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