| (946 | ) |
Total | |
$ | 920 | | |
$ | 1,274 | |
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 $75,000 and $46,000 in
2013 and 2012, respectively.
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.
Capitalized Costs of Internally Developed
Software
Costs of producing product masters incurred
subsequent to establishing technological feasibility are capitalized. Those costs include coding and testing performed subsequent
to establishing technological feasibility.
Software production costs for computer
software that is to be used as an integral part of a product or process are not capitalized until technological feasibility has
been established for the software and all research and development activities for the other components of the product have been
completed.
Capitalization of computer software costs ceases
when the product is available for general release to customers. Costs of maintenance and customer support are charged to expense
when related revenue is recognized or when those costs are incurred, whichever occurs first.
Costs of internally developed software are
capitalized during the development stage of the software. The cost will be transferred to property and equipment and will be depreciated
over the expected life of the software, which is estimated to be three years once the software becomes functional.
Other Assets
Other
assets primarily consist of long-term deposits for various tooling projects that are being constructed for the Company. At December
31, 2013 and 2012, such balances were approximately $326,000 and $283,000, respectively.
Accrued Liabilities
Accrued liabilities are summarized as follows at December 31,
2013 and 2012 (in thousands):
| |
As of December 31, |
| |
2013 | |
2012 |
Accrued compensation | |
$ | 426 | | |
$ | 706 | |
Accrued professional fees | |
| 116 | | |
| 191 | |
Deferred rent | |
| 68 | | |
| 77 | |
Other accrued expenses | |
| 113 | | |
| 64 | |
Total | |
$ | 723 | | |
$ | 1,038 | |
Revenue Recognition
Revenue from the sale of the Company’s
products is recognized upon shipment of such products to its customers. The Company recognizes revenue from contracts on a straight
line basis, over the terms of the contracts. The Company recognizes revenue from grants based on the grant agreements, at the time
the expenses are incurred.
Significant Customers
In 2013 and 2012, the majority of the Company’s
revenues were from three and two customers, respectively. Revenue from these customers totaled approximately $653,000 or 65% and
approximately $2.9 million or 85% of total revenue for the year ended December 31, 2013 and 2012, respectively. Accounts receivable
due from the customers represents 27% and 48% as of December 31, 2013 and 2012, respectively.
Deferred Revenue
The Company defers payments received
as revenue until earned based on the related contracts on a straight line basis, over the terms of the contract.
Research and Development
Research and development expenses consist of
expenditures for research conducted by the Company and payments made under contracts with consultants or other outside parties
and costs associated with internal and contracted clinical trials. All research and development costs are expensed as incurred.
Income Taxes
The Company uses the liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Management provides valuation allowances against the deferred tax assets for amounts
that are not considered more likely than not to be realized.
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 December 31, 2013 and 2012, there were no uncertain tax positions.
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, 2013, the Company has approximately $59.8 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. However, fiscal years 2010 and later
remain subject to examination by the IRS and applicable states.
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 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, 2013 and 2012,
share-based compensation for options attributable to employees and officers were approximately $824,000 and $645,000, 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, 2013, the Company had approximately $865,000 of unrecognized
compensation costs related to granted stock options to be recognized over the remaining vesting period of approximately three years.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, ASC820,
Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for
measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would
be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the measurement date. The Company uses a three-tier
fair value hierarchy based upon observable and non-observable inputs as follow:
| · | Level 1 – Quoted market prices in active markets for identical assets and liabilities; |
| · | Level 2 – Inputs, other than level 1 inputs, either directly or indirectly observable;
and |
| · | Level 3 – Unobservable inputs developed using internal estimates and assumptions (there
is little or no market date) which reflect those that market participants would use. |
The Company records its derivative
activities at fair value, which consisted of warrants as of December 31, 2013. The fair value of the warrants was estimated
using the Monte Carlo 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, 2013:
FAIR VALUE MEASUREMENTS ( In Thousands)
| Description | | |
| Level 1 | | |
| Level 2 | | |
| Level 3 | | |
| Total | | |
| Asset/(Liability) Total | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Warrants | | |
$ | — | | |
$ | — | | |
$ | (1,548 | ) | |
$ | (1,548 | ) | |
$ | (1,548 | ) | |
|
There were neither derivatives liabilities nor valuations of financial
liabilities at December 31, 2012.
4. Stockholders’ Equity
Common Stock
The Company has authorized 145 million shares
of common stock with $0.001 par value, of which 70.5 million were issued and outstanding as of December 31, 2013. For the year
ended December 31, 2012, there were 145 million authorized shares of common stock, of which 62.3 million were issued and outstanding.
In December 2012, the Company entered into
an agreement to purchase the remaining 49% interest in InterScan, Inc. In exchange, the Company agreed to issue to the seller warrants
equal to 49% of the fair value of InterScan, Inc., as determined by a third party. The agreement established a minimum value purchase
price of $147,000, or approximately 198,000 warrants, based upon the closing stock price at the date of the agreement, and a maximum
purchase price of 2,500,000 warrants. The agreement required the seller to exercise one quarter of his outstanding warrants, subject
to a minimum of $450,000 in warrant exercise payments, prior to March 1, 2013. The seller exercised all required warrants in accordance
with the agreement. The Company issued 439,883 warrants to purchase the Company’s common stock at $0.68 per share to the
seller, which will expire on March 31, 2016.
Preferred Stock; Series B Convertible 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, and 3,000
shares of preferred stock as Series B Preferred Stock, of which 2,147 shares were issued and outstanding as of December 31, 2013.
Pursuant to the terms
of the Series B Preferred Stock set forth in the Certificate of Designations, Preferences and Rights designating the Preferred
Stock (the “Preferred Stock Designation”), shares of Series B Preferred Stock are convertible into common stock by
their holder at any time, and will be 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. The original conversion price was $0.68 per share, such that each share of Preferred Stock
would convert into 1,471 shares of common stock, subject to customary adjustments, including any accrued but unpaid dividends and
pursuant to certain anti-dilution provisions, as set forth in the Preferred Stock Designation. As a result of anti-dilution provisions,
the current conversion price is set at $0.40 per share, such that each share of Preferred Stock would convert into 2,500 shares
of common stock.
Holders of the Series
B Preferred Stock are entitled to quarterly dividends at an annual rate of 5.0%, for the quarter ended December 31, 2013, and at
an annual rate of 10% thereafter, in each case, payable in cash or, subject to certain conditions, common stock, at the Company’s
option. Accrued dividends totaled approximately $27,000 at December 31, 2013. Each share of Series B Preferred Stock is entitled
to a number of votes equal to the number of shares of common stock into which the Series B Preferred Stock is convertible. As long
as shares of the Series B Preferred Stock are outstanding, and until 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, the Company
may not incur indebtedness for borrowed money secured by the Company’s intellectual property or in excess of $2.0 million
without the prior consent of the holders of two-thirds of the outstanding shares of Series B Preferred Stock. The Company may redeem
the Series B Preferred Stock after the second anniversary of issuance, subject to certain conditions. Upon the Company’s
liquidation or sale to or merger with another corporation, each share of Series B Preferred Stock will be entitled to a liquidation
preference of $1,000 per share, plus any accrued but unpaid dividends.
The Series B Preferred
Stock was issued with Tranche A warrants to purchase 1,858,089 shares of common stock and Tranche B warrants purchasing 1,858,088
shares of common stock, both at an exercise price of $1.08 per share. Pursuant to the terms of the Tranche B warrants, their exercise
price will be reduced, and the number of shares of common stock into which those warrants are exercisable will be increased, if
the Company issues shares at a price below the then-current exercise price. The exercise price of Tranche B warrants is currently
$0.40 per share, convertible into 5,016,840 shares of common stock. As a result of these provisions, the Company is required to
account for the warrants as a liability recorded at fair value each period. The Company values the warrants using a Monte Carlo
Simulation model. Of the $2.6 million in proceeds from issuance of the Series B Preferred Stock, the Company originally allocated
$873,000 to the fair value of the warrants. At December 31, 2013, the fair value of these warrants was approximately $1.5 million.
Stock Options
Under the Company’s 1995 Stock Plan (the
“Plan”), a total of 6,724,027 shares remained available at December 31, 2013 and 6,531,192 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 13,255,219 shares of common stock as of December 31, 2013. 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
2013 and 2012 were estimated using the Black-Scholes option pricing model. A summary of the assumptions used in determining the
fair value of options follows:
| |
2013 | |
2012 |
Expected volatility | |
| 174 | % | |
| 141 | % |
Expected option life in years | |
| 10.0 | | |
| 10.0 | |
Expected dividend yield | |
| 0.00 | % | |
| 0.00 | % |
Risk-free interest rate | |
| 1.87 | % | |
| 1.84 | % |
Weighted average fair value per option at grant date | |
$ | 0.69 | | |
$ | 0.76 | |
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 stock options were granted.
Stock option activity for each of the two years
ended December 31 is as follows:
| |
2013 | |
2012 |
| |
| |
Weighted Average Exercise | |
| |
Weighted Average Exercise |
| |
Shares | |
Price | |
Shares | |
Price |
Outstanding at beginning of year | |
| 6,463,206 | | |
$ | 0.67 | | |
| 6,862,167 | | |
$ | 0.70 | |
Options granted | |
| 977,276 | | |
$ | 0.50 | | |
| 96,500 | | |
$ | 0.79 | |
Options exercised | |
| (580,540 | ) | |
$ | 0.31 | | |
| (326,461 | ) | |
$ | 0.28 | |
Options expired/forfeited | |
| (328,750 | ) | |
$ | 1.15 | | |
| (169,000 | ) | |
$ | 2.60 | |
Outstanding at end of year | |
| 6,531,192 | | |
$ | 0.66 | | |
| 6,463,206 | | |
$ | 0.67 | |
Options vested and exercisable at year-end | |
| 5,463,963 | | |
$ | 0.58 | | |
| 4,373,807 | | |
$ | 0.50 | |
Options available for grant at year-end | |
| 6,724,027 | | |
| | | |
| 6,792,013 | | |
| | |
Aggregate intrinsic value – options exercised | |
$ | 236,059 | | |
| | | |
$ | 93,088 | | |
| | |
Aggregate intrinsic value – options outstanding | |
$ | 625,412 | | |
| | | |
$ | 1,332,965 | | |
| | |
Aggregate intrinsic value – options vested and exercisable | |
$ | 612,946 | | |
| | | |
$ | 1,208,831 | | |
| | |
Options unvested, balance at beginning of year (1) | |
| 1,819,087 | | |
$ | 1.18 | | |
| — | | |
| — | |
Options granted (1) | |
| 977,276 | | |
$ | 0.50 | | |
| — | | |
| — | |
Vested (1) | |
| (1,582,034 | ) | |
$ | 0.80 | | |
| — | | |
| — | |
Cancelled/Forfeited | |
| (147,100 | | |
$ | 1.22 | | |
| — | | |
| — | |
Balance, end of period (1) | |
| 1,067,229 | | |
$ | 1.12 | | |
| — | | |
| — | |
|
|
|
(1) |
Includes awards not captured in valuation fragments |
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
In July 2012, the Company completed a warrant
exchange program, pursuant to which it exchanged warrants exercisable for a total of 15,941,640 shares of common stock, or 56.29%
of the warrants eligible to participate, for three classes of new warrants. These exchanges resulted in a deemed dividend of approximately
$2.66 million, reflected as a non-cash disclosure in this financial statement of cash flows. The first class of new warrants expired
on September 17, 2012 and carried an exercise price of $0.40, $0.45 or $0.50, depending on the date exercised. The second class
of new warrants carries a one-year extension from the original expiration date and is exercisable at $0.65. The third class of
new warrants carries a two-year extension from the original expiration date and is exercisable at $0.80.
In November 2013, the Company completed a warrant
exchange program, pursuant to which it exchanged warrants exercisable for a total of 3,560,869 shares of common stock, or 99% of
the warrants eligible to participate. These exchanges resulted in a deemed dividend of approximately $537,000, reflected as a non-cash
disclosure in this financial statement of cash flows.
The following table summarizes transactions
involving the Company’s outstanding warrants to purchase common stock for the year ended December 31, 2013:
| |
Warrants (Underlying Shares) |
Outstanding, January 1, 2013 | |
| 20,801,512 | |
Issuances | |
| 6,874,929 | |
Canceled / Expired | |
| (10,349,659 | ) |
Exercised | |
| (6,067,843 | ) |
Outstanding, December 31, 2013 | |
| 11,258,939 | |
The Company had the following shares reserved for the warrants as
of December 31, 2013:
Warrants
(Underlying Shares) |
|
Exercise Price |
|
Expiration Date |
29,656 |
(1) |
$0.65 per share |
|
March 1, 2014 |
471,856 |
(1) |
$0.80 per share |
|
July 26, 2014 |
3,590,522 |
(1) |
$0.80 per share |
|
March 1, 2015 |
6,790 |
(2) |
$1.01 per share |
|
September 10, 2015 |
439,883 |
(3) |
$0.68 per share |
|
March 31, 2016 |
285,186 |
(4) |
$1.05 per share |
|
November 20, 2016 |
1,858,089 |
(5) |
$1.08 per share |
|
May 23, 2018 |
5,016,840 |
(6) |
$0.40 per share |
|
May 23, 2018 |
__________
(1)
Consists of outstanding warrants issued in connection with a warrant exchange program in June
2012.
| (2) | Consists of outstanding warrants issued in
conjunction with a private placement on September 10, 2010. |
| (3) | Consists of outstanding warrants issued in
conjunction with a buy back of our minority interest in December 2012, which were issued in February 2014. |
| (4) | Consists of outstanding warrants issued in
conjunction with a private placement on November 21, 2011. |
| (5) | Consists of outstanding warrants issued in
conjunction with a private placement on May 24, 2013. |
| (6) | Consists of outstanding warrants issued in
conjunction with a private placement on May 24, 2013. Underlying shares increased from 1,858,089 to 5,016,840, and exercise price
decreased from $1.08 per share to $0.40 per share, pursuant to the terms of the warrants, as a result of the 2013 warrant exchange
program. |
5. Income Taxes
The Company has incurred net operating losses
(“NOLs”) since inception. As of December 31, 2013, the Company had NOL carryforwards available through 2033 of
approximately $59.8 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):
| |
2013 | |
2012 |
Deferred tax assets: | |
$ | 287 | | |
$ | 277 | |
Net operating loss carry forwards | |
| 22,737 | | |
| 23,474 | |
Deferred tax liabilities: | |
| | | |
| | |
Intangible assets and other | |
| — | | |
| — | |
| |
| 23,025 | | |
| 23,751 | |
Valuation allowance | |
| (23,025 | ) | |
| (23,751 | ) |
| |
$ | 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:
| |
2013 | |
2012 |
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 automotive equipment
under operating lease agreements with monthly payments ranging from $275 to $1,960. These leases expire at various dates
through April 2016. Future minimum rental payments at December 31, 2013 under non-cancellable operating leases for office
space and equipment are as follows (in thousands):
|
| Year | | |
| Amount
(,000) | |
|
| 2014 | | |
$ | 207 | |
|
| 2015 | | |
| 211 | |
|
| 2016 | | |
| 201 | |
|
| 2017 | | |
| 98 | |
|
| Total | | |
$ | 717 | |
Rental expense was approximately $170,000 in 2013 and 2012.
Litigation and Claims
For the years ended December 31, 2013 and 2012,
there was no accrual needed for any potential losses related to pending litigation.
Contracts
Under the Company’s prior collaboration
agreements with Konica Minolta related to the development of lung and esophageal cancer detection products, the Company received
approximately $400,000 and $1.3 million, respectively, in 2012. In February 2013, the Company replaced its 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 the Company 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 the Company’s biophotonic
technology platform. The license permits the Company to use certain related intellectual property of Konica Minolta. In return
for the license, the Company has agreed to pay Konica Minolta a royalty for each licensed product the Company sells.
7. License and Technology Agreements
As part 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 revenue from the sale of commercial products developed from the research. The Company
generally is required to make minimum royalty payments for the exclusive license to develop certain technology.
8. Notes Payable
Short Term Notes Payable
At December 31, 2012, the Company maintained
a note payable to IQMS, an enterprise resources planning software provider, of approximately $34,000, as well as a note to Premium
Assignment Corporation, an insurance premium financing company, of approximately $33,000. These notes were 8 and 12 month, straight-line
amortizing loans dated June 29, 2012 and July 4, 2012, respectively, with monthly principal and interest payments of approximately
$4,300 and $11,000 per month, respectively. The notes carried annual interest rates ranging between 5-6%. The Premium Assignment
Corporate note was paid in full during the quarter ended March 31, 2013. The IQMS note was paid in full during the quarter ended
September 30, 2013.
At December 31, 2013, the Company
maintained an additional note payable to Premium Assignment Corporation of approximately $35,000. This note is an 8 month,
straight-line amortizing loan dated July 4, 2013 with monthly principal and interest payments of approximately $12,000 per
month. The note carries an annual interest rate of 5.34%.
Notes Payable
At December 31, 2012, the Company was past
due on two short-term notes totaling approximately $419,000 of principal and accrued interest. Interest charged on these notes
prior to amendment ranged between 15-18%. On February 27, 2013, the Company renegotiated one of the two past due notes. The new
note accrued interest at 6% and was paid in full during the quarter ended June 30, 2013. On April 16, 2013, the Company renegotiated
the other note. The renegotiated note accrues interest at 9.0%, requires monthly payments of $10,000, including interest, and matures
November 2015. The balance due on this note was approximately $208,000 at December 31, 2013, of which $103,000 is payable during
the year ending December 31, 2014 and $105,000 is payable during the year ending December 31, 2015.
9.
Related Party Transactions
None
10. Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
The Company has the following allowances for
doubtful accounts (in thousands):
| |
Year Ended December 31, |
| |
2013 | |
2012 |
Beginning balance | |
$ | 12 | | |
$ | 20 | |
Additions / (Adjustments) | |
| 6 | | |
| (8 | ) |
Balance | |
$ | 18 | | |
$ | 12 | |
| |
| | | |
| | |
Inventory Reserves
The Company has the following reserves for
inventory balance (in thousands):
| |
Year Ended December 31, |
| |
2013 | |
2012 |
Beginning balance | |
$ | 52 | | |
$ | 64 | |
Additions / (Adjustments) | |
| 132 | | |
| (12 | ) |
Balance | |
$ | 184 | | |
$ | 52 | |
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.
On December 17, 2012, the Company entered into
a buy-back agreement with the holder of a 51 percent interest in the Company’s subsidiary, InterScan, Inc., pursuant to which
the original agreement, dated February 28, 2011, was canceled and ownership of InterScan reverted back to the Company. InterScan
is a non-active subsidiary of the Company.
12.
Subsequent Events
On January 7, 2014 the Company announced the
appointment of Gene Cartwright, 59, as Chief Executive Officer, effective January 6, 2014. Dr. Cartwright replaced Mark L. Faupel,
who has transitioned to the role of Chief Scientific Officer. In accordance with Dr. Faupel’s employment agreement, all outstanding
unvested stock options became fully vested on January 6, 2014, resulting in compensation expense of approximately $111,000. The
Company also owes Dr. Faupel additional compensation payable of $40,000, as a result of the Company’s employment agreement with Dr. Cartwright.
Effective January 31, 2014, Ronald W. Allen resigned from the Board
of Directors of the Company.
Between February 1 and March 25, 2014, the Company received cash
advances from certain affiliates totaling about $175,000.
GUIDED THERAPEUTICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in Thousands Except
Share Data) |
|
| |
|
| |
AS OF |
ASSETS | |
September 30, 2014 | |
December 31, 2013 |
CURRENT ASSETS: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 42 | | |
$ | 613 | |
Accounts receivable, net of allowance for doubtful accounts of $45 and $18 at September 30, 2014 and December 31, 2013, respectively | |
| 417 | | |
| 133 | |
Inventory, net of reserves of $124 and $184, at September 30, 2014 and December 31, 2013, respectively | |
| 1,204 | | |
| 1,193 | |
Other current assets | |
| 431 | | |
| 101 | |
Total current assets | |
| 2,094 | | |
| 2,040 | |
| |
| | | |
| | |
Property and equipment, net | |
| 706 | | |
| 920 | |
Other assets | |
| 132 | | |
| 356 | |
Debt issuance cost, net | |
| 790 | | |
| — | |
Total noncurrent assets | |
| 1,628 | | |
| 1,276 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 3,722 | | |
$ | 3,316 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Short-term notes payable, related parties | |
$ | 564 | | |
$ | 35 | |
Current portion of long-term debt | |
| 118 | | |
| 109 | |
Short-term notes payable, net of discount | |
| 851 | | |
| — | |
Accounts payable | |
| 1,664 | | |
| 891 | |
Accrued liabilities | |
| 914 | | |
| 723 | |
Deferred revenue | |
| 10 | | |
| 14 | |
Total current liabilities | |
| 4,121 | | |
| 1,772 | |
| |
| | | |
| | |
LONG-TERM LIABILITIES: | |
| | | |
| | |
Warrants, at fair value | |
| 1,247 | | |
| 1,548 | |
Long-term debt, net | |
| 40 | | |
| 103 | |
Convertible debt, net of discount | |
| 2,259 | | |
| — | |
Total long-term | |
| 3,546 | | |
| 1,651 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 7,667 | | |
| 3,423 | |
| |
| | | |
| | |
COMMITMENTS & CONTINGENCIES | |
| | | |
| | |
STOCKHOLDERS’ DEFICIT: | |
| | | |
| | |
Series B convertible preferred stock, $.001 par value; 3,000 shares authorized, 1,277 and 1,737 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively (liquidation preference of $1.3 million and $2.1 million as of September 30, 2014 and December 31, 2013, respectively) | |
| 678 | | |
| 1,139 | |
Common stock, $.001 par value; 145,000,000 shares authorized, 79,377,404 and 70,478,961 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively | |
| 79 | | |
| 71 | |
Additional paid-in capital | |
| 105,268 | | |
| 101,840 | |
Treasury stock, at cost | |
| (132 | ) | |
| (132 | ) |
Accumulated deficit | |
| (109,838 | ) | |
| (103,025 | ) |
| |
| | | |
| | |
TOTAL STOCKHOLDERS’ DEFICIT | |
| (3,945 | ) | |
| (107 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
$ | 3,722 | | |
$ | 3,316 | |
The accompanying notes are an integral part of these condensed consolidated financial statements. | | |
| |
| | | |
| | |
GUIDED THERAPEUTICS INC. AND SUBSIDIARY |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
(Unaudited, In Thousands Except Per Share Data) |
| |
| |
| |
| |
|
| |
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, | |
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
REVENUE: | |
| | | |
| | | |
| | | |
| | |
Contract and grant revenue | |
$ | 22 | | |
$ | 86 | | |
$ | 52 | | |
$ | 474 | |
| |
| | | |
| | | |
| | | |
| | |
Sales - Devices and Disposables | |
| 262 | | |
| 58 | | |
| 586 | | |
| 306 | |
Cost of goods sold | |
| 260 | | |
| 117 | | |
| 723 | | |
| 394 | |
Gross
Loss (Loss) | |
| 2 | | |
| (59 | ) | |
| (137 | ) | |
| (88 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | | |
| | | |
| | |
Research and development | |
| 892 | | |
| 596 | | |
| 2,122 | | |
| 2,243 | |
Sales and Marketing | |
| 135 | | |
| 249 | | |
| 762 | | |
| 608 | |
General and administrative | |
| 1,412 | | |
| 822 | | |
| 3,551 | | |
| 2,791 | |
Total | |
| 2,439 | | |
| 1,667 | | |
| 6,435 | | |
| 5,642 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss | |
| (2,415 | ) | |
| (1,640 | ) | |
| (6,520 | ) | |
| (5,256 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME / (LOSS) | |
| 9 | | |
| 213 | | |
| 14 | | |
| 289 | |
CHANGES IN FAIR VALUE OF WARRANTS | |
| (195 | ) | |
| — | | |
| 266 | | |
| — | |
INTEREST EXPENSE | |
| (371 | ) | |
| (11 | ) | |
| (445 | ) | |
| (35 | ) |
| |
| | | |
| | | |
| | | |
| | |
LOSS BEFORE INCOME TAXES | |
| (2,972 | ) | |
| (1,438 | ) | |
| (6,685 | ) | |
| (5,002 | ) |
| |
| | | |
| | | |
| | | |
| | |
PROVISION FOR INCOME TAXES | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
| (2,972 | ) | |
| (1,438 | ) | |
| (6,685 | ) | |
| (5,002 | ) |
| |
| | | |
| | | |
| | | |
| | |
PREFERRED STOCK DIVIDENDS | |
| (39 | ) | |
| — | | |
| (128 | ) | |
| (1,171 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS | |
$ | (3,011 | ) | |
$ | (1,438 | ) | |
$ | (6,813 | ) | |
$ | (6,173 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
BASIC AND DILUTED NET (LOSS) PER SHARE | |
| | | |
| | | |
| | | |
| | |
ATTRIBUTABLE TO COMMON STOCKHOLDERS | |
$ | (0.04 | ) | |
$ | (0.02 | ) | |
$ | (0.09 | ) | |
$ | (0.09 | ) |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE SHARES OUTSTANDING | |
| 77,651 | | |
| 66,261 | | |
| 74,052 | | |
| 65,212 | |
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 NINE MONTHS ENDED SEPTEMBER 30, |
| |
2014 | |
2013 |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (6,685 | ) | |
$ | (5,002 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Bad debt expense | |
| 32 | | |
| 7 | |
Depreciation and amortization | |
| 359 | | |
| 344 | |
Stock based compensation | |
| 852 | | |
| 699 | |
Warrants | |
| (301 | ) | |
| (210 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Inventory | |
| (11 | ) | |
| (296 | ) |
Accounts receivable | |
| (316 | ) | |
| (11 | ) |
Other current assets | |
| (330 | ) | |
| 12 | |
Accounts payable | |
| 774 | | |
| 57 | |
Deferred revenue | |
| (4 | ) | |
| (3 | ) |
Accrued liabilities | |
| 639 | | |
| 9 | |
Other assets | |
| 184 | | |
| (64 | ) |
Total adjustments | |
| 1,877 | | |
| 544 | |
| |
| | | |
| | |
Net cash used in operating activities | |
| (4,807 | ) | |
| (4,458 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Additions to fixed assets | |
| (144 | ) | |
| (111 | ) |
Net cash used in investing activities | |
| (144 | ) | |
| (111 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Net proceeds from issuance of preferred stock and warrants | |
| — | | |
| 2,214 | |
Proceed from issuance of common stock | |
| 201 | | |
| — | |
Proceeds from debt financing | |
| 4,571 | | |
| — | |
Proceeds from options and warrants exercised | |
| 67 | | |
| 1,916 | |
Payments on notes and loan payables | |
| (459 | ) | |
| (320 | ) |
Net cash provided by financing activities | |
| 4,380 | | |
| 3,925 | |
| |
| | | |
| | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | |
| (571 | ) | |
| (644 | ) |
CASH AND CASH EQUIVALENTS, beginning of year | |
| 613 | | |
| 1,044 | |
CASH AND CASH EQUIVALENTS, end of period | |
$ | 42 | | |
$ | 400 | |
SUPPLEMENTAL SCHEDULE OF: | |
| | | |
| | |
Cash paid for: | |
| | | |
| | |
Interest | |
$ | 33 | | |
$ | 11 | |
NONCASH INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
Deemed dividends on preferred stock | |
$ | — | | |
$ | 1,171 | |
Issuance of common stock as board compensation | |
$ | 355 | | |
$ | 463 | |
Debt issuance cost paid via warrants | |
$ | 522 | | |
$ | — | |
Conversion of convertible debt into common stock | |
$ | 800 | | |
$ | — | |
Conversion of accrued expenses into common stock | |
$ | 178 | | |
$ | — | |
The accompanying notes are an integral part of these condensed
consolidated financial statement.
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 September 30, 2014, results of operations for the three and nine months ended September 30, 2014 and 2013, and cash
flows for the nine months ended September 30, 2014 and 2013. The results of operations for the three and nine months ended September
30, 2014 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, 2013.
The Company's prospects must be considered
in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry
is characterized by an increasing number of participants, intense competition and a high failure rate. The Company has experienced
net losses since its inception and, as of September 30, 2014, it had an accumulated deficit of approximately $109.8 million. Through
September 30, 2014, 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. Notwithstanding the foregoing, the Company believes it
has made progress in recent years in stabilizing its financial situation by execution of multiyear contracts from Konica Minolta
Opto, Inc., a subsidiary of Konica Minolta, Inc., a Japanese corporation based in Tokyo (“Konica Minolta”) and grants
from the National Cancer Institute (“NCI”), while at the same time simplifying its capital structure and significantly
reducing debt. However, the Company has replaced its prior agreements with Konica Minolta with a new licensing agreement, and therefore
will no longer receive direct payments from Konica Minolta, and will have to pay a royalty to Konica Minolta should the Company
sell any products licensed from Konica Minolta.
At September 30, 2014, the Company had negative
working capital of approximately $2.0 million and the stockholders’ deficit was approximately $4.0 million, 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.
The Company’s capital-raising efforts
are ongoing. If sufficient capital cannot be raised by the fourth quarter of 2014, the Company has plans to curtail operations
by reducing discretionary spending and staffing levels, and attempting to operate by only pursuing activities for which it has
external financial support and additional NCI, NHI or other grant funding. 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
15.7 million shares of its common stock outstanding at September 30, 2014, with exercise prices of $0.24 to $1.08 per share. Exercises
of these warrants would generate a total of approximately $8.1 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 through grants, if available.
The
Company submitted a PMA Amendment to the US FDA on July 24, 2014. The Company expects to hear back from the FDA regarding
the submission by January 24, 2015 or sooner. If the Company receives a favorable result from the FDA review, US launch
of LuViva could occur as early as the second half of 2015. However, the Company cannot be assured it will be able to launch
on this timetable, or at all. Product launch outside the United States began in the second half of 2013.
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, 2013 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 Lattice Model calculations.
Principles of Consolidation
The accompanying consolidated financial statements,
as of and for the quarters ended September 30, 2014 and 2013, includes the accounts of Guided Therapeutics, Inc. and its wholly
owned subsidiary.
Accounting Standards Updates
Newly effective accounting standards updates
and those not effective until after September 30, 2014, are not expected to have a significant effect on the Company’s financial
position or results of operations.
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.
Concentration of Credit Risk
The Company, from time to time during the periods
covered by these consolidated financial statements, may have bank balances in excess of its insured limits. Management has deemed
this a normal business risk.
Inventory Valuation
All inventories are stated at lower of cost
or 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 September 30, 2014 and December 31, 2013 our inventories
were as follows (in thousands):
| |
September 30, 2014 | |
December 31 2013 |
Raw materials | |
$ | 1,089 | | |
$ | 1,013 | |
Work in process | |
| 143 | | |
| 268 | |
Finished goods | |
| 96 | | |
| 96 | |
Inventory reserve | |
| (124 | ) | |
| (184 | ) |
Total | |
$ | 1,204 | | |
$ | 1,193 | |
Debt Issuance Costs
Debt issuance costs incurred in securing the
Company’s financing arrangements are capitalized and amortized over the term of the debt. Deferred financing costs are included
in other long term assets.
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.
Revenues
The majority of the Company’s revenues
were from product sales of approximately $586,000, grants with NIH totaling approximately $52,000, as well as other income from
royalties of approximately $14,000, for the nine months ended September 30, 2014. Substantially all of the Company’s revenues,
for the nine months ended September 30, 2013, were from product sales, totaling approximately $306,000, grants with the NIH and
NCI, totaling approximately $295,000, and other contract revenue from royalty and miscellaneous receipts, totaling approximately
$179,000.
Accounts Receivable
The Company performs periodic credit evaluations
of its customers’ financial condition 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.
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.
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.
Income Taxes
The Company accounts for income taxes
in accordance with the liability method. Under the liability method, the Company recognizes 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. The Company establishes 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. As of December 31, 2013, the Company had
approximately $59.8 million of net operating loss (“NOL”) carry forward. There was no provision for income taxes at
September 30, 2014. A full valuation allowance has been recorded related to any deferred tax assets created from the NOL.
Stock Option Plan
The Company measures the cost of employees
services received in exchange for equity awards, including stock options, based on the grant date fair value of the awards. The
cost will be recognized as compensation expense over the vesting period of the awards.
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 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 model.
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 September 30, 2014. The fair value of the warrants was estimated using the Monte
Carlo 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 September 30, 2014 and December 31, 2013:
FAIR VALUE MEASUREMENTS ( In Thousands)
Description | |
Level 1 | |
Level 2 | |
Level 3 | |
Total | |
Asset/(Liability) Total |
|
Date |
| Warrants | | |
$ | — | | |
$ | — | | |
$ | (1,548 | ) | |
$ | (1,548 | ) | |
$ | (1,548 | ) |
|
December 31, 2013 | |
| Warrants | | |
$ | — | | |
$ | — | | |
$ | (1,247 | ) | |
$ | (1,247 | ) | |
$ | (1,247 | ) |
|
March 31, 2014 | |
4. STOCK OPTIONS
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 and nine months ended September
30, 2014, stock-based compensation for options attributable to employees, officers and directors was approximately $272,000 and
$559,000, respectively. Compensation costs for stock options, which vest over time, are recognized over the vesting
period. As of September 30, 2014, the Company had approximately $622,000 of unrecognized compensation cost related to granted stock
options, to be recognized over the remaining vesting period of approximately three years.
The Company has a 1995 stock option plan (the
“Plan”) approved by its stockholders for officers, directors and key employees of the Company and consultants to the
Company. Participants are eligible to receive incentive and/or nonqualified stock options. The aggregate
number of shares that may be granted under the Plan is 13,255,219 shares. The Plan is administered by the compensation
committee of the board of directors. The selection of participants, grant of options, determination of price and other
conditions relating to the exercise of options are determined by the compensation committee of the board of directors and administered
in accordance with the Plan.
Both incentive stock options and non-qualified
options granted to employees, officers and directors under the Plan are exercisable for a period of up to 10 years from the date
of grant, at an exercise price that is not less than the fair market value of the common stock on the date of the grant. The
options typically vest in installments of 1/48 of the options outstanding every month. Options granted to management vest based
upon certain market and performance conditions.
A summary of the Company’s activity under
the Plan as of September 30, 2014 and changes during the nine months then ended is as follows:
| |
Shares | |
Weighted average exercise price | |
Weighted average remaining contractual (years) | |
Aggregate intrinsic value (thousands) |
Outstanding, January 1, 2014 | |
| 6,531,192 | | |
$ | 0.66 | | |
| 6.97 | | |
$ | 625,412 | |
Granted | |
| 496,761 | | |
| 0.50 | | |
| | | |
| | |
Exercised / Expired | |
| (319,963 | ) | |
| 0.43 | | |
| | | |
| | |
Outstanding, September 30, 2014 | |
| 6,707,990 | | |
$ | 0.67 | | |
| 5.78 | | |
$ | 56,830 | |
| |
| | | |
| | | |
| | | |
| | |
Vested and exercisable, September 30, 2014 | |
| 5,918,043 | | |
$ | 0.65 | | |
| 5.41 | | |
$ | 56,830 | |
The Company estimates the fair value of stock
options using a Black-Scholes and Lattice valuation models. Key input assumptions used to estimate the fair value of stock options
include the expected term, expected volatility of the Company’s 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.
5. 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 September 30, 2014 and December 31, 2013,
there was no accrual recorded for any potential losses related to pending litigation.
6. CONVERTIBLE DEBT
On April 23, 2014, the
Company entered into a securities purchase agreement (the “Purchase Agreement”), with Magna Equities II, LLC (formerly
Hanover Holdings I, LLC), an affiliate of Magna Group (“Magna”). Pursuant to the Purchase Agreement, the Company sold
Magna a 6% senior convertible note with an initial principal amount of $1.5 million and an 18-month term (the “Initial Convertible
Note”), for a purchase price of $1.0 million (an approximately 33.3% original issue discount). Additionally, pursuant to
the Purchase Agreement, on May 23, 2014 Magna purchased an additional senior convertible note with an initial principal amount
of $2.0 million and an 18-month term (the “Additional Convertible Note” and, with the Initial Convertible Note, (the
“Convertible Notes”), for a fixed purchase price of $2.0 million.
Pursuant to the terms
of the Initial Convertible Note, $500,000 of the outstanding principal amount (together with any accrued and unpaid interest with
respect to such portion) was automatically extinguished (without any cash payment by the Company) upon satisfaction of certain
conditions.
Subject to certain limitations,
the Convertible Notes are convertible at any time, in whole or in part, at Magna’s option, into shares of the Company’s
common stock, at a conversion price equal to the lesser of $0.55 per share and a discount from the lowest daily volume-weighted
average price of the Company’s common stock in the five trading days prior to conversion. The discount is 20% if the conversion
takes place prior to December 19, 2014 (November 20, 2014 for the initial Convertible Note, pursuant to a November 21, 2014 agreement
described in Note 10, Subsequent Event), and 25% if after that date. At no time will Magna be entitled to convert any portion of
the Convertible Notes to the extent that after such conversion, Magna (together with its affiliates) would beneficially own more
than 9.99% of the outstanding shares of the Company’s common stock as of such date. As long as Magna or its affiliates beneficially
own any of the shares issued upon conversion, they may not engage in any “short sale” transactions in the Company’s
common stock and may not sell more than the greater of $15,000 or 15% of the trading volume of the common stock in any single trading
day.
The Convertible Notes
include customary event of default provisions and a default interest rate of 16%. Upon the occurrence of an event of default, Magna
may require the Company to pay in cash the “Event of Default Redemption Price,” which is defined in the Convertible
Notes to mean the greater of (i) the product of (A) the amount to be redeemed multiplied by (B) 135% (or 100% if an insolvency
related event of default) and (ii) the product of (X) the conversion price in effect at that time multiplied by (Y) the product
of (1) 135% (or 100% if an insolvency related event of default) multiplied by (2) the greatest closing sale price of the common
stock on any trading day during the period commencing on the date immediately preceding such event of default and ending on the
date the Company makes the entire payment required to be made under this provision.
The Company paid to Magna
a commitment fee for entering into the Purchase Agreement in the form of 321,820 shares of common stock. The Company also paid
$50,000 of reasonable attorneys’ fees and expenses incurred by Magna in connection with the transaction. Total debt issuance
costs incurred on the Senior Convertible Note was approximately $889,000. This amount is being amortized over 18 months. Approximately
$148,000 and $213,000 were recorded as expense in the three and nine months ended September 30, 2014, respectively.
In connection with the
sale of the Convertible Notes, the Company issued its placement agent warrants exercisable for 200,000 shares of common stock at
$0.50 per share with an expiration date of April 23, 2019, and warrants exercisable for 561,798 shares of common stock at $0.45
per share with an expiration date of May 22, 2019.
As of September 30, 2014,
the Company had issued a total of 2,364,929 shares of common stock, in conjunction with conversions of the Convertible Notes.
7. STOCKHOLDERS' DEFICIT
Common Stock
The Company has authorized 145 million shares
of common stock with $0.001 par value, 79,377,404 of which were outstanding as of September 30, 2014. During the nine months ended
September 30, 2014, the Company issued 242,440 shares in connection with the exercise of outstanding options.
For the nine months ended September 30, 2014,
the Company issued 2,074,603 shares of common stock in connection with conversions of outstanding shares of Series B preferred
stock, as well as 99,766 shares of common stock as payment of accrued dividends on the Series B preferred stock.
Stock issued to employees and directors
The
Company issued 2,000,000 restricted shares of stock to an officer valued at $731,000 during the first quarter of 2014. The shares
are comprised of two tiers, including 1,000,000 shares in each tier, and are subject to performance and service conditions for
vesting. If the performance conditions are not achieved prior to January 2017, the restricted shares will be forfeited.
Total compensation expense recorded for the three and nine months
ended September 30, 2014 was approximately $98,000 and $293,000, respectively.
The Company issued 771,740 shares of common stock to directors valuing
$355,000 during the third quarter of 2014.
Preferred Stock; Series B Convertible 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,
and 3,000 shares of preferred stock as Series B Preferred Stock, of which 1,277 and 2,147 shares were issued and outstanding as
of September 30, 2014 and December 31, 2013, respectively.
Pursuant to the
terms of the Series B Preferred Stock set forth in the Certificate of Designations, Preferences and Rights designating the Preferred
Stock (the “Preferred Stock Designation”), shares of Series B Preferred Stock are convertible into common stock by
their holder at any time, and will be 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. The original conversion price was $0.68 per share, such that each share of Preferred
Stock would convert into 1,471 shares of common stock, subject to customary adjustments, including any accrued but unpaid dividends
and pursuant to certain anti-dilution provisions, as set forth in the Preferred Stock Designation. As a result of anti-dilution
provisions, the conversion price as of September 30, 2014 was $0.24 per share, such that each share of Preferred Stock would convert
into 4,132 shares of common stock.
Holders of the Series
B Preferred Stock are 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. Accrued dividends totaled approximately $39,000 at September 30, 2014. Each share
of Series B Preferred Stock is entitled to a number of votes equal to the number of shares of common stock into which the Series
B Preferred Stock is convertible. As long as shares of the Series B Preferred Stock are outstanding, and until 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, the Company may not incur indebtedness for borrowed money secured by the Company’s intellectual
property or in excess of $2.0 million without the prior consent of the holders of two-thirds of the outstanding shares of Series
B Preferred Stock. The Company may redeem the Series B Preferred Stock after the second anniversary of issuance, subject to certain
conditions. Upon the Company’s liquidation or sale to or merger with another corporation, each share of Series B Preferred
Stock will be entitled to a liquidation preference of $1,000 per share, plus any accrued but unpaid dividends.
The Series B Preferred Stock was issued with
Tranche A warrants to purchase 1,858,089 shares of common stock and Tranche B warrants purchasing 1,858,088 shares of common stock,
both at an exercise price of $1.08 per share. Pursuant to the terms of the Tranche B warrants, their exercise price will be reduced,
and the number of shares of common stock into which those warrants are exercisable will be increased, if the Company issues shares
at a price below the then-current exercise price. The exercise price of Tranche B warrants at September 30, 2014 was $0.24, and
on that date, the Tranche B warrants were convertible into 8,292,297 shares of common stock. As a result of these provisions, the
Company is required to account for the warrants as a liability recorded at fair value each period. The Company values the warrants
using a Monte Carlo Simulation model. Of the $2.6 million in proceeds from issuance of the Series B Preferred Stock, the Company
originally allocated $873,000 to the fair value of the warrants. At September 30, 2014 and December 31, 2013, the fair value of
these warrants was approximately $1.2 million and $1.5 million, respectively.
Warrants
We have issued warrants to purchase our common stock from time to
time in connection with certain financing arrangements.
The Company had the following shares reserved for the warrants as
of September 30, 2014:
Warrants
(Underlying Shares) |
|
Exercise Price |
|
Expiration Date |
3,590,522 |
(1) |
$0.80 per share |
|
March 1, 2015 |
6,790 |
(2) |
$1.01 per share |
|
September 10, 2015 |
439,883 |
(3) |
$0.68 per share |
|
March 31, 2016 |
285,186 |
(4) |
$1.05 per share |
|
November 20, 2016 |
1,858,089 |
(5) |
$1.08 per share |
|
May 23, 2018 |
8,292,297 |
(6) |
$0.24 per share |
|
May 23, 2018 |
200,000 |
(7) |
$0.50 per share |
|
April 23, 2019 |
561,798 |
(7) |
$0.45 per share |
|
May 22, 2019 |
184,211 |
(8) |
$0.38 per share |
|
September 9, 2019 |
325,521 |
(9) |
$0.46 per share |
|
September 17, 2019 |
|
|
|
|
|
__________
(1)
Consists of outstanding warrants issued in connection with a warrant exchange program in June
2012.
| (2) | Consists of outstanding warrants issued in
conjunction with a private placement on September 10, 2010. |
| (3) | Consists of outstanding warrants issued in
conjunction with a buy back of our minority interest in our subsidiary in December 2012, which were issued in February 2014. |
| (4) | Consists of outstanding warrants issued in
conjunction with a private placement on November 21, 2011. |
| (5) | Consists of outstanding warrants issued in
conjunction with a private placement on May 24, 2013. |
| (6) | Underlying shares increased from 1,858,089
to 8,292,297, and exercise price decreased from $1.08 per share to $0.24 per share, pursuant to the terms of the warrants, as a
result of certain conversions of Convertible Notes. |
| (7) | Consists of outstanding warrants issued to
a placement agent in conjunction with the April 23, 2014 and May 23, 2014 sales of Convertible Notes. |
| (8) | Consists of outstanding warrants issued to
a placement agent in conjunction with a September 2014 secured note offering. |
| (9) | Consists of outstanding warrants issued in
conjunction with a Regulation S private placement on September 17, 2014. |
8. 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 common shares outstanding during the period.
9. NOTES PAYABLE
Short Term Notes Payable
At September 30, 2014, the Company maintained
notes payable and accrued interest to related parties totaling $564,000. These notes are short term, straight-line amortizing notes.
The notes carry an annual interest rate of between 5% and 10%.
On September 10, 2014, the Company
entered into a note purchase agreement with Tonaquint, Inc., pursuant to which the Company 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).
For the three and nine months ended September 30, 2014, the Company recorded amortization of approximately $35,000 on the
discount. The Company also paid $15,000 of reasonable attorneys’ fees and expenses incurred by Tonaquint, Inc. in
connection with the transaction. Total debt issuance costs capitalized were approximately $130,000. This amount is being
amortized over six months. Total amortized expense for the three and nine months ended September 30, 2014 was approximately
$15,000. The note does not bear interest, and will be due six months from issuance. The Company may prepay the note at any
time, with the following discounts applied: if the Company prepays the note on or before the 70th day from the date of
issuance, a $420,000 reduction of the outstanding principal amount of the note will be applied, and if the Company prepays
the note after the 70th day, but on or before the 120th day from the date of issuance, a $210,000 reduction of the
outstanding principal amount of the note will be applied. 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 note purchase
agreement. In connection with the offering, the Company issued its placement agent warrants exercisable for 184,211 shares at
$0.38 per share with an expiration date of September 10, 2019.
Notes Payable
At December 31, 2012, the Company was past
due on two short-term notes totaling approximately $419,000 of principal and accrued interest. Interest charged on these notes
prior to amendment ranged between 15-18%. On February 27, 2013, the Company renegotiated one of the two past due notes. The new
note accrued interest at 6% and was paid in full during the quarter ended June 30, 2013. On April 16, 2013, the Company renegotiated
the other note. The renegotiated note accrues interest at 9.0%, with a 16.0% default rate, requires monthly payments of $10,000,
including interest, and matures November 2015. The balance due on this note was approximately $153,000 and $208,000 at September
30, 2014 and December 31, 2013, respectively. As of September 30, 2014, the note is accruing interest at the default rate, of which
principal and interest of $60,000 is payable during the year ending December 31, 2014 and $102,000 is payable during the year ending
February 2016.
At September 30, 2014, the Company
maintained a note payable to Premium Assignment Corporation, an insurance premium financing company, of approximately
$100,000. The note is a 10 month straight-line amortizing loan dated June 24, 2014. The note carries annual interest of
4.6%. The balance due to on the Premium Assignment note was approximately $71,000 at September 30, 2014.
10. SUBSEQUENT EVENTS
On October 23, 2014 the Company’s
President and CEO, Gene Cartwright, advanced the Company $30,000 in cash for a 5% simple interest note. On October 24, 2014 and
October 7, 2014, the Company’s Senior Vice President of Engineering, Richard Fowler, advanced $6,100 and $20,000, respectively,
in cash for 6% simple interest notes. On October 7, 2014, the Company’s Director of Marketing advanced $10,000 in cash for
a 6% simple interest note.
On November 4, 2014, a stockholder of
the Company, Richard Blumberg, advanced the Company $100,000 in cash for a note for $106,500 in aggregate principal and interest
due November 30, 2014.
On November 6, 2014, Magna agreed to refrain from converting any
portion of the Convertible Notes or selling any shares of the Company’s common stock until after November 21, 2014, in exchange
for an acceleration of the scheduled increase in the conversion discount on the Initial Convertible Note from December 19, 2014
to November 21, 2014.
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