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EX-31 - CERTIFICATION - GUIDED THERAPEUTICS INCex31.htm
EX-23.1 - CONSENT - GUIDED THERAPEUTICS INCex23one.htm
EX-32 - CERTIFICATION - GUIDED THERAPEUTICS INCex32.htm
 
 


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010.
OR
[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________

Commission file number:  0-22179

GUIDED THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)

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

 
5835 Peachtree Corners East, Suite D
Norcross, Georgia
(Address of principal executive offices)
30092
(Zip Code)
 

 
   Registrant’s telephone number (including area code):                 (770) 242-8723
        Securities registered under Section 12(b) of the Exchange Act:         None
   Securities registered under Section 12(g) of the Act:      Common Stock, $0.001 par value
                                                                                                                     (Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [   ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [   ] No [X]

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [   ] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.


Large accelerated filer [  ]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [X]

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was approximately $37,257,519 as of June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the closing sales price of the registrant’s Common Stock of $0.89, reported for such date by the OTC Bulletin Board.
 
 
 
 
 

 
 
 

As of March 4, 2011, the registrant had outstanding 48,110,789 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE.

None.
 
 
 
 
 
 
 
 
 

 
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TABLE OF CONTENTS
 

 
   PART I  4
 
   ITEM 1.  BUSINESS  4
   ITEM 1A.  RISK FACTORS 11
   ITEM 2.  PROPERTIES  17
   ITEM 3.  LEGAL PROCCEDINGS  17
   ITEM 4.  RESERVED  17
 
   PART II  18
 
   ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  18
   ITEM 6.  SELECTED FINANCIAL DATA  19
   ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION  19
   ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  23
   ITEM 9.  CHANGES AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 38
   ITEM 9A.  CONTROLS AND PROCEDURES  38
   ITEM 9B.  OTHER INFORMATION  39
 
   PART III  40
 
   ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  40
   ITEM 11.  EXECUTIVE COMPENSATION  43
   ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  45
   ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE  46
   ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES 47
 
   PART IV  48
 
   ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  48
 
   SIGNATURES  49
 
 
 
 
 

 
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PART I

Item 1.     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 Light Touch cervical cancer detection technology and extension of our cancer detection platform into other cancers, especially lung and esophageal. Our technology, including products in research and development, primarily relates to biophotonics technology for the non-invasive detection of cancers, including cervical cancer.

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 our cervical cancer detection device will provide a less invasive and painless alternative to conventional tests for cervical cancer detection. We also believe our cervical cancer detection product 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 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. Assuming we receive FDA approval in 2011, we currently anticipate a late 2011 or early 2012 product launch, but cannot be assured we will be able to launch on that timetable, or at all.

Other Cancers

We believe our non-invasive cancer detection technology can be applied to other cancers in addition to cervical cancer.  To that end, we are working with Konica Minolta Opto, Inc., a subsidiary of Konica Minolta, Inc., a Japanese corporation based in Tokyo (“Konica Minolta”) (see “—Lung and Esophageal Cancer Detection —Konica Minolta”) to adapt our cervical cancer detection technology for detection of lung cancer and esophageal cancer.

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 our cervical cancer diagnostic product, filed our PMA application with the FDA and have begun to raise capital for the development and launch of this product. 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 adequately finance the completion of the FDA review process, complete product development and prepare for marketing of our cervical cancer detection product, additional capital will be needed; however, we cannot be assured of the availability of adequate capital (see Item 1A. “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 have been seeking a new strategic partner that can help defray costs and otherwise assist in the expansion of our cancer detection technology into other cancers. This has resulted in a series of six-month and one-year exclusive negotiation and feasibility study agreements with Konica Minolta, the most recent of which is a one-year development agreement for extending our technology into the areas of lung and esophageal cancer. This agreement expires on April 30, 2011, but can be extended for an additional year, after which both parties would consider executing a long-term agreement license and marketing agreement. For each year of the current contract, we are paid a minimum fee of $750,000. In addition, on January 28, 2010, we executed a new agreement with Konica Minolta for development of LightTouch prototype devices specifically for the esophageal cancer detection application. In this agreement, Konica Minolta paid us an additional approximately $1.6 million during 2010 for technical, regulatory and clinical development of prototype devices for esophageal cancer detection (see “—Lung and Esophageal Cancer Detection —Konica Minolta”).


 
4

 

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; 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, 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 American Cancer Society estimated that in 2010 about 12,200 cases of invasive cervical cancer would be diagnosed and predicted 4,210 deaths from cervical cancer in the U.S. 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 U.S. has declined dramatically, due mainly to the increased use of the Pap smear screening test. However, the Pap smear screening 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 U.S. The average price of a Pap test in the U.S. is about $26. New technologies improving the sensitivity and specificity of Pap smear screening have recently been introduced and are finding acceptance in the marketplace.

After screening for cervical cancer by use of a Pap smear, 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 U.S. and Europe. In 2003, the average cost of a stand-alone colposcope examination in the U.S. 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
 
We are developing a non-invasive cervical cancer detection product. The product is based on our proprietary biophotonic technology. The device is expected 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 smear 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 expected 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 launch our cervical cancer detection product first in the developed countries of Europe, while continuing steps to procure FDA approval in the U.S.
 
 
 
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To date, more than 3,000 women have been tested with various prototype 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 fifth 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 our LightTouch non-invasive cervical cancer detection technology. The award provides resources to complete the regulatory process and begin manufacturing ramp up for the device and single-patient-use disposable cancer detection device and will be received over a period of three years. Under the award, we recorded revenue of $667,000 in 2010 and $339,000 in 2009. We are eligible to receive a maximum of $517,000 in 2011.

In June 2007, we announced that we had successfully completed an audit of our quality system and were recertified under ISO 13485:2003.  This designation means that we are eligible to issue a conformity mark (“CE mark”) for our non-invasive cervical cancer detection device once development is complete.  The CE mark is necessary to sell our non-invasive cervical cancer detection device in the European Union and other markets.

We completed enrollment in our FDA pivotal trial 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. Assuming we receive FDA approval in 2011, we currently anticipate a late 2011 or early 2012 product launch, but cannot be assured we will be able to launch on that timetable, or at all.

Sales or leases of the Light Touch cervical cancer detection product are expected to include a single-patient-use disposable patient interface. We expect the device itself to be priced at less than $20,000, with the disposable interface priced around $30 to $40. Profit margins on the device could be approximately 90%. In the United States, we plan on increasing our own currently 10-person sales force, 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 and expect to announce 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 Cytyc, Inc. (acquired by Hologic, Inc.), which markets the Thin Prep Pap test and Digene, Inc. (acquired by 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.
 
 
 
 
 
 
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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 215,000 new cases and more than 161,000 deaths annually, according to the American Cancer Society.  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 63,000 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 16,000 new cases and 14,000 deaths in the U.S. alone.  In Japan, esophageal cancer is responsible for 11,300 deaths annually.  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 biopies 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 are working with Konica Minolta to adapt our cervical cancer detection technology for detection of lung cancer and esophageal cancer (see “—Konica Minolta”). However, we have not as yet conducted 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 product. We have two clinics in the Atlanta, Georgia metropolitan area where we will conduct a small scale study with 30 to 40 subjects, which should take 60 to 90 days to enroll, depending on availability of qualified subjects. We expect to begin the study in the second or third quarter of 2011. The goal of the study is to establish feasibility of the product design and clinical implementation. Qualified subjects will undergo a standard Barrett’s endoscopic exam and also be tested with our technology. Standard biopsies will be taken, against which our measurements will be compared.

Konica Minolta

On April 28, 2008, we executed a six-month option to license and no-shop agreement with Konica Minolta.  In return for limited option to license and negotiation rights to certain of our technology, we were paid $250,000.  The agreement was renewed for an additional six-month period starting on October 28, 2008, for which we were paid an additional $250,000.   In addition, Konica Minolta purchased prototype materials and devices from us for a sum of approximately $100,000.  The primary objective of the collaboration was to explore the feasibility of adapting our cervical cancer detection technology to other cancers 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. In April 2010, we renewed the agreement for an additional year, with an option for an additional one-year term thereafter. We will be paid a total fee during the term of this agreement of $750,000. As of December 31, 2010, we had received a total of $700,000. On March 28, 2011, we extended this agreement for an additional year, effective May 1, 2011. Under the 2011 extension agreement, we will receive a total of $750,000, with the first payment of $500,000 due on or before April 29, 2011 and the final $250,000 payment due on or before October 29, 2011.

On January 28, 2010, we entered into a new agreement with Konica Minolta for development of LightTouch prototype devices specific to the esophageal cancer detection application.  In this agreement, Konica Minolta agreed to pay us an additional approximately $1.6 million during 2010 for technical, regulatory and clinical development. In addition to the Barrett’s esophagus product, Konica Minolta retains the rights to apply our technology to lung cancer detection. As of December 31, 2010, we have received the total amount of $1.6 million. On March 28, 2011, we extended this agreement for an additional year, effective May 1, 2011. Under the 2011 extension agreement, we will receive a total of $1.72 million, with the first three payments of $450,000 each due on May 1, August 1 and November 1, 2011, and the last payment of $370,440 due on or before February 1, 2012.
 
 
 
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Research, Development and Engineering
 
To date, we have been engaged primarily in the research, development and testing of our cancer detection product, including research for and development of our core biophotonic technologies, as well as our since-discontinued glucose monitoring, diabetes detection, infant jaundice products. From inception to December 31, 2010, we incurred about $52.4 million in research and development expenses, net of about $19.2 million reimbursed through collaborative arrangements. Research and development costs were about $1.8 million and $1.4 million in 2010 and 2009, respectively.

Since 2008, we have focused our research and development and our engineering resources almost exclusively on development of our cervical cancer detection system, with only limited support of other programs funded through government contracts or third party funding, such as Konica Minolta.  Because we have not yet launched commercial versions of our technology, only prototypes of our cervical cancer detection products 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 products or planned products are available from only one supplier, and substitutes for these components could not be obtained easily or would require substantial modifications to our products.

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 December 31, 2010, we have 18 granted U.S. patents relating to our cancer technology and three pending U.S. patent applications.

One or more of the patents held directly by us or licensed by us from third parties, as well as 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 systems, primarily the Pap smear and colposcopy, are well established and pervasive. Improvements and new technologies for cervical cancer detection and prevention, such as Thin-Prep from Cytyc Corporation (now 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 create devices that 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. In worldwide clinical analyses, however, women who were already infected with one or more of the four HPV types targeted by the vaccine were protected from clinical disease caused by the remaining HPV types in the vaccine. 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 smears. On October 16, 2009, GlaxoSmithKline PLC was granted approval in the United States for a similar preventive HPV vaccine, known as Cervarix.
 
 
 
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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, which could have a material adverse effect on our business, financial condition and results of operations. For any of our products that are or will be cleared through the 510(k) process, 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 510(k) premarket notification or approval of an application for premarket approval. Any modified device for which a new 510(k) premarket notification is required cannot be distributed until 510(k) clearance is obtained. We may not be able to obtain 510(k) clearance in a timely manner, if at all, for any devices or modifications to devices for which we may submit a 510(k).

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.
 
 
 
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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. 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 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.
 
 
 
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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 December 31, 2010, we had 22 regular employees and consulting or other contract arrangements with five additional persons to provide services to us on a full- or part-time basis. Of the 27 people employed or engaged by us, 13 are engaged in research and development activities, two are engaged in sales and marketing activities, one is engaged in clinical testing and regulatory affairs, four are engaged in manufacturing and development, and seven are engaged in administration and accounting. No employees are covered by collective bargaining agreements, and we believe we maintain good relations with our employees.

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

Item 1A.  Risk Factors

In addition to the other information in this annual report on Form 10-K, the following risk factors should be considered carefully in evaluating us.

Although we will be required to raise additional funds sometime by the fourth quarter of 2011, there is no assurance that such funds can be raised on terms that we would find acceptable, or at all.

Additional debt or equity financing will be required for us to continue as a going concern. Management 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 collaborative arrangements in order to execute our plans to launch our cervical cancer detection product line 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 financial statements as of December 31, 2010, indicates that there is substantial doubt about our ability to continue as a going concern because we have suffered recurring losses from operations and have an  accumulated deficit of $78.4 million. We are also in default on payments due on some short-term loans.
 
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.
 
 
 
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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 believe funds on hand as of date of this report, along with funds from government contracts and grants, and other strategic partnerships, will be sufficient to support planned operations through the fourth quarter of 2011, but will not be sufficient to fund our planned operations to the point of commercial introduction of our cervical cancer detection product. Any failure to agree on a collaborative arrangement or 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.

We have historically financed our operations though agreements with collaborative partners, grants and private sales of debt and public and private sales of equity securities.

Should we enter into an agreement with a collaborative partner, the obligations of a collaborative partner to fund our expenditures will be largely discretionary and will 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 meet these milestones, or our collaborative partner may not continue to fund our expenditures. Debt and certain types of equity financing, if available, may involve restrictive covenants or other provisions that could limit how we conduct our business or finance our operations.
 
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, and 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 $78.4 million at December 31, 2010.

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.
 
 
 
 
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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.

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 will be 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 obtain and protect the proprietary information on which we base our products.

Our success depends in large part upon our ability to establish and maintain 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 December 31, 2010, we have been issued, or have rights to, 18 U.S. patents (including those under license).  In addition, we have filed for, or have rights to, three 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.
 
 
 
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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 adequately finance the completion of the FDA pivotal trial, 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 people, and few independent studies regarding our products have been published. The lack of independent studies limits the ability of doctors or consumers to compare our products to conventional products.

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

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

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

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

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

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

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

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

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

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. Our President and Chief Executive Officer and our 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.

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 32.2% of our outstanding common stock as of December 31, 2010. 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.
 
 
 
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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 traded on the OTCQB . Shares of our common stock are thinly traded, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including:

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

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 Securities and Exchange Commission’s “penny stock” rule, which imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established 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 purposes of the rule, the phrase “accredited investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse’s income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities and also may affect the ability of our stockholders to sell their securities in any market that might develop.

Stockholders should be aware that, according to Securities and Exchange Commission Release No. 34-29093, 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.

Substantial future sales of shares of our common stock in the public market could cause our stock price to fall.

If our stockholders (including those persons who may become stockholders upon 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.
 
Our need to raise additional capital in the near future or to use our equity securities for payments could have a dilutive effect on your investment.

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

Two of our stockholders have asserted claims against us, the resolution of which could have a material adverse impact on our business, operating results or financial condition.

In October 2010, we received a letter from an attorney representing two of our stockholders, asserting claims for breach of contract and fraud in connection with transactions and occurrences in 2005 and 2009. See Item 3, “Legal Proceedings.”  Although we have denied the validity of these claims, there is no guarantee that the Company’s defense would succeed if the Company is sued, and we may be have to pay damages awards or otherwise may enter into settlement arrangements in connection with these claims.  Should we be unsuccessful or otherwise choose to settle such claims, the resulting damage awards or settlement arrangements could have material adverse effects on our business, operating results or financial condition.  As the claims relate to the issuance of securities, we may be required to issue additional shares of our common stock or other securities convertible into or exchangeable for our common stock in payment of  settlement of these claims, which would result in dilution to our stockholders. Even if the pending claims are not successful, litigation with respect to these claims could result in substantial costs and significant adverse impact on our reputation and divert management's attention and resources, which could have a material adverse effect on our business, operating results or financial condition.
 
 
 
16

 
 
 
FORWARD LOOKING STATEMENTS

Statements in this report, which express “belief,” “anticipation” or “expectation,” as well as other statements that are not historical facts, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Exchange Act. 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 report. 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 effectiveness and ultimate market acceptance of our products;
 
 ·
whether our products in development will prove safe, feasible and effective;
 
 ·
whether and when we or any potential strategic partners will obtain approval from the FDA and corresponding foreign agencies;
 
 ·
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 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.
 
 
Item 2.     Properties

In December 2009, we moved our offices, which comprise our administrative, research and development, marketing and production facilities, to 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.

Item 3.     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.

In October 2010, we received a letter from an attorney representing two stockholders (one of whom, Dolores Maloof, is a significant stockholder) (the “Claimants”), asserting claims for breach of contract and fraud in connection with transactions and occurrences in 2005 and 2009. The letter concerns a Warrant Agreement we entered into with the Claimants in August 2005. Pursuant to the Warrant Agreement, if certain initial financing were to be obtained for our wholly owned subsidiary, InterScan (formerly named Guided Therapeutics, Inc.), the Claimants would receive warrants to purchase an aggregate number of shares of InterScan common stock equal to 7.5% of the outstanding InterScan common stock as of the closing of the such InterScan financing. The Warrant Agreement further provides that if, prior to such financing, we were to license or sell our cervical cancer detection technology, we would remit to the Claimants an aggregate of 7.5% of the net proceeds of such license or sale. The Claimants, through their attorney, allege that the warrants are now issuable to them under the terms of the Warrant Agreement. In that regard, the Claimants have alleged that our name change from SpectRx, Inc. to Guided Therapeutics, Inc., which occurred in 2008, coupled with subsequent financings, supports their claim.  In the alternative, the Claimants assert that the Warrant Agreement was modified by an agreement with us in 2009, and under such modification they are entitled to warrants to purchase 2.6 million shares of our common stock at a nominal exercise price, a 2% royalty on certain future product sales, and 3% of any proceeds should we be sold. In a letter issued by our attorneys on November 5, 2010, we have responded to the Claimants’ demands, denying the validity of each.  Our response states that the closing of a financing of InterScan was a condition precedent under the express terms of the Warrant Agreement to the issuance of the warrants that the Claimants allege are owed them and that such financing has never occurred. Further, we deny that any agreement to modify the Warrant Agreement was ever made as the Claimants assert, and also deny that any wrongdoing was committed in connection with the change of our name.  Although no lawsuit has been filed by Claimants, the Claimants have stated an intention to file suit if a settlement cannot be reached.  Although we have denied the validity of these claims, there is no guarantee that our defense would succeed if we are sued, and we may be have to pay damages awards or otherwise may enter into settlement arrangements in connection with these claims.

Item 4.     Reserved
 

 
 
17

 

PART II

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
                 Securities

Market for Common Stock; Holders

Our common stock is traded on the OTCQB quotation systems under the ticker symbol GTHP. The number of record holders of our common stock at March 4, 2011 was 194.

The high and low sales prices for the calendar years 2010 and 2009, as reported by the OTCQB, are as follows:

   
2010
   
2009
 
 
HIGH
   
LOW
   
HIGH
   
LOW
First Quarter
 
$
1.43
   
$
0.72
   
$
0.43
   
$
0.20
Second Quarter
 
$
1.04
   
$
0.68
   
$
0.45
   
$
0.24
Third Quarter
 
$
 0.90
   
$
0.77
   
$
0.38
   
$
0.20
Fourth Quarter
 
0.89
   
0.73
   
$
1.60
   
$
0.32

Dividend Policy

We have not paid any dividends since our inception and do not intend to pay any dividends in the foreseeable future.

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:
 

 
 
 
 
 
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
 
 
 
5,738,167
 
 
 
$0.41
 
 
 
2,517,052
Equity compensation plans
   not approved by security
   holders
 
 
 
-
 
 
 
-
 
 
 
-
            TOTAL
 
5,738,167
 
$0.41
 
2,517,052

Recent Sales of Unregistered Securities

In 2010, we received approximately $432,500, from the exercise of outstanding warrants to purchase an aggregate of 665,384 shares of our common stock. See Note 3 to the consolidated financial statements accompanying this report. The warrants were originally issued pursuant to an exemption from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering, except for the issuances of warrants on February 26, 2010, which were exempt from registration under the Securities Act in reliance upon Section 3(a)(9) of the Securities Act as exchanges with existing securities holders exclusively where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchanges. The cash received upon exercise of the warrants was used for general corporate purposes. In December 2010, we issued 100,000 shares of common stock to Mark Faupel, our President and CEO, as a payment for outstanding salary of $82,000, the value of our common stock on the date of issuance, which was exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering.

 
18

 

Item 6.     Selected Financial Data

Not applicable.

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this report.

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 Light Touch cervical cancer detection technology and extension of our cancer detection platform into other cancers, especially lung and esophageal. Our technology, including products in research and development, primarily relates to biophotonics technology for the non-invasive detection of cancers, including cervical cancer.

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 December 31, 2010, we have an accumulated deficit of about $78.4 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 will require substantial development, regulatory, sales and marketing, manufacturing and other expenditures. We expect our operating losses to continue through at least the end of 2011 as we continue to expend substantial resources to introduce our cervical cancer detection product, 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 2010 and 2009, the majority of our revenues were from the NCI and Konica Minolta.  We expect that the majority of our revenue in 2011 will also be derived from research contract revenue.

Recent Developments
 
On January 28, 2010, we entered into a new agreement with Konica Minolta for development of LightTouch prototype devices specific to the esophageal cancer detection application.  In this agreement, Konica Minolta agreed to pay us an additional approximately $1.6 million during 2010 for technical, regulatory and clinical development. In addition to the Barrett’s esophagus product, Konica Minolta retains the rights to apply our technology to lung cancer detection. As of December 31, 2010, we had received the total amount of $1.6 million. On March 28, 2011, we extended this agreement for an additional year, effective May 1, 2011. Under the 2011 extension agreement, we will receive a total of $1.72 million, with the first three payments of $450,000 each due on May 1, August 1 and November 1, 2011, and the last payment of $370,440 due on or before February 1, 2012.

On March 28, 2011, we also extended our exclusive negotiation and development agreement of optimization of our microporation system for manufacturing, regulatory approval, commercialization and clinical utility with Konica Minolta through April 2011. As of December 31, 2010, we had received a total of $700,000 under this agreement. Under the 2011 extension agreement, we will receive a total of $750,000, with the first payment of $500,000 due on or before April 29, 2011 and the final $250,000 payment due on or before October 29, 2011.
 
 
 
19

 
 

On February 26, 2010, we held a special meeting of stockholders to approve an amendment to our certificate of incorporation to reclassify our series A convertible preferred stock into common stock and warrants to purchase shares of common stock.  As a result, all 242,576 outstanding shares of Series A convertible preferred stock and accrued dividends were reclassified into 8,084,139 shares of common stock and warrants to purchase an additional 2,799,327 shares of common stock.  Upon this reclassification, the $9.1 million in outstanding 2007 Notes and accrued interest were automatically converted into 13,985,197 shares of common stock.

On September 10, 2010, we completed a private placement of 3,771,605 shares of our common stock at a purchase price of $0.81 per share, pursuant to which we raised approximately $3 million. For each share of common stock issued, subscribers received warrants exercisable for the purchase of 1/10 of one share of common stock (in the aggregate, 377,161 shares) at an exercise price of $1.01 per share. The warrants have a five-year term.
 
We completed enrollment in our FDA pivotal trial 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.

In a letter from the U.S. Treasury Department dated October 29, 2010, we were notified that we were awarded a cash grant of $244,479 under the federal Qualifying Therapeutic Discovery Project program for 2009.  We received the cash on November 30, 2010.

As of March 10, 2011, we have received a total of $611,362, from the exercise of outstanding warrants to purchase an aggregate of 940,556 shares of our common stock.

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.
 
Valuation of Deferred Taxes:  We account for income taxes in accordance with the liability method. Under the liability method, we recognize deferred assets and liabilities based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. We establish a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be utilized against future taxable income.
 
Valuation of Equity Instruments Granted To Employee, Service Providers and Investors: On the date of issuance, the instruments are recorded at their fair value as determined using the Black-Scholes valuation model. See Note 3 to the consolidated financial statements accompanying this report for the assumptions used in the Black-Scholes valuation.
 
Allowance for Accounts Receivable:  We estimate losses from the inability of our customers to make required payments and periodically review the payment history of each of our customers, as well as their financial condition, and revise our reserves as a result.
 
Results of Operations
 
Comparison of 2010 and 2009

General: Net loss attributable to common stockholders decreased to approximately $4.5 million or $0.12 per share in 2010, from $6.4 million or $0.38 per share in 2009.

Revenue from Grants and other Agreements: Total revenues increased to approximately $3.3 million in 2010, from $1.6 million in 2009. During the years ended December 31, 2010 and 2009, we recorded revenue of approximately $741,000 and $539,000 from the NCI grant, respectively. In 2010, approximately $1.4 million of revenue was recorded form Konica Minolta agreements, compared to approximately $726,000 for the same period in 2009. We also recorded revenue of approximately $133,000 in 2009 from NIH. There were no costs of sales in 2010 and 2009.
 
 
 
20

 
 

Research and Development Expenses: Research and development expenses increased to approximately $1.8 million in 2010, compared to approximately $1.4 million in 2009, due to an increase in expenses related to our cancer detection technology, primarily due to preparation for the production of demonstration devices.

Sales and Marketing Expenses: Sales and marketing expenses increased to approximately $131,000 in 2010, compared to approximately $63,000 in 2009, due to an increase in expenses related to our cancer detection technology, primarily due to preparation for the marketing efforts for our devices.

General and Administrative Expense: General and administrative expense increased to about $3.0 million in 2010, from about $1.9 million in 2009. The increase is primarily related to an increase in the use of professionals to support our efforts in preparation for the production of demonstration devices.

Other Income: Other income was approximately $2,000 in 2010 compared to approximately $32,000 in 2009.

Loss on Extinguishment of Debt: Loss on extinguishment of debt was approximately $401,000 in 2009. The debt extinguishment relates to a gain from the write-off of old payables to a former collaborative partner, dating back to 1999, which was approximately $381,000 and a loss from the conversion of notes, which was approximately $782,000. There was no loss on debt extinguishment in 2010.

Interest Expense: Interest expense decreased to approximately $1.2 million for the year ended December 31, 2010, as compared to expenses of approximately $3.9 million for the same period in 2009. The significant decrease is primarily due to the February 26, 2010 conversion of indebtedness into common stock, as well as a decrease in interest expense on a lower loan balance for the year ended December 31, 2010.

Liquidity and Capital Resources

We have financed our operations since inception primarily through grants and private sales of debt and private and public sales of our equity securities, as well as agreements with collaborative partners. At December 31, 2010, we had cash of approximately $3.3 million and working capital of approximately $612,000.

Our major cash flows in the year ended December 31, 2010, consisted of cash out-flows of $310,000 from operations, including approximately $2.8 million of net loss, cash outflow of $226,000 from investing activities and a net change from financing activities of $3.5 million, which primarily represents the proceeds received from our convertible notes payable and proceeds from a third party investment in our subsidiary.

On March 12, 2007, we completed a restructuring of our then-existing indebtedness by entering into a loan agreement with existing and new creditors. Pursuant to the loan agreement, our then-existing indebtedness was restructured and consolidated into the 2007 Notes.  The aggregate principal amount of the originally issued 2007 Notes was approximately $4.8 million and was due on March 1, 2010. On February 26, 2010, these 2007 Notes plus accrued interest were converted into common stock (see details below).

On December 1, 2008, we entered into a note purchase agreement with 28 existing and new lenders, pursuant to which we issued approximately $2.3 million in aggregate principal amount of 2008 notes and warrants exercisable for 11,558,878 shares of common stock. Approximately $1.3 million of the proceeds from the issuance of the 2008 notes was used to convert existing debt into 2008 notes, including conversion of an unsecured note issued to Dolores Maloof on April 10, 2008 in the aggregate principal amount of $400,000, plus interest, as well as notes issued under the note purchase agreement, dated between May 23 and July 7, 2008, in aggregate principal amount of $625,000, plus interest, held by John E. Imhoff and eleven other designated investors. The remaining funds were used in product development, working capital and other corporate purposes.

On August 31, 2009, we issued an aggregate of $3.6 million in 2007 Notes in exchange for the extinguishment of an equal amount of debt represented by the 2008 notes and the other outstanding notes issued after the 2007 Notes.  

In October of 2009, the loan agreement governing the 2007 Notes was further amended to provide for automatic conversion of the 2007 Notes into a number of shares of common stock equal to the outstanding amounts being so converted divided by the then-current conversion price of $0.65, to be triggered upon a reclassification of our series A convertible preferred stock into common stock and warrants to purchase shares of common stock.
 
 
 
21

 
 

On February 1, 2010, we entered into an agreement with Konica Minolta to co-develop new, non-invasive cancer development products.  Pursuant to the agreement, we were paid approximately $1.6 million as of December 31, 2010, in addition to pre-existing option-to-license payments of approximately $700,000 already received from Konica Minolta, in exchange for Konica Minolta’s right to purchase prototype devices and to rely on us to establish the technical approach and regulatory strategy for potential entry of the new products into the U.S. and international markets.  The new products are for the detection of esophageal and lung cancer, and are based on our LightTouch non-invasive cervical cancer detection technology, which will be undergoing the U.S. Food and Drug Administration’s premarket approval process.  We have received approximately $3.8 million since 2008 from Konica Minolta pursuant to various co-development agreements similar to the current agreement, as well as no-shop agreements.

On February 26, 2010, we amended our certificate of incorporation to reclassify our series A convertible preferred stock into common stock and warrants to purchase shares of common stock.  As a result, all 242,576 outstanding shares of series A convertible preferred stock and accrued dividends were reclassified into 8,084,139 shares of common stock and warrants to purchase an additional 2,799,327 shares of common stock.  Upon this reclassification, the $9.1 million in outstanding 2007 Notes and accrued interest were automatically converted into 14 million shares of common stock.

On April 27, 2010, we executed an agreement to extend our license agreement with Konica Minolta to co-develop non-invasive cancer detection products for one year. Konica Minolta will pay us a $750,000 fee for the extension. As of December 31, 2010, we have received $700,000. Additionally, the agreement provides for a subsequent one-year renewal upon the written agreement of the parties. The original agreement was a one-year exclusive negotiation and development agreement of optimization of our microporation system for manufacturing, regulatory approval, commercialization and clinical utility, which we and Konica Minolta entered into in April 2009. For the year ended December 31, 2009 we were paid $750,000 under the agreement.

On September 10, 2010, we completed a private placement of 3,771,605 shares of our common stock at a purchase price of $0.81 per share, pursuant to which we raised approximately $3 million. For each share of common stock issued, subscribers received warrants exercisable for the purchase of 1/10 of one share of common stock (in the aggregate, 377,161 shares) at an exercise price of $1.01 per share. The warrants have a five-year term.

We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements in addition to these sources. We believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the fourth quarter of 2011. 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 using certain assets as collateral.

Substantial capital will be required to develop our products, including completing product testing and clinical trials, obtaining all required United States 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.  The above factors raise substantial doubt about our ability to continue as a going concern, as more fully discussed in Note 1 to the consolidated financial statements contained herein and in the report of our independent registered public accounting firm accompanying our financial statements.

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.
 
 

 

 
22

 

Item 8.     Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Guided Therapeutics, Inc.
and its Subsidiary

We have audited the accompanying consolidated balance sheets of Guided Therapeutics, Inc. and its subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in Stockholders’ equity (deficit) and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  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. 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 and 2009 included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Guided Therapeutics, Inc. and its subsidiary as of December 31, 2010 and 2009, and the consolidated 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, accumulated deficit and lack of working capital 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

Atlanta, Georgia

March 30, 2011

 
23

 


GUIDED THERAPEUTICS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
AS OF DECEMBER 31, 2010 AND 2009
 
(In Thousands Except Per Share Data)
 
             
ASSETS
 
2010
   
2009
 
CURRENT ASSETS:
           
    Cash and cash equivalents
  $ 3,268     $ 230  
    Accounts receivable, net of allowance for doubtful accounts of  $38 and $41 at
       December 31, 2010 and 2009, respectively
    85       132  
    Other current assets
    30       48  
                    Total current assets
    3,383       410  
                 
    Property and equipment, net
    37       4  
    Deferred debt issuance costs, net
    -       101  
    Capitalized cost of internally developed software for internal use
    299       113  
    Other assets
    200       161  
                    Total noncurrent assets
    536       379  
                 
                    TOTAL ASSETS
  $ 3,919     $ 789  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
CURRENT LIABILITIES:
               
    Loan payable – current portion
  $ 25     $ 74  
    Notes payable – past due
    614       438  
    Accounts payable
    915       1,158  
    Accrued liabilities
    885       831  
    Deferred revenue
    332       250  
    Dividends payable – Series A
    -       1,824  
    Convertible notes payable, including accrued interest and net of debt discount and
       unfunded subscriptions of $1.0 million at December 31, 2009, to former related
       party debt holders
    -       8,189  
                    Total current liabilities
    2,771       12,764  
    Long-term loan payable, less current portion
    31       -  
                 
                    TOTAL LIABILITIES
    2,802       12,764  
                 
COMMITMENTS & CONTINGENCIES (Note 5)
               
STOCKHOLDERS’ EQUITY (DEFICIT):
               
    Series A convertible preferred stock, $.001 par value; 5,000 shares authorized, 0 and
       243 shares issued and outstanding as of December 31, 2010 and 2009, respectively
      (liquidation preference $5,599 as of December 31, 2009)
    -       1,962  
   Common stock, $.001 par value; 100,000 shares authorized, 47,299 and 19,961
       shares issued and outstanding as of December 31, 2010 and 2009, respectively
    47       20  
    Additional paid-in capital
    79,515       61,642  
    Treasury stock, at cost
    (104 )     (104 )
    Accumulated deficit
    (78,445 )     (75,599 )
                   TOTAL GUIDED THERAPEUTICS STOCKHOLDERS’ EQUITY (DEFICIT)
    1,013       (12,079 )
                 
   Non-controlling interest
    104       104  
                   TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
    1,117       (11,975 )
                 
  TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 3,919     $ 789  
The accompanying notes are an integral part of these consolidated statements.
         
 
 

 
24

 


GUIDED THERAPEUTICS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
(In Thousands Except Per Share Data)
 
             
   
2010
   
2009
 
REVENUE:
           
          Contract and grant revenue
  $ 3,364     $ 1,550  
                 
COSTS AND EXPENSES:
               
         Research and development
    1,805       1,409  
         Sales and marketing
    131       63  
         General and administrative
    3,049       1,938  
                  Total Costs and Expenses
    4,985       3,410  
                 
                  Operating loss
    (1,621 )     (1,860 )
                 
OTHER INCOME
    2       32  
                 
LOSS FROM EXTINGUISHMENT OF DEBT, net
    -       (401 )
                 
INTEREST EXPENSE
    (1,227 )     (3,983 )
                 
LOSS BEFORE INCOME TAXES
    (2,846 )     (6,212 )
                 
PROVISION FOR INCOME TAXES
    -       -  
                 
NET LOSS
    (2,846 )     (6,212 )
                 
PREFERRED STOCK DIVIDENDS
    (1,700 )     (223 )
                 
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ (4,546 )   $ (6,435 )
                 
BASIC AND DILUTED NET (LOSS) PER SHARE
   ATTRIBUTABLE TO COMMON STOCKHOLDERS
               
  $ (0.12 )   $ (0.38 )
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
    38,596       16,828  
                 
                 
   
   
   
   
   
   
   
   
   
   
   
The accompanying notes are an integral part of these consolidated statements.
 

 
25

 
 
 

 
GUIDED THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands)
 
 
    Preferred Stock                 Additional                 Non        
    Series A     Common Stock     Paid-In     Treasury     Accumulated     Controlling        
    Shares     Amount     Shares     Amount     Capital     Stock     Deficit     Interest     TOTAL  
BALANCE, January 1, 2009
    336     $ 3,069       15,577     $ 16     $ 58,784     $ (104 )   $ (69,408 )   $ -     $ (7,643 )
Dividends on preferred stock
    -       -       -       -       (223 )     -       -       -       (223 )
Conversion of convertible notes
      into common stock
    -       -       1,592       1       1,042       -       -       -       1,043  
Conversion of preferred stock
      into common stock
    (93 )     (1,107 )     2,746       3       1,104       -       -       -       -  
Stock-based compensation expense
    -       -       -       -       407       -       21       -       428  
Warrants issued in modification of
      debt
    -       -       -       -       907       -       -       -       907  
Loss on extinguishment of debt owed
      to related parties
    -       -       -       -       (379 )     -       -       -       (379 )
  Net (Loss)
    -       -       -       -       -       -       (6,212 )     -       (6,212 )
 Investment in common stock of
      subsidiary
    -       -       -       -       -       -       -       104       104  
BALANCE, December 31, 2009
    243     $ 1,962       19,915     $ 20     $ 61,642     $ (104 )   $ (75,599 )   $ 104     $ (11,975 )
Conversion of convertible notes
      into common stock
    -       -       14,528       14       9,319       -       -       -       9,333  
Conversion of preferred stock and
     accrued dividends into common
     stock
    (243 )     (1,962 )     8,084       8       3,778       -       -       -       1,824  
Issuance of common stock
    -       -       3,772       4       3,051       -       -       -       3,055  
Exercise  of warrants/options
    -       -       899       1       477       -       -       -       478  
Conversion of accrued compensation
     into common stock
    -       -       101       -       90       -       -       -       90  
Stock-based compensation expense
    -       -       -       -       1,158       -       -       -       1,158  
  Net (Loss)
    -       -       -       -       -       -       (2,846 )     -       (2,846 )
BALANCE, December 31, 2010
    -     $ -       47,299     $ 47     $ 79,515     $ (104 )   $ (78,445 )   $ 104     $ 1,117  
 
 

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

 
26

 

GUIDED THERAPEUTICS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
(In Thousands)
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
     Net loss
  $ (2,846 )   $ (6,212 )
     Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
        Bad debt expense
    3       16  
        Depreciation
    7       7  
        Amortization and accretion of deferred financing costs, notes and warrants
    1,095       3,077  
        Issuance of options and warrants for services and debt
    1,158       428  
        Loss of extinguishment of debt
    -       401  
        Conversion of interest to principal
    230       856  
    Changes in operating assets and liabilities:
               
        Accounts receivable
    47       16  
        Other current assets
    18       (2 )
        Accounts payable
    (243 )     (179 )
        Deferred revenue
    82       83  
        Accrued liabilities
    141       89  
        Other assets
    (39 )     -  
    Total adjustments
    2,499       4,792  
                 
     Net cash from (used) in operating activities
    (347 )     (1,420 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
       Additions to capitalized software costs
    (186 )     90  
       Deposit paid on long-term assets
    -       (110 )
       Additions to fixed assets
    (40 )     -  
                 
       Net cash used in investing activities
    (226 )     (200 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
      Proceeds from issuance of common stock
    3,055       -  
      Proceeds from issuance of convertible notes payable to former
         debt holders -  related parties
    101       1,370  
      Proceeds from third party investment in subsidiary
    -       104  
      Proceeds from subscription receivable
    -       335  
      Payments made on notes payable
    (23 )     (27 )
      Proceeds from options exercised     478       -  
                 
       Net cash provided by financing activities
    3,574       1,782  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    3,038       162  
                 
CASH AND CASH EQUIVALENTS, beginning of year
    230       68  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 3,268     $ 230  
                 
SUPPLEMENTAL SCHEDULE OF:
               
Cash paid for:
               
        Interest
  $ 253     $ 1,233  
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
   Conversion of preferred stock into common stock
  $ 1,962     $ 1,104  
   Dividends payable in the form of preferred stock converted into common stock
  $ 1,824     $ -  
   Conversion of bridge notes payable into common stock
  $ 9,333     $ 1,075  
   Conversion of 2008 convertible notes and 2009 bridge loans to 2007 convertible notes
  $ -     $ 4,027  
   Conversion of accrued compensation to debt
  $ 90     $ -  
   Dividends in the form of preferred stock and redeemable convertible preferred stock
  $ -     $ 223  
   Disposal of property and equipment
  $ -     $ 32  
   Deemed dividends in the form of warrants.
  $ 1,700     $ -  
The accompanying notes are an integral part of these consolidated statements.
 

 
27

 
 
 
GUIDED THERAPEUTICS, INC.  AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
 


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 developing and providing products for the non-invasive cervical cancer detection markets in the United States and internationally. The Company uses its technologies to develop non-invasive diagnostic devices such as its cervical cancer detection product.  The Company’s products in development are based upon its proprietary biophotonic technologies.
 
 
Basis of Presentation

All information and footnote disclosures included in 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, 2010, it had an accumulated deficit of approximately $78.4 million. Through December 31, 2010, 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 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 stabilizing its financial situation by execution of multiyear contracts from Konica Minolta and grants from the National Cancer Institute (“NCI”), while at the same time simplifying its capital structure and significantly reducing debt.

At December 31, 2010, the Company’s current assets exceeded current liabilities by approximately $612,000 and it had stockholders equity of approximately $1.0 million, primarily due to the conversion of the convertible notes to common shares in the amount of $9.3 million along with the proceeds from the September 2010 private placement of $3.0 million. 

As of December 31, 2010, the Company was past due on payments due under its notes payable in the amount of approximately $614,000. These notes are unsecured and management is working on a payment arrangement with the holders. As at March 10, 2011, two of the four notes have been renegotiated and are now current.

During 2009, the Company issued short-term bridge notes to fund operations. On August 31, 2009, the Company converted all of these notes and an additional $1.3 million raised from new notes in 2009 into 2007 Notes (see Note 7), which were subject to automatic conversion into shares of common stock upon the reclassification of the series A convertible preferred stock into common stock and warrants to purchase common stock.

On February 26, 2010, the Company held a special meeting where the stockholders approved the amendment to the Company’s certificate of incorporation to reclassify the series A convertible preferred stock into common stock and warrants to purchase shares of common stock, and therefore the 2007 Notes were converted into an aggregate of 13,985,197 shares of common stock (see Note 7).
 
 
 
28

 
 

On September 10, 2010, the Company completed a private placement of 3,771,605 shares of common stock at a purchase price of $0.81 per share, pursuant to which it raised approximately $3.1 million. For each share of common stock issued, subscribers received warrants exercisable for the purchase of 1/10 of one share of common stock (in the aggregate, 377,161 shares) at an exercise price of $1.01 per share. The warrants have a five-year term.

In a letter from the U.S. Treasury Department dated October 29, 2010, the Company was notified that it was awarded a cash grant of $244,479 under the federal Qualifying Therapeutic Discovery Project program for 2009. This amount was received in the fourth quarter of 2010.

The Company’s capital-raising efforts are ongoing. If sufficient capital cannot be raised during the fourth quarter of 2011, 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, such as under the Konica Minolta development agreement (see below) and additional NCI 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 anticipates receiving approximately $2.5 million from Konica Minolta in 2011, as well as additional federal grants, which could bring in an additional $750,000.  It also has 28.9 million warrants to purchase shares of its common stock outstanding with exercise prices of $0.65 per share.  So far in 2011, warrant exercises have generated approximately $179,000 and would generate a total of approximately $18.8 million in cash, assuming full exercise.  Management intends to obtain additional funds through debt or equity financings and collaborative partnerships.  Management believes that such financing, along with funds from government contracts and grants, including matching-grant funding, if available, and other strategic partnerships will be sufficient to support planned operations through the fourth quarter of 2011. Assuming we receive FDA approval for our Light Touch cervical cancer detection device in 2011, the Company currently anticipates a late 2011 or early 2012 product launch.

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 and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

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.

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. 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, 2010 and 2009 (in thousands):


 
29

 


   
Year Ended
December 31,
   
   
2010
   
2009
Equipment
  $ 1,426     $ 1,402  
Furniture and fixtures
    500       483  
      1,926       1,885  
Less accumulated depreciation
    (1,889 )     (1,881 )
            Total
  $ 37     $ 4  

Patent Costs (Principally Legal Fees)

Costs incurred in filing, prosecuting, and maintaining patents are expensed as incurred.  Such costs aggregated approximately $41,000 and $27,000 in 2010 and 2009, respectively.

Accounts Receivable

The majority of the Company’s receivables in 2010 and 2009 were from NCI. The Company performs periodic credit evaluations of its customer’s 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 receivables.

Capitalized Costs of Internally Developed Software

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. At this time none of the software is functional and there has not been any depreciation recognized in association with the software.

The Company capitalized software costs of $186,000 and $90,000 for the years ended December 31, 2010 and 2009, respectively.

Accrued Liabilities

Accrued liabilities are summarized as follows at December 31, 2010 and 2009 (in thousands):

   
As of
December 31,
 
   
2010
   
2009
 
Accrued compensation
  $ 632     $ 633  
Accrued professional fees
    143       144  
Accrued rent
    36       12  
Other accrued expenses
    74       42  
            Total
  $ 885     $ 831  

Revenue Recognition

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.
 
In 2010 and 2009, the majority of the Company’s revenues were from the Konica Minolta and NCI.

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.


 
30

 

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, 2010, there were no uncertain tax positions that require accrual.

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, 2010, the Company has approximately $62 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 2007 and later remain subject to examination by the IRS and respective states. 

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, 2010 and 2009, share-based compensation for options attributable to employees and officers were approximately $850,000 and $160,000, 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, 2010, the Company had approximately $48,000 of unrecognized compensation cost related to granted stock options to be recognized over the remaining vesting period of approximately four years.

3. Stockholders’ Equity (Deficit)

Common Stock

The Company has authorized 100 million shares of common stock with $0.001 par value, 47,299,617 of which were issued and outstanding as of December 31, 2010.

On September 10, 2010, the Company completed a private placement of 3,771,605 shares of common stock at a purchase price of $0.81 per share, pursuant to which the Company raised approximately $3.1 million. For each share of common stock issued, subscribers received warrants exercisable for the purchase of 1/10 of one share of common stock (in the aggregate, 377,161 shares) at an exercise price of $1.01 per share. The warrants have a five-year term.
 
Preferred Stock
 
The Company has authorized 5,000,000 shares of preferred stock with a $.001 par value, none of which were issued or outstanding as of December 31, 2010. 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.

   

 
31

 

Redeemable Convertible Preferred Stock

The board of directors designated 525,000 shares of the preferred stock as redeemable convertible preferred stock, none of which remain outstanding.

            Series A Convertible Preferred Stock

In 2004, the board of directors designated 242,576 shares of the preferred stock as series A convertible preferred stock. On February 26, 2010, the Company’s certificate of incorporation was amended to reclassify the series A convertible preferred stock into common stock and warrants to purchase shares of common stock, and therefore all of the then-outstanding 242,576 shares of series A convertible preferred stock and accrued dividends were reclassified into 8,084,139 shares of common stock and warrants to purchase an additional 2,799,327 shares of common stock.

On the date of issuance, the warrants were recorded at their fair value as determined using the Black-Scholes valuation model.  The Company issued the warrants for the purpose of inducing conversion, or “reclassification,” of the series A preferred stock into common stock.  The consideration expense associated with the warrants was treated as a preferred dividend. The dividend, which is the excess of (1) the fair value of all securities and other consideration (the warrants and common stock) transferred by the Company to the holders of the series A preferred stock over (2) the fair value of securities issuable pursuant to the original conversion terms (the common stock), has been subtracted from net income to arrive at net income available to common stockholders in the calculation of earnings per share in the first quarter of 2010. Since the series A preferred stockholders received the same number of shares of common stock in the reclassification into which the series A preferred stock were contractually convertible, the excess value was attributed solely to the warrants.

In accordance with the loan agreement governing the then-outstanding outstanding notes first issued in 2007 (the “2007 Notes”), and as a result of the reclassification of the series A preferred stock, on February 26, 2010, the then-outstanding 2007 Notes were converted into 14 million shares of common stock.

The only cash settlements related to the conversion of the 2007 Notes were for fractional shares issued upon conversion.

Stock Options

Under the Company’s 1995 Stock Plan (the “Plan”), a total of 2,517,052 shares remained available at December 31, 2010 and 5,738,167 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 8,255,219 shares of common stock as of December 31, 2010.  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 2010 and 2009 were estimated using the Black-Scholes option pricing model. A summary of the assumptions used in determining the fair value of options follows:

 
2010
 
2009
Expected volatility
 
125
%
   
151
%
Expected option life in years
 
10.0
     
10.0
 
Expected dividend yield
 
0.0
%
   
0.0
%
Risk-free interest rate
 
1.50
%
   
2.24
%
Weighted average fair value per option at grant date
$
0.98
   
$
0.38
 
 
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:

 
32

 


   
2010
   
2009
 
   
 
   
Weighted
Average
Exercise
   
 
   
Weighted
Average
Exercise
 
   
Shares
   
Price
   
Shares
   
Price
 
Outstanding at beginning of year
    5,480,076     $ 0.38       4,306,500     $ 0.47  
   Options granted
    632,667     $ 1.02       1,222,576     $ 0.31  
   Options exercised
    (223,576 )   $ 0.03       -       -  
   Options expired/forfeited
    (151,000 )   $ 3.59       (49,000 )   $ 7.63  
Outstanding at end of year
    5,738,167     $ 0.41       5,480,076     $ 0.38  
Options vested and exercisable at year-end
    4,456,500               3,978,125     $ 0.37  
Options available for grant at year-end
    2,517,052               975,143          
Aggregate intrinsic value –options exercised   172,073             -          
Aggregate intrinsic value – options outstanding
  $ 2,229,563             $ 4,492,517          
Aggregate intrinsic value – options vested and
    exercisable
  $ 1,860,362             $ 2,987,307          

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 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 OTCQB 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.

In January 2002, the Company assumed the Sterling Medivations 2000 Stock Option Plan, which authorizes the issuance of up to 93,765 shares of the Company’s common stock.  No options have been exercised under this plan.  At December 31, 2010, options exercisable for 6,090 shares were outstanding under this plan.

Warrants

The Company has the following shares of common stock reserved for the warrants outstanding as of December 31, 2010:

Warrants
(Underlying Shares)
 
Exercise Price
Expiration Date
 
29,167,565
(1)
0.65
03/01/2013
 
151,905
(2)
 0.005
08/25/2014
 
377,161
(3)
1.01
09/10/2015
 
29,696,631
       

 
(1)
Consists of outstanding warrants issued in connection with various financings, but amended or originally issued on February 26, 2010 to expire on March 1, 2013. Shares underlying these warrants have been registered for resale with the SEC on October 5, 2010.  During the year ended December 31, 2010, 665,384 shares of warrants were exercised.
 
(2)
Consists of outstanding warrants issued in conjunction with a consulting agreement dated August 26, 2009.
 
(3)
Consists of outstanding warrants issued in conjunction with a private placement on September 10, 2010.

In connection with certain financing, which became due and payable as of January 30, 2004, and under an agreement dated February 6, 2004, the Company agreed to cause its subsidiary, InterScan, to issue to the lenders party to the agreement, InterScan warrants exercisable for the number of shares of common stock of InterScan equal to 5% of all shares of common stock of InterScan as of and after the issuance of InterScan securities in an InterScan financing, as defined in the agreement.  The exercise price per share of common stock of InterScan will equal 5% of the per share purchase price paid by the Purchasers in such InterScan financing.  As of December 31, 2009, no such InterScan financing had occurred.

4. Income Taxes

The Company has incurred net operating losses (“NOLs”) since inception. As of December 31, 2010, the Company had NOL carryforwards available through 2029, of approximately $72.0 million available to offset its future income tax liability. The NOL carryforwards began to expire in 2008. The Company has recorded a valuation allowance for all NOL carryforwards and all deferred tax assets. Utilization of existing NOL carryforwards 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 has had any change of control issues that could limit the future use of NOL.
 
 
 
33

 
 

Components of deferred taxes are as follows at December 31 (in thousands):
 
Deferred tax assets:   2010     2009  
   Net operating loss carryforwards   $ 23,651     $ 22,218  
 Deferred tax liabilities:                
   Intangible assets and other     980       924  
      24,631       23,142  
 Valuation allowance     (24,631 )     (23,142 )
    $ 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:

   
2010
   
2009
 
Statutory federal tax rate
    34 %     34 %
State taxes, net of federal benefit
    4       4  
Nondeductible expenses
    -       -  
Valuation allowance
    (38 )     (38 )
      0 %     0 %

5. Commitments and Contingencies

Operating Leases

Future minimum rental payments at December 31, 2010 under non-cancellable operating leases for office space that expires in 2017 and equipment that expires in 2012 are as follows (in thousands):

Year
 
Amount
 
2011
  $ 149  
2012
  $ 193  
2013
  $ 185  
2014
  $ 189  
2015
  $ 194  
2016 and thereafter
  $ 299  
Total
  $ 1,209  

Rental expense was approximately $179,000 and $264,000 in 2010 and 2009, respectively.

Litigation and Claims

In October 2010, the Company received a letter from an attorney representing two stockholders (one of whom, Dolores Maloof, is a significant stockholder) (the “Claimants”), asserting claims for breach of contract and fraud in connection with transactions and occurrences in 2005 and 2009. The letter concerns a Warrant Agreement entered into by the Company and the Claimants in August 2005. Pursuant to the Warrant Agreement, if certain initial financing were to be obtained for the Company’s wholly owned subsidiary, InterScan (formerly named Guided Therapeutics, Inc.), the Claimants would receive warrants to purchase an aggregate number of shares of InterScan common stock equal to 7.5% of the outstanding InterScan common stock as of the closing of the such InterScan financing. The Warrant Agreement further provides that if, prior to such financing, the Company were to license or sell its cervical cancer detection technology, the Company would remit to the Claimants an aggregate of 7.5% of the net proceeds of such license or sale. The Claimants, through their attorney, allege that the warrants are now issuable to them under the terms of the Warrant Agreement. In that regard, the Claimants have alleged that the name change by the Company from SpectRx, Inc. to Guided Therapeutics, Inc., which occurred in 2008, coupled with subsequent financings, supports their claim.  In the alternative, the Claimants assert that the Warrant Agreement was modified by an agreement with the Company in 2009, and under such modification they are entitled to warrants to purchase 2.6 million shares of common stock of the Company at a nominal exercise price, a 2% royalty on certain future product sales, and 3% of any proceeds should the Company be sold. The Company in a letter issued by its attorneys on November 5, 2010, has responded to the Claimants’ demands, denying the validity of each.  The Company’s response states that the closing of a financing of InterScan was a condition precedent under the express terms of the Warrant Agreement to the issuance of the warrants that the Claimants allege are owed them and that such financing has never occurred. Further, the Company denies that any agreement to modify the Warrant Agreement was ever made as the Claimants assert, and also denies that any wrongdoing was committed in connection with the change of the Company’s name.  Although no lawsuit has been filed by Claimants, the Claimants have stated an intention to file suit if a settlement cannot be reached.  Although the Company has denied the validity of these claims, there is no guarantee that the Company’s defense would succeed if it is sued, and the Company may be have to pay damages awards or otherwise may enter into settlement arrangements in connection with these claims.
 
 
34

 
 

In addition, from time to time, the Company may be involved in various other legal proceedings and claims arising in the ordinary course of business. The disposition of these additional matters, which may occur, individually or in the aggregate, is 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 December 31, 2010, there was no accrual recorded for any potential losses related to pending litigation.

Contracts

On April 30, 2009, the Company entered into a one year agreement for $750,000 with Konica Minolta to co-develop non-invasive cancer detection products.  The Company received $500,000 on May 15, 2009 and the remaining balance of $250,000 was paid on October 29, 2009.  The new development agreement follows two years of collaborative preparations to identify large market opportunities that would benefit from the Company’s proprietary technology. The new products, for the detection of lung and esophageal cancer, are based on the Company’s LightTouch non-invasive cervical cancer detection technology, which is undergoing the FDA’s premarket approval process.
 
 
On April 28, 2010, the Company entered into a one-year agreement for $750,000 with Konica Minolta to co-develop non-invasive cancer detection products. The Company received $500,000 on April 30, 2010, $200,000 in October 2010 and the remaining balance of $50,000 is payable in April 2011.  The new development agreement follows two years of collaborative preparations to identify large market opportunities that would benefit from the Company’s proprietary technology. The new products, for the detection of lung and esophageal cancer, are based on the Company’s LightTouch non-invasive cervical cancer detection technology, which is undergoing the FDA’s premarket approval process. In addition, on January 28, 2010, the Company executed a new agreement with Konica Minolta for development of LightTouch prototype devices specifically for the esophageal cancer detection application. In this agreement, Konica Minolta has agreed to pay an additional approximately $1.6 million during 2010 for technical, regulatory and clinical development of prototype devices for esophageal cancer detection. As of December 31, 2010, the Company has been paid in full.

6.  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.

7.  Notes Payable

On February 26, 2010, the Company held a special meeting of stockholders to approve an amendment to the Company’s certificate of incorporation to reclassify the series A convertible preferred stock into common stock and warrants to purchase shares of common stock.  As a result, all 242,576 outstanding shares of series A convertible preferred stock and accrued dividends were reclassified into 8,084,139 shares of common stock and warrants to purchase an additional 2,799,327 shares of common stock.  Upon this reclassification, the approximately $9.1 million in outstanding 2007 Notes was automatically converted into 14.0 million shares of common stock.

Historical Details of the 2007 Convertible Notes

On March 12, 2007, the Company completed a restructuring of its then-existing indebtedness by entering into a loan agreement with existing and new creditors.  Pursuant to the loan agreement, the Company’s then-existing indebtedness was restructured and consolidated into the 2007 Notes.  The aggregate principal amount of the originally issued 2007 Notes was approximately $4.8 million and was due on March 1, 2010.  The originally issued 2007 Notes were convertible into common stock at $0.65 per share, or 7,285,061 shares of common stock, and were issued with approximately 7.2 million warrants, exercisable immediately at $0.78 per share for the Company’s common stock. Additionally, accrued interest on the 2007 Notes was convertible into shares of the Company’s common stock, on the same terms. In addition, the Company issued 661,000 warrants at an exercise price of $0.78 to the placement agent and others in conjunction with the original issuance of the 2007 Notes, as well as a warrant to purchase 15,000 shares of common stock at $0.78, as part of interest expense to a non-converting bridge note holder.

Of the proceeds from the original issuance of the 2007 Notes, approximately $1.9 million was used to convert debt from the previous loans into 2007 Notes, and approximately $1.2 million was used to retire debt from the previous loans.
 
 
 
35

 
 

The issuance of the 2007 Notes and the warrants changed the conversion price of the Company’s series A convertible preferred stock from $1.50 to $0.65, the exercise price of certain of the Company’s warrants from $2.25 to $0.81 and the exercise price of certain of the Company’s warrants issued in August 2005 from $1.50 to $0.65 (see Note 3). The re-pricing of the series A convertible preferred stock and the associated warrants triggered a deemed dividend in 2007 of approximately $3.8 million in total.  The deemed dividend has no net effect on stockholders’ equity.

In March and April 2008, the Company issued four short-term unsecured promissory notes to its directors in the amounts of $10,000 each.  This financing was to provide working capital for the Company. The notes were non-interest bearing, matured sixty days from funding and were considered past due. However, on December 1, 2008 these notes were surrendered in exchange for new convertible notes, and on August 31, 2009, the Company converted all of those notes into 2007 Notes.

On April 10, 2008, the Company issued a new short-term unsecured promissory note to one of the Company’s stockholders, Dolores Maloof, in the amount of $400,000. The note matured on July 10, 2008, with an interest rate of 13%, and contained an obligation to issue a total of 400,000 warrants to purchase shares of the Company’s common stock at $0.65 per share.  Under the agreement governing the note, the note was past due; however, on December 1, 2008 the note was surrendered in exchange for a new note, and on August 31, 2009, the Company converted this note into a 2007 Note.

Between May 23 and July 7, 2008, the Company received a total of $625,000, as part of a new note purchase agreement, effective July 7, 2008. The notes carried 30% warrant coverage at $0.78. However, subsequent to the third quarter of 2008, these notes were surrendered in exchange for new convertible notes, and on August 31, 2009, the Company converted all of those notes into 2007 Notes.

On December 1, 2008, the Company entered into a note purchase agreement with 29 existing and new lenders  pursuant to which the Company issued approximately $2.3 million in aggregate principal amount of 15% subordinated secured convertible notes due December 1, 2011 and warrants exercisable for 11,558,878 shares of the Company’s common stock.  Approximately $1.3 million of the proceeds from this agreement was used to convert existing debt into 2008 notes, including conversion of an unsecured note issued to Dolores Maloof on April 10, 2008 in the aggregate principal amount of $400,000, plus interest, as well as notes issued under the note purchase agreement, dated between May 23 and July 7, 2008, in aggregate principal amount of $625,000, plus interest, held by John E. Imhoff and eleven other designated investors.  The remaining funds were used in product development, working capital and other corporate purposes. At December 31, 2009, one investor has a subscription agreement totaling $5,000 outstanding, relating to the December 1, 2008 financing. On August 31, 2009, the Company converted all of the outstanding 2008 notes into 2007 Notes.

On April 13, 2009, the Company issued a 15% note to John E. Imhoff in the amount of $565,660 to replace the notes purchased by Dr. Imhoff that were previously issued to other investors, in the amounts of $154,403, $102,470, $158,787 and $150,000, under the same terms and conditions. In connection with Dr. Imhoff’s re-purchase of those notes, warrants to purchase 2,464,360 shares of common stock, previously issued to the selling investors, were canceled and a new warrant was issued to Dr. Imhoff.  Thereafter, three of the four selling investors kept warrants to purchase 150,000, 102,400 and 150,000 shares of common stock, respectively, under the same terms and conditions. On August 31, 2009, the Company converted Dr. Imhoff’s note into a 2007 Note.

On April 15, 2009, the Company issued a 17% unsecured note to John E. Imhoff in the amount of $35,000 to replace the notes purchased by Dr. Imhoff that were previously issued to Dolores Maloof on April 3, 2009 and William Zachary on March 26, 2009, in the amounts of $25,000 and $10,000, respectively, under the same terms and conditions. On August 31, 2009, the Company converted this note into a 2007 Note.

Additionally, the Company issued 17% unsecured notes to the following related parties on the dates indicated (see Note 8):

 
Original Loan
 Amount
Original Loan
Date(s)
Original
Loan Maturity
Date
 
Loan Status
Ronald W. Hart
$10,000
04/10/09
10/09/09
Converted to 2007 Note
Dolores Maloof
$25,000
04/17/09
05/27/09
Converted to 2007 Note
Ronald W. Hart
$6,000
04/23/09
10/22/09
Converted to 2007 Note
John E. Imhoff
$65,000
07/07/09
01/06/10
Converted to 2007 Note

On June 19, 2009, the Company issued a 15% unsecured note in the amount of $10,000 to a new investor. On August 31, 2009, the Company converted this note and all of the outstanding notes described in the table above into 2007 Notes.
 
 
 
36

 
 

On August 31, 2009, giving effect to all of the conversions to 2007 Notes described above, the Company issued an aggregate of $3.6 million in 2007 Notes in exchange for the extinguishment of an equal amount of debt represented by the exchanged notes.  Prior to the August 31, 2009 conversions, there were approximately $4.6 million in aggregate principal amount of 2007 Notes, for which accrued interest as of August 31, 2009 was approximately $1.6 million. The Company recorded a loss from the conversion of Notes of approximately $782,000 in its statements of operations for the year then ended.

In October of 2009, the loan agreement governing the 2007 Notes was further amended to provide for automatic conversion of the 2007 Notes into a number of shares of common stock equal to the outstanding amounts being so converted divided by the then-current conversion price of $0.65, to be triggered upon a reclassification of the series A convertible preferred stock into common stock and warrants to purchase shares of common stock.

On February 26, 2010, the Company held a special meeting of stockholders to approve an amendment to the Company’s certificate of incorporation to reclassify the series A convertible preferred stock into common stock and warrants to purchase shares of common stock.  As a result, all 242,576 outstanding shares of series A convertible preferred stock and accrued dividends were reclassified into 8,084,139 shares of common stock and warrants to purchase an additional 2,799,327 shares of common stock.  Upon this reclassification, the $9.1 million in outstanding 2007 Notes was automatically converted into 14.0 million shares of common stock.

Loan Payable

At December 31, 2009, the Company maintained a line of credit in the amount of $75,000 with Pacific International Bank of Seattle, Washington. This line was converted to a 36 months straight-line amortizing loan on February 24, 2010, with monthly principal and interest payment of $2,333 per month. At December 31, 2010, a balance of approximately $56,000 was outstanding, approximately $25,000 of which is classified as current loan payable and approximately $31,000 as long term loan payable.

Notes Payable – Past Due

At December 31, 2010, the Company was past due on four short term notes totaling approximately $614,000 of principal and accrued interest. On February 7, 2011, the Company was successful in re-negotiating two of the four remaining past due Notes (see Note 11).

8. Related Party Transactions

On April 13, 2009, the Company issued a 15% note to John E. Imhoff in the amount of $565,660 to replace the notes purchased by Dr. Imhoff that were previously issued to other investors, in the amounts of $154,403, $102,470, $158,787 and $150,000, under the same terms and conditions. In connection with Dr. Imhoff’s purchase of those notes, warrants to purchase 2,464,360 shares of common stock, previously issued to the selling investors, were canceled and a new warrant was issued to Dr. Imhoff.  Thereafter, three of the four selling investors kept warrants to purchase 150,000, 102,400 and 150,000 shares of common stock, respectively, under the same terms and conditions. On August 31, 2009, the Company converted Dr. Imhoff’s note into a 2007 Note.

On April 15, 2009, the Company issued a 17% unsecured note to John E. Imhoff, in the amount of $35,000, to replace the notes purchased by Dr. Imhoff that were previously issued to Dolores Maloof on April 3, 2009 and William Zachary on March 26, 2009, in the amounts of $25,000 and $10,000, respectively, under the same terms and conditions. On August 31, 2009, the Company converted this note into a 2007 Note.

Additionally, the Company issued 17% unsecured notes to the following persons on the dates indicated:

Noteholder
 
Original Loan Amount
 
Original Loan
Date(s)
Original
Loan Maturity
Date
 
Loan Status
Ronald W. Hart
  $ 10,000  
04/10/09
10/09/09
Converted to 2007 Note
Dolores Maloof
  $ 25,000  
04/17/09
05/27/09
Converted to 2007 Note
Ronald W. Hart
  $ 6,000  
04/23/09
10/22/09
Converted to 2007 Note
John E. Imhoff
  $ 65,000  
07/07/09
01/06/10
Converted to 2007 Note

On August 31, 2009, the Company converted all of these notes into 2007 Notes. On February 26, 2010, the 2007 Notes were automatically converted into 14.0 million shares of common stock (see Note 7).
 
 
 
37

 
 

9.    Valuation and Qualifying Accounts

Allowance for Doubtful Accounts

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

   
Year Ended
December 31,
   
   
2010
   
2009
Beginning balance
  $ 41     $ 25  
Additions / (Adjustments)
    (3 )     16  
    $ 38     $ 41  
 
10.   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 by the weighted average number of shares outstanding during the period.

11.  Subsequent Events

On February 7, 2011, the Board of Directors approved repayment plans for two past due notes totaling approximately $245,000 (see Note 7).

On February 25, 2011, the Company entered into a three year automobile lease with Southeast Toyota Finance for a 2011 Toyota Camry, for its only expatriate from Konica Minolta. The minimum lease obligation on the Agreement is approximately $9,317.

As of March 10, 2011, the Company has received a total of $611,362 from the exercise of outstanding warrants to purchase an aggregate of 940,556 shares of its common stock (See Note 3). The warrants were originally issued pursuant to an exemption from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering, except for the issuances of warrants on February 26, 2010, which were exempt from registration under the Securities Act in reliance upon Section 3(a)(9) of the Securities Act as exchanges with existing securities holders exclusively where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchanges. The cash received upon exercise of the warrants was used for general corporate purposes.
 
On March 28, 2011, the Company and Konica Minolta entered into a one-year Option and Development Agreement for Collaboration in the Development of Spectroscopic Technology. The effective date of this Agreement is May 1, 2011. The agreement is an extension of a similar 2009 agreement. Under the 2011 agreement, the Company will receive a total of $750,000. The first payment of $500,000 is due on or before April 29, 2011 and the final $250,000 payment is due on or before October 29, 2011.
 
 
On March 28, 2011, the Company and Konica Minolta also entered into an Assigned Task Agreement for the Development of Spectroscopy for Barrett’s Esophagus. The effective date of this Agreement is May 1, 2011. The agreement is an extension of a similar 2010 agreement. Under the 2011 agreement, the Company will receive a total of $1.72 million.  The payments for this agreement are due as follows:  three payments of $450,000 each, due on May 1, August 1 and November 1, 2011, and a final payment of $370,440, due on or before February 1, 2012.
 
Item 9.   Changes and Disagreements with Accounts on Accounting and Financial Disclosure

None.

Item 9A.   Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported, within the time periods specified in Securities and Exchange Commission (“Commission”) rules and forms. We carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer/Acting Chief Financial Officer, Mark Faupel, of the effectiveness of its disclosure controls and procedures.  Based on that evaluation, the Chief Executive Officer/Acting Chief Financial Officer has concluded that our disclosure controls and procedures were ineffective as of December 31, 2010, due to the existence of a significant deficiency in our internal control over financial reporting, described below, that we have yet to fully remediate.
 
 
 
38

 
 

Management’s Annual Report on Internal Control over Financial Reporting:  Our management, including our Chief Executive Officer/Acting Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting.  Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer/Chief Financial Officer and implemented by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and (ii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.  Because of their inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Principal Executive Officer/Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation, our management concluded that our internal control over financial reporting was ineffective as of December 31, 2010, due to the existence of the significant deficiency described below:
 
Management has identified that some processes for preparing the consolidated financial statements lack the appropriate controls to ensure the completeness, accuracy, appropriate valuation and proper presentation and disclosure of financial transactions.

Management has taken steps to remediate these weaknesses by hiring a CFO Consultant and an Accounting Analyst in the first quarter of 2011. Additionally, we expect to hire an Accounts Payable/Accounts Receivable employee in 2011, and we will implement additional procedures and internal controls over financial reporting as we may deem necessary to fully remediate this control deficiency. 

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Commission that permit non-accelerated filers to provide only the management’s report in their annual reports on Form 10-K.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter  ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Item 9B.   Other Information

None.
 
 
 

 
 
39

 

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

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 December 31, 2010:

Name
Age
Position with Guided Therapeutics
Mark L. Faupel, Ph.D.
55
Chief Executive Officer, Acting Chief Financial Officer, President and Director
Richard L. Fowler
54
Senior Vice President of Engineering
Shabbir Bambot, Ph.D.
45
Vice President for Research and Development
Ronald W. Allen
69
Director
Ronald W. Hart, Ph.D.
68
Director
John E. Imhoff, M.D.
62
Director
Michael C. James
52
Director
Jonathan M. Niloff, M.D. 
56
Director 
William E. Zachary, Jr.
68
Chairman and 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.

Mark L. Faupel, Ph.D. has been a director since 2007 and has more than 25 years of experience in developing non-invasive alternatives to surgical biopsies and blood tests, especially in the area of cancer screening and diagnostics. Dr. Faupel has served as our Chief Executive Officer since May 2007 and prior thereto was our Chief Technical Officer from April 2001 to May 2007.  Prior to coming to us in 1998, Dr. Faupel was the co-founder and Vice President of Research and Development at Biofield Corp. His work in early stage cancer detection has won two international awards and he is a former member of the European School of Oncology Task Force.  Dr. Faupel serves as a National Institutes of Health reviewer, is the inventor on 15 U.S. patents and has authored numerous scientific publications and presentations, appearing in such peer-reviewed journals as The Lancet. Dr. Faupel earned his Ph.D. in neuroanatomy and physiology from the University of Georgia.

Dr. Faupel’s extensive experience in founding and managing point of care cancer detection companies includes the basic scientific applications, clinical trials, regulatory affairs and financing.  As such, Dr. Faupel, as CEO, advises the board on all aspects of our business. He is currently, the Acting Chief Financial Officer.

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 start up 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.

Shabbir Bambot, Ph.D. is a co-founder and serves as our Vice President of Product Development. He has been instrumental in the launch of multiple medical diagnostic products notable among which are the OPTI 2® (AVL/Roche) blood chemistry analyzer and the Bilicheck® (Philips/Respironics) neonatal jaundice monitor.  He has been awarded multiple NIH SBIR grants totaling in excess of $6.0 million for developing and clinical testing of devices for cancer diagnosis and has 8 US patents and several pending patent applications. He has a Ph.D. in Chemical Engineering from the University of Pittsburgh, has published extensively in the life sciences and medical diagnosis arena and has served on NIH study sections as well as review panels for scientific and technical publications.  He also has extensive experience with FDA 510K and PMA applications as well as quality systems compliance and ISO 13485 certification.
 
 
 
40

 
 

Ronald W. Allen was named a Director of Guided Therapeutics in September 2008.  Mr. Allen retired as Delta Airline Chairman of the Board, President and Chief Executive Officer in July 1997, and had been its chairman of the board and Chief Executive Officer since 1987.  He is a Director of The Coca-Cola Company, Aaron Rents, Inc., Aircastle Limited and Interstate Hotels & Resorts, Inc. He also is a board member of the St. Joseph’s Translational Research Institute, which endeavors to turn new medical discoveries into tangible cures.

Mr. Allen, as Chairman and CEO of Delta Airlines, pioneered the international expansion of Delta into new markets, much as we are pioneering new technology in the fight against cancer.  Mr. Allen has extensive experience serving on many types of boards, both for small and large companies and for medical and non-medical entities.  His background in personnel is helpful to the Board as we grow and add new personnel.

Ronald W. Hart, Ph.D. has served as a member of our Board of Directors since March 2007.  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 currently serves on the Boards of Directors of Miltos Pharmaceuticals, WaterChef, Inc. and Immunovative, Inc. and since 2002, 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 of Directors since April 2006.  Dr. Imhoff is an ophthalmic surgeon who specializes in cataract and refractive surgery.  He presently serves as a member of the Hawaiian Eye Foundation’s Scientific Advisory Board.  He is also 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 Imhoff 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 of Directors since March 2007. Mr. James is also the Managing Partner of Kuekenhof Capital Management, LLC, a private investment management 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 Millennium Biotechnologies Group, Inc.  Mr. James was Chief Executive Officer of Nestor, Inc. from January 2009 to September 2009.  He was on the Board of Directors of Nestor, Inc. 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 was employed by National Discount Brokers from 1986 to 1991 and held positions of Treasurer and Chief Financial 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.
 
 
 
41

 
 

Jonathan M. Niloff, M.D. was elected as a director in April 2010.  Dr. Niloff is 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 CEO of MedVenture.  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.

William E. Zachary, Jr. has served as a member of our Board of Directors since April 1999. Since 1971, Mr. Zachary has been a member with the law firm of Zachary & Segraves, P.A. of Decatur, Georgia, of which he is a founding member.  He served on the Investigative Panel of the State Bar of Georgia Disciplinary Board from 1997 to 2000. Mr. Zachary was a founder and was chairman of the Board of Directors of Bank Atlanta from 1986 to 2000, at which time Bank Atlanta merged with Branch Bank & Trust Company. Mr. Zachary is a qualified arbitrator for the American Stock Exchange, served as a qualified arbitrator for the New York Stock Exchange until 2008 and served as an arbitrator for the National Association of Securities Dealers, Inc. until 2005.

As an attorney, Mr. Zachary reviews our contracts and financings, and can advise the Board on legal and procedural issues.  Mr. Zachary has experience on other Boards and, as arbitrator for the National Association of Securities Dealers, understands and can advise the Board on many issues important to a publicly held company.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who beneficially own more than 10% of a registered class of our equity securities to file reports of ownership and reports of changes in ownership with the Securities and Exchange Commission.  These persons are required by regulations of the Securities and Exchange Commission to furnish us with copies of all Section 16(a) forms they file.

Based solely on our review of the copies of these forms received by us, we believe that, with respect to fiscal year 2010, our officers, directors, with the exception of director John Imhoff, M.D., who was delinquent in filing his Form 3, and 10% stockholders were in compliance with all applicable filing requirements.

Code of Ethics

We have adopted a code of ethics that applies to all of our directors, officers and employees.  To obtain a copy without charge, contact our Corporate Secretary, Guided Therapeutics, Inc., 5835 Peachtree Corners East, Suite D, Norcross, Georgia 30092.  If we amend our code of ethics, other than a technical, administrative or non-substantive amendment, or we grant any waiver, including any implicit waiver, from a provision of the code that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, we will disclose the nature of the amendment or waiver on our website, www.guidedinc.com, under the “Investor Relations” tab under the tab “About Us.”  Also, we may elect to disclose the amendment or waiver in a report on Form 8-K filed with the Securities and Exchange Commission.

Material Changes to Security Holders Nomination Procedure

There has been no material change to the procedures by which security holders may recommend nominees to the registrant’s board of directors, since the last disclosure.

Audit Committee

The Board of Directors of Guided Therapeutics has adopted a written audit committee charter. All members of the audit committee are independent as defined in Rule 4200(a) (14) of the National Association of Securities Dealers’ listing standards.

For the fiscal year ended December 31, 2010, Mr.  William E. Zachary, an Attorney by profession and Michael C. James, retired Certified Public Accountant, were members of the Audit Committee, Director Michael C. James is designated the Audit Committee Financial Expert.


 
42

 

Item 11.    Executive Compensation

Summary Compensation Table

The following table lists specified compensation we paid during each of the fiscal years ended December 31, 2010 and 2009 to the chief executive officer and our two other most highly compensated executive officers, collectively referred to as the named executive officers, in 2010:

2010 and 2009 Summary Compensation Table

 
 
Name and Principal Position
 
 
Year
   
Salary
($)
   
Bonus
($)
   
Option Awards
 ($)(1)
   
Total
($)
 
Mark Faupel, Ph.D.
President, CEO, Acting CFO and Director
 
2010
      228,000             520,000       748,000  
 
2009
      228,000       -       380,000       608,000  
Richard Fowler,
Senior Vice President of Engineering
   
            2010
            2009
     
170,000
 170,000
     
-
 -
     
 -
 -
     
170,000
 170,000
 
Shabbir Bambot, Ph.D.
Vice President of Research and Development
                2010       175,000                       175,000  
                2009       175,000       7,500       -       182,500  
                                         
(1) See Note 3 to the consolidated financial statements that accompany this report.

Dr. Faupel’s 2010 and 2009 compensation consisted of a base salary of $228,000 and usual and customary company benefits.  In 2009, Dr. Faupel received no bonus and 1 million incentive stock options. Incentive stock options granted to employees, officers and directors under the Company’s Stock Based Compensation 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 vest in three installments:  one-third of the options vest equally over a two-year period; one-third vest upon a certain condition that was met as of December 31, 2009; and the remaining one-third vests when a certain condition is achieved. The condition had not been met as of December 31, 2010.

In December 2010, Dr Faupel was issued 100,000 shares of common stock, as a payment for outstanding salary of $82,000, the value of our common stock on the date of issuance.  As at December 31, 2010, Dr. Faupel’s remaining deferred salary was approximately $299,414. On March 22 and May 27, 2010, Dr. Faupel was issued 250,000 options each, to purchase common stock at $1.33 and $0.75, respectively, pursuant to his employment agreement.

Dr. Bambot’s 2010 compensation consisted of a base salary of $175,000 and usual and customary company benefits [see similar comment in Faupel’s paragraph]. He received $7,500 in cash bonuses and no stock options in 2009. Incentive stock options granted to employees, officers and directors under the Company’s Stock Based Compensation 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 vest in three installments:  one-third of the options vest equally over a two-year period; one-third vest upon a certain condition that was met as of December 31, 2009; and the remaining one-third vest when a certain condition is achieved. The condition had not been met as of December 31, 2010.

As of December 31, 2009, Dr. Bambot’s total salary deferred was approximately $8,319. In 2010, Dr. Bambot was issued 10,399 shares of common stock, valued at $0.80 per share to offset the deferred salary.  As of December 31, 2010, no amount was owed to Dr. Bambot.

Mr. Fowler’s 2010 and 2009 compensation consisted of a base salary of $170,000 and usual and customary company benefits. He received no bonus and no stock options in 2010 or 2009.

As of December 31, 2010, Mr. Fowler’s total salary deferred was approximately $76,064.
 
 
 
 

 
 
43

 

Outstanding Equity Awards to Officers at December 31, 2010

     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
 
958,778
 
-
 
647,222
 
0.62
 
05/27/2020
Richard Fowler
Senior Vice President of Engineering
 
336,000
 
-
 
-
 
0.30
 
11/12/2017
Shabbir Bambot, Ph.D.
Vice President of Research & Development
 
506,667
 
-
 
178,333
 
0.33
 
12/12/2018

 
(1)
Represents fully vested Options.
 
(2)
Based on all outstanding Options

Outstanding Equity Awards to Directors at December 31, 2010

 
Option Awards
Name and Principal Position
Option
Awards
(#)
Exercise
Price
($)
Ronald W.  Allen
Director
 
542,522
 
0.34
Ronald W. Hart, Ph.D.
Director
 
1,043,750
 
0.14
John E. Imhoff, M.D.
Director
 
22,500
 
0.98
Michael C. James
Director
 
26,250
 
0.98
Jonathan Niloff, M.D.
Director
 
                                             11,667
 
                                               0.75
William E. Zachary, Jr.
Chairman & Director
 
272,000
 
0.20

The following Board members also serve as consultants to the company:

 
1.
Ronald W. Hart, Ph.D. – Dr. Hart’s consulting services include regulatory and clinical issues, especially with advice for the Company with regard to its application to the FDA.
 
2.
Ronald W. Allen – Mr. Allen advises the company with regard to personnel and financing.  As such, he plays an important role in identifying potential funding sources.
 
3.
William E. Zachary, Esq.  Mr. Zachary advises the company on legal matters and negotiations.  He also serves on the Board’s audit committee.

For the fiscal year ended December 31, 2010, Mr. Michael C. James, retired Certified Public Accountant and Dr. John E. Imhoff were members of the compensation committee. The Company’s compensation committee has reviewed and discussed the Compensation Discussion and Analysis with management and based on the review and discussion, the compensation committee will recommend to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s proxy statement.

Risk Oversight
 
 
Our board as a whole has responsibility for risk oversight, with reviews of certain areas being conducted by the relevant board committees that report on their deliberations to the full board, as further described below. Given the small size of the board, the board feels that this structure for risk oversight is appropriate (except for those risks that require risk oversight by independent directors only). The audit committee is specifically charged with discussing risk management (primarily financial and internal control risk), and receives regular reports from management and independent auditors on risks related to, among others, our financial controls and reporting. The compensation committee reviews risks related to compensation and makes recommendations to the board with respect to whether the Company’s compensation policies are properly aligned to discourage inappropriate risk-taking, and is regularly advised by management. In addition, the Company’s management regularly communicates with the board to discuss important risks for their review and oversight, including regulatory risk, and risks stemming from periodic litigation or other legal matters in which we are involved.
 
 
 
44

 
 

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table lists information regarding the beneficial ownership of our common stock as of March 18, 2011 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 below, 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)
    10,786,552       20.38 %
Dolores Maloof (4)
    2669 Mercedes Drive
    Atlanta, GA   30345
    5,509,155       10.53 %
The Whittemore Collection, Ltd. / George Landegger (5)
    4 International Drive
    Rye Brook, NY   10573
    4,196,075       8.66 %
Richard Blumberg (6)
    821 Second Avenue, Suite 2200
    Seattle, WA   98116
    3,793,767       7.45 %
Michael C. James / Kuekenhof Equity Fund, LLP (7)
    3,076,192       6.17 %
Ronald Hart (8)
    1,341,685       2.76 %
Mark L. Faupel (9)
    1,306,000       2.65 %
Ronald W. Allen (10)
    879,376       1.80 %
Shabbir Bambot (11)
    614,566       1.26 %
Richard L. Fowler (12)
    479,343       * %
William E. Zachary, Jr. (13)
    387,057       *  
Jonathan Niloff (14)
    23,334       *  
                 
All directors and executive officers as a group (9 persons) (15)
    18,894,105       32.25 %
_____________
(*)
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 48,110,789 shares of common stock outstanding as of March 18, 2011. 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 March 20, 2011, 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 5,980,129 common shares, 4,783,923 warrants to purchase common stock at $0.65 per share and 22,500 shares subject to stock options. Dr. Imhoff is on the board of directors.
(4)
Consists of 1,281,969 shares of common stock and warrants to purchase 4,227,186 common shares at $0.65 per share.
(5)
Consists of 3,825,704 shares of common stock and 370,371 warrants to purchase common stock at $0.65 per share.
(6)
Consists of 995,298 shares of common stock and 2,798,469 warrants to purchase common stock at $0.65 per share.
(7)
Consists of 1,313,368 shares of common stock and 1,736,574 warrants to purchase common stock at $0.65 per share, held by Kuekenhof Equity Fund, LP, plus 26,250 shares subject to stock options held by Michael C. James personally. Mr. James is on the Board of Directors.
(8)
Consists of 773,275 shares of common stock, 218,410 warrants to purchase common stock at $0.65 per share and 350,000 shares subject to stock options held by Hart Management, LLC, Ronald Hart, owner. Dr. Hart is on the Board of Directors.




 
45

 

 
(9)
Consists of 100,000 shares of common stock and 1,206,000 shares subject to stock options.
(10)
 
Consists of 94,341 shares of common stock, 242,535 warrants to purchase common shares at $0.65 per share and 542,500 shares subject to stock options held by Ronald Allen. Mr. Allen is on the Board of Directors.
(11)
Consists of 10,399 shares of common stock and 604,167 shares subject to stock options.
(12)
Consists of 87,223 shares of common stock , 56,120 warrants to purchase common shares at $0.65 per share and 336,000 shares subject to stock options.
(13)
Consists of 50,493 shares of common stock, 64,564 warrants to purchase common shares at $0.65 per share and 272,000 shares subject to stock options held by William Zachary. Mr. Zachary is on our Board of Directors.
(14)
Consists of 11,667 shares of common stock, and 11,667 shares subject to stock options held by Jonathan M. Niloff.  Dr. Niloff is on the Board of Directors.
(15)
Consists of 8,420,895 shares of common stock, 7,102,126 warrants to purchase common shares at $0.65 per share and 3,371,084 shares subject to stock options.

See Item 5 of this report for information regarding Securities Authorized for Issuance under Equity Compensation Plans.

Item 13.   Certain Relationships and Related Transactions and Director Independence

On April 13, 2009, we issued a 15% note to John E. Imhoff, one of our directors, in the amount of $535,660 and warrants to purchase 2,464,360 shares of our common stock, to replace the notes purchased by Dr. Imhoff that were previously owned by J.E. Funderburke, Robert Johnson, John C. Imhoff and Easy Money (the “Selling Investors”), in the amounts of $154,403, $102,470, $158,787 and $150,000, respectively, under the same terms and conditions. Thereafter, J.E. Funderburke, Robert Johnson and Easy Money, kept 150,000, 102,400 and 150,000 warrants, respectively, under the same terms and conditions. The note was ultimately converted into shares of common stock on February 26, 2010 (see Note 3 to the consolidated financial statements accompanying this report).

On April 15, 2009, we issued a 17% unsecured note to John E. Imhoff, one of our directors, in the amount of $35,000, to replace note purchased by Dr. Imhoff that were previously issued to Dolores Maloof on April 3, 2009 and William Zachary on March 26, 2009, in the amounts of $25,000 and $10,000, respectively. The note was ultimately converted into shares of common stock on February 26, 2010 (see Note 3 to the consolidated financial statements accompanying this report).

Between March and April 2009, we received loans and issued promissory notes to: Ron Allen, a director, for $10,000; Ronald W. Hart, a director, for a total of $16,000; John E. Imhoff, a director, for $35,000 and to Dolores Maloof, an individual, for $50,000. The interest rate on the notes was 17% and they were due six months from issuance. The notes were ultimately converted into shares of common stock on February 26, 2010 (see Note 3 to the consolidated financial statements accompanying this report).

In March and April 2008, we issued four short-term unsecured promissory notes to our directors in the amounts of $10,000 each. The notes were non-interest bearing, matured sixty days from funding and were considered past due. However, subsequent to the third quarter of 2008, these notes were surrendered in exchange for new notes, which were ultimately converted into shares of common stock on February 26, 2010 (see Note 3 to the consolidated financial statements accompanying this report).

Between April and September 2008, we received loans and issued a promissory note to Dolores Maloof, an individual, for a total of $512,358. The interest rate on the note was 15% and was due on December 1, 2011. The note was ultimately converted into shares of common stock on February 26, 2010 (see Note 3 to the consolidated financial statements accompanying this report).

On January 2, 2008, we received a loan and issued a promissory note to Dolores Maloof, an individual, for $100,000. The interest rate on the promissory note was 13% and was due on April 2, 2008. The note was ultimately converted into shares of common stock on February 26, 2010 (see Note 3 to the consolidated financial statements accompanying this report).

In December 2010, we issued 100,000 shares of common stock to Mark Faupel, our President and CEO, as a payment for outstanding salary of $82,000, the value of our common stock on the date of issuance, which was exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering.

Based on the definition of independence of the NASDAQ Stock Market, the board has determined that Messrs. Zachary, Allen and James, and Drs. Hart and Imhoff are independent directors.


 
46

 

Item 14.   Principal Accountant Fees and Services

UHY LLP is our current independent registered public accounting firm.  UHY LLP personnel work under the direct control of UHY LLP partners and are leased from wholly-owned subsidiaries of UHY Advisors, Inc. in an alternative practice structure.  Representatives of UHY LLP are expected to attend the annual meeting of stockholders, will have the opportunity to make a statement if they desire, and will be available to respond to appropriate questions.

We were billed by UHY LLP $249,207 and $250,883 during the fiscal years ended December 31, 2010 and 2009, respectively, for professional services, which include fees associated with the annual audit of financial statements and review of our quarterly reports on Form 10-Q, and other SEC filings.

   
 
2010
   
2009
 
Audit fees
  $ 249,207     $ 250,883  
Audit related fees
    -       -  
Tax fees
    -       -  
All other fees
    -       -  
Total Fees
  $ 249,207     $ 250,883  

Audit Committee Pre-Approval Policy and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

Our Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered public accounting firm.  These services may include audit services, audit-related services, tax services and other services.  Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget.  Our independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with the pre-approval, and the fees for the services performed to date.  The Audit Committee may also pre-approve particular services on a case-by-case basis.

 
 
 
 

 

 
47

 

PART IV

Item 15.  Exhibits and Financial Statement Schedules

The consolidated financial statements included in Item 8 of this reported are filed as part of this report.

The exhibits listed below are filed as part hereof, or incorporated by reference into, this Report.  All documents referenced below were filed pursuant to the Securities and Exchange Act of 1934 by Guided Therapeutics, Inc. (f/k/a SpectRx, Inc.), file number 0-22179, unless otherwise indicated.

EXHIBIT INDEX

EXHIBIT
NO.
DESCRIPTION
3.1
Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed August 12, 2010).
3.2
Bylaws, as amended (incorporated by reference to Exhibit 3.2A to the Annual Report on Form 10-K for the year ended December 31, 2003, filed March 30, 2004).
4.1
Sp