e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
|
|
|
þ |
|
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
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-935
CYTOCORE, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
36-4296006
(I.R.S. Employer
Identification No.) |
|
|
|
414 N. Orleans St., Suite 510, Chicago, IL
(Address of principal executive offices)
|
|
60654
(Zip Code) |
(312) 222-9550
(Registrants Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of each class |
|
Name of each exchange on which registered |
None
|
|
Not Applicable |
Securities registered pursuant to 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 o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. o
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 þ No o
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 ___ (not required)
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 registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one.)
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company þ |
|
|
(Do not check
if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
The aggregate market value of the common stock held by non-affiliates of the Company was
$4,439,379, based upon the closing price of shares of the Companys common stock, $0.001 par value
per share, of $0.12 as reported on the Over-the-Counter Bulletin Board on June 30, 2010.
Shares of common stock held by each current executive officer and director and by each person
who is known by the Company to own 5% or more of the outstanding common stock have been excluded
from this computation in that such persons may be deemed to be affiliates of the Company. This
determination of affiliate status is not a conclusive determination for other purposes.
The number of shares of common stock outstanding as of April 8, 2011 was 51,407,709.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CYTOCORE, INC.
Annual Report on Form 10-K
December 31, 2010
TABLE OF CONTENTS
1
PART I
Item 1. Business
Cautionary Statement Regarding Forward-Looking Statements
This report contains ''forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the ''Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (the ''Exchange Act). All statements other than statements of
historical facts included or incorporated by reference in this annual report on Form 10-K,
including without limitation, statements regarding our future financial position, business
strategy, budgets, projected revenues, projected costs and plans and objective of management for
future operations, are forward-looking statements. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as ''may, ''will, ''expects,
''intends, ''plans, ''projects, ''estimates, ''anticipates, or ''believes or the
negative thereof or any variation there on or similar terminology or expressions. These
forward-looking statements are based on beliefs of our management as well as current expectations,
projections and information currently available to the Company and are subject to known and unknown
risks and uncertainties that could cause actual results to differ materially from historical
results or those anticipated or implied by such forward-looking statements. Certain of these risks
are described more fully under the caption Risk Factors herein and include, but are not limited
to, our ability to raise capital; our ability to retain key employees; our ability to engage third
party distributors to sell our products; economic conditions; technological advances in the medical
field; demand and market acceptance risks for new and existing products, technologies, and
healthcare services; the impact of competitive products and pricing; U.S. and international
regulatory, trade, and tax policies; product development risks, including technological
difficulties; ability to enforce patents; and foreseeable and unforeseeable foreign regulatory and
commercialization factors and any statements of assumptions underlying any of the foregoing.
Should one or more of such risks or uncertainties materialize or should underlying expectations,
projections or assumptions prove incorrect, actual results may differ materially from those
described. Those events and uncertainties are difficult to predict accurately and many are beyond
our control. All subsequent written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as
required by law, we assume no duty to update or revise our forward-looking statements.
Overview
CytoCore, Inc. (CCI, Cytocore, the Company, we, or us), formerly Molecular
Diagnostics, Inc., is developing, and plans to sell an integrated family of cost-effective products
for the detection, diagnosis and treatment of cancer under the trade name of CytoCore
Solutions®. CytoCore Solutions products are intended to address sample collection,
specimen preparation, specimen evaluation (including detection/screening and diagnosis), treatment
and patient monitoring within vertical markets related to specific cancers. Current CytoCore
Solutions products are focused upon cervical cancer. We plan that this focus will later be
expanded to include other gynecological cancers as well as bladder, lung, and breast cancers, among
others. Within each of these markets, we anticipate that the CytoCore Solutions products will be
sold as individual value-added drop-in replacements for existing products and as integrated systems
that improve the efficiency and effectiveness of clinical and laboratory operations.
Currently our only product is the SoftPAP cell collection device that is intended to replace
the spatula and brush currently used to collect cervical cytology samples. SoftPAP®
constitutes one of the cell collection components of our CytoCore Solutions System. We are also
licensed to sell the PadKit®, another sample collection device directed at ensuring
female reproductive tract health, and a cell preservative developed for cytological applications by
Cell Solutions LLC. CCI intends to market and sell the SoftPAP and PadKit devices along with this
preservative worldwide. The other components of the CytoCore Solutions System include certain
biochemical assays and slide-based tests, our next generation specialized system for
computer-assisted cytology the Automated Image Proteomic Systems or AIPS and a drug delivery
system.
We believe the CytoCore Solutions System will provide better detection and diagnosis of cancer
and cancer-related diseases through improved specimen quality and accuracy of test results, both in
terms of a lower incidence of false negatives and fewer inadequate collections of samples. We
also believe the system will expand the number of women who can be tested, thereby increasing
detection and diagnosis rates.
2
Background
We were incorporated in Delaware in December 1998 as the successor to Bell National
Corporation, a company incorporated in California in 1958. In December 1998, Bell National, which
was then a shell corporation, acquired InPath, LLC, a development stage company engaged in the
design and development of products used in screening for cervical and other types of cancer. For
accounting purposes, the acquisition was treated as if InPath had acquired Bell National. However,
Bell National continued as the legal entity and the registrant for Securities and Exchange
Commission filing purposes. Bell National merged into Ampersand Medical Corporation, its
wholly-owned subsidiary, in May 1999 in order to change the state of incorporation of the company
to Delaware.
In September 2001, we acquired 100% of the outstanding stock of AccuMed International, Inc. by
means of a merger of AccuMed into a wholly-owned subsidiary of the Company. Shortly after the
AccuMed merger we changed our corporate name to Molecular Diagnostics, Inc. The name change was
effected by the merger of our wholly-owned subsidiary, Molecular Diagnostics, Inc., with and into
Ampersand. In 2006, our shareholders approved a proposal to change the Companys name from
Molecular Diagnostics, Inc. to CytoCore, Inc., which change was effected in Delaware in June 2006.
Except where the context requires or as otherwise noted, CCI, the Company, we and our
refers to CytoCore, Inc. and our subsidiaries and predecessors.
Recent Developments
During 2010 and 2011 to date, our operations were severely restricted by our lack of working
capital. We have maintained minimal operations. Due to this restriction, we have not been able to
hire marketing and sales personnel or accelerate our research and development activities. If we are
unable to raise additional capital, we may be forced to cease operations.
Information About Industry Segments
We operate in one industry segment involving medical screening devices, diagnostics, and
supplies. All of our operations during the reporting period were conducted and managed within this
segment, with a single management team that reports directly to our Chief Executive Officer. For
information on revenues, profit or loss and total assets, among other financial data, attributable
to our operations, see the consolidated financial statements included herein.
Description of Business
We develop, manufacture and plan to sell an integrated family of cost-effective products for
the detection, diagnosis and treatment of cancer under the trade name of CytoCore
Solutions®. CytoCore Solutions products are intended to address sample collection,
specimen preparation, specimen evaluation (including detection/screening and diagnosis), treatment
and patient monitoring within vertical markets related to specific cancers. Current CytoCore
Solutions products are focused upon cervical cancer. We plan that this focus will later be
expanded to include other gynecological cancers as well as bladder, lung, and breast cancers among
others. Within each of these markets, we anticipate that the CytoCore Solutions products will be
sold as individual value-added drop-in replacements for existing products and as integrated systems
that improve the efficiency and effectiveness of clinical and laboratory operations.
Total revenue for the years ended December 31, 2010 and 2009 were $30,000 and $44,000,
respectively. Of this total revenue, license fees accounted for $29,000, or 97%, of our revenue in
2010 and $40,000, or 90%, of our revenue in 2009. Sales of our SoftPap® product
accounted for revenue of $1,000, or 3%, of our revenue in 2010 and $4,000, or 10%, of our revenue
in 2009.
Products
Cell Collection Devices
The clinical diagnostics laboratory analyzes or otherwise evaluates samples obtained from the
human body for the purpose of detecting the presence of disease, characterizing it as to type and
extent, and/or monitoring the efficacy of
3
treatment. The starting point in any clinical diagnostic test is the collection of a sample
that contains the analyte of interest. To a very large extent, the characteristics of the sample
collected determine the quality of the results of any tests performed on the sample. The
sensitivity and/or accuracy of a test is, for example, likely to be reduced if the sample
collection device or method does not capture a sufficient amount of the target analyte, alters the
analyte of interest, or collects significant quantities of substances that interfere with the
analysis. For this reason, sample collection is a major focus of CytoCore.
SoftPAP®
We currently manufacture and sell the SoftPAP® device for the collection
of cervical cell samples that are used in the detection of cervical dysplasia, cancer and human
papillomavirus (HPV) infections. We believe that SoftPAP, which has been cleared by the Food and
Drug Administration (FDA) for sale in the United States and which is CE Marked for international
distribution, is positioned as a premium value-added alternative to the spatula, broom and
brush-style devices that have traditionally been used for these purposes. Unlike these traditional
devices, SoftPAP collects only exfoliated cells and does not scrape, cut or abrade the
cervix. This unique sample collection method has been shown in clinical trials to reduce the
frequency of false negative and false positive results when the sample is evaluated by cytological
methods to detect the presence of dysplasia and cancer. A reduction in the false negative rate
means that a greater percentage of patients who have cervical dysplasia, cancer or similar
abnormalities are detected during cervical cancer screening (Pap testing) and can, therefore, be
treated. A reduced false positive rate means that fewer patients are falsely identified as having
cervical dysplasia or cancer, thus sparing these patients the unnecessary stress, discomfort and
expense of the additional testing needed to verify that dysplasia or cancer is actually present.
In addition, women have reported that having a cervical sample taken using SoftPAP is
more comfortable than when a traditional device is used. Variants of SoftPAP are also
being designed for the collection of exfoliated cell samples from tissues other than the cervix.
PadKit®
PadKit® is a low cost device that captures a sample that can be evaluated to provide an
assessment of the health of the entire female genital tract. We have obtained an exclusive license
to sell PadKit for the collection of cellular samples that can be screened for a variety of
gynecological cancers (including cervical, endometrial, and ovarian), and for the collection of
gynecological samples to be tested for the presence of HPV. In the future, we may obtain licenses
to sell PadKit for additional indications such as the collection of samples for sexually
transmitted disease (STD) testing. PadKit addresses a number of market niches and segments that
are not addressed effectively by SoftPAP or traditional gynecological sampling devices.
CCI believes that PadKit thus complements SoftPAP in the CytoCore Solutions family of products.
PadKit is designed to eliminate the need for assistance from a medical professional when collecting
gynecological samples for many screening applications. We believe that this feature, in addition
to the range of tests that can be performed on a PadKit sample and PadKits low cost, makes PadKit
particularly attractive for use in large scale public health screening programs. We are also
evaluating the use of PadKit in an internet-based fee-for-service testing program outside of the
United States. Additional uses, such as providing a simple and rapid means of monitoring patients
who have had an abnormal Pap test or who are undergoing treatment for a gynecological cancer, are
also being explored.
Specimen Preparation
Cervical cytology specimens are traditionally prepared as smears where the cells on the
collecting device are literally wiped or smeared onto a microscope slide. In the mid-1990s an
alternative method, variously called a monolayer or liquid-based preparation (LBP), was
introduced. In this method, cells are washed off of the collection device into a preservative
solution to form a cell suspension. A portion of this cell suspension is then transferred to a
microscope slide. LBPs presently account for about 80% of the cervical cytology slides prepared in
the United States, but despite the technical benefits of LBPs, only about 20% of the cervical
cytology slides in the European Union and much lower percentages in the rest of the world are
prepared in this manner. The primary limitations to greater adoption of LBPs outside of the United
States are the high equipment and ancillary supply costs associated with the two predominant LBP
methods.
Cell Preservative
We have reached an agreement with Synermed Select Partners, Inc. (Synermed) under which we
will package and market their cell preservative with our SoftPAP and PadKit cell collection
devices. We selected this preservative for
4
inclusion in convenience kits due to both its technical
performance and because slides can be prepared manually from cells in this
preservative, thus avoiding the high equipment and supply costs incurred when using competing
methods. We believe that this methodology provides a cost effective means for laboratories to
transition from smears to high quality LBPs. We intend to introduce convenience kits containing
the SoftPAP and the preservative in the European Union to address the demand for LBPs in that part
of the world. We expect that distribution of such manual kits will then be expanded by region. In
parallel, We plan to introduce a cytocentrifuge-based slide preparation system for use in low
volume laboratories and to collaborate with Cell Solutions, an affiliate of Synermed, on selling
the Cell Solutions automated slide preparation system to high volume laboratories in these
countries. Unlike the rest of the world, where this preservative is already approved for use, it
is approved only as a general cytology preservative in the United States and requires additional
FDA approval before it can be sold for use in specific applications such as cervical cytology. CCI
and Cell Solutions have agreed to collaborate on obtaining the necessary FDA approval. We are also
working with the manufacturer of PadKit to validate the preservative for this application, where
CCI believes its superior ability to process bloody samples is of particular relevance. An
independent clinical trial of PadKit in combination with the preservative has recently been
initiated by the UCLA School of Nursing.
Stains and Reagents
Once a cytology specimen has been deposited onto a microscope slide, it is stained in order to
assist the cytologist in detecting and identifying the various features of the deposited cells that
are relevant to determining whether the cells are normal, dysplastic or cancerous. We are
developing several proprietary stains for use in cervical cytology and other screening
applications. These stains are designed for automated evaluation using the AIPS Imager (see
below), but some may also be evaluated visually or using a flow cytometer. We are presently
designing clinical studies to validate certain of these stains for use in cervical cytology as well
as for use in other cytological assays. We believe that an added benefit of the CCI proprietary
stains is that after the specimen has been evaluated using these stains, it can be counterstained
with Pap stain for conventional confirmation and archiving.
Specimen Evaluation
When reading a cytology specimen, a cytologist traditionally examines the specimen by eye
through a conventional optical microscope to detect, classify, record, mark, and report abnormal
cells. While performing this examination, the cytologist is also referring to the patients
medical history, assessing specimen adequacy, and capturing a variety of metrics and other
information needed for regulatory compliance and operational purposes. Despite the widespread
deployment of computers in the laboratory, many of these operations are still largely paper-based.
Even in laboratories where medical histories are available to the cytologists in electronic form
and reports are prepared on a computer, it is not uncommon for the data, and sometimes even draft
reports, to be initially captured on paper and then transcribed.
In 1994 AccuMed, a corporate predecessor to CytoCore, introduced the AcCell computer-assisted
cytology workstation. AcCell provided a means to assist the cytologist by automatically capturing
the information relevant to screening cytology specimens in electronic form, managing the captured
information, and automatically generating the necessary specimen, regulatory and operational
reports. The benefits of this approach were clearly demonstrated in several cytology laboratories
where installation of the AcCell system reduced operating costs, eliminated transcription errors,
and reduced the time needed to generate a reportable result.
AIPS Workstation
The AIPS Workstation is an updated and improved version of the AcCell Workstation. Like the
AcCell, the AIPS Workstation is intended to reduce operating costs and improve operating efficiency
in the cytology laboratory. Among the improvements and new features incorporated in the AIPS
Workstation are a more efficient user interface, improved data management, workflow management and
communications capabilities, and new features such as image capture, audio dictation, a consult
mode, and support for continuing education and proficiency testing. In keeping with the AcCell
tradition, patented context-sensitive software allows these capabilities to be provided in an
unobtrusive manner that permits the cytologist to concentrate on evaluating specimens rather than
on operating the instrument.
We believe that the AIPS Workstation hardware also incorporates several major advances over
the AcCell, competing computerized microscope systems, and conventional cytology microscopes.
Fly-by-wire technology, for
5
example, allows the user to switch seamlessly between manual and
computer-controlled specimen positioning and focusing and makes possible many of the improvements
in system ergonomics. This is important as it has been documented that the
poor ergonomics of conventional cytology microscopes are responsible for causing many cytologists
to leave the field due to carpal tunnel syndrome and related medical problems. The AIPS
Workstation is expressly designed to address the root causes of many of these ergonomic problems
and is, therefore, expected to improve the retention of trained cytologists, who are in
increasingly short supply, by the laboratory. Unlike the AcCell and other computerized
microscopes, the AIPS Workstation does not require an external PC for operation. Instead, all
necessary computing power is embedded within the workstation frame. This provides multiple
benefits ranging from eliminating a considerable quantity of equipment from a cytologists
typically cramped work area to facilitating the periodic equipment validations that laboratories
are required to perform.
In addition to use as part of a cytology screening system, the AIPS Workstation can also be
used in conjunction with the AIPS Imager for automated cytological analysis, and in many other
applications in which a conventional microscope is used such as pathology and hematology in a
clinical laboratory, and applications outside of the clinical laboratory that range from drug
discovery and quality control to metallurgy.
AIPS Imager
The intent of a medical screening program is to differentiate between patients who show no
evidence of the target disease state (normals) and those who do (abnormals). Patients who have
abnormal screening results are offered follow-up testing to confirm the presence of the disease,
diagnosis to classify the disease state and determine its extent and, where appropriate, treatment
for the disease. Patients who have a normal screening result are not offered these services. In
order to allow scarce medical resources to be focused upon those patients having the greatest need,
screening programs are structured to differentiate between normal and abnormal patients as
accurately, rapidly, reliably and cost effectively as possible.
Although the evaluation of cervical cytology specimens by automated image analysis can be
traced back to the 1940s and a number of capable systems have been developed, the FDA has not to
date approved any automated image analysis system to diagnose, or classify as normal or abnormal,
cervical cytology specimens without human intervention. The FDA has, however, approved several
systems including the AccuMed TracCell for use in mapping or location-guided screening. In
these systems, image analysis is used to identify potentially abnormal cells which are then
presented to a cytologist for classification. This approach, which has been shown to reduce the
time required to differentiate between normal and abnormal specimens, is starting to be adopted by
high volume laboratories, but is presently too expensive for most laboratories. We believe that our
imager will be marketable at a price that will be affordable for most laboratories.
The AIPS Imager is an advanced version of the AccuMed TracCell location-guided cytology
screening system that has been optimized for use with the proprietary CCI stains described above.
As these stains are designed to be more effective in highlighting the cellular abnormalities
associated with cancer and precancerous conditions than the traditional Pap stain used in
conjunction with other automated cytology screening instruments, the AIPS Imager is expected to
deliver superior performance when used in cytological screening applications. The AIPS Imager is
intended to work in conjunction with the AIPS Workstation. When a specimen slide is evaluated by
the AIPS Imager, the locations on the slide of any potentially abnormal cells are recorded to a
data file. The slide is then transmitted to an AIPS Workstation where the data file guides the
workstation to present each of the potentially abnormal cells detected to the cytologist for
classification.
CCI plans several additional software modules that will expand the capabilities of the AIPS
Imager. These modules may include those for the analysis of specimens stained with new CytoCore
stains, bulk image capture and archiving, generation of time-optimized routing plans to maximize
the efficiency of specimen review on an AIPS Workstation, and a preview module that assists the
cytologist in evaluating difficult specimens. CCI hopes that this product family will also be
expanded by the addition of application kits consisting of the stains and associated software that
are needed for the automated screening of other types of cytology specimens.
Therapeutics
We have placed the development of a derivative of the SoftPAP cell collection device that can
be used to apply a patch containing a therapeutic agent to the cervix on hold pending the
availability of the necessary resources. We are
6
planning to develop and market this applicator, as
well as patches containing established therapeutic agents, at some future date in collaboration
with a pharmaceutical or transdermal patch manufacturer.
Product Development
Our core product development strategy is to develop the CytoCore Solutions System and its
component products, enhance such products, and develop new and innovative diagnostic and screening
devices for the early detection of various types of cancer. To implement this strategy, we have
and will continue to utilize internal resources, sponsored and collaborative agreements with
medical institutions, strategic partnerships with commercial entities, and licenses and
acquisitions of intellectual property.
In the future, we anticipate expanding our portfolio to include other cytological assays and
tests, tests for STDs, including HPV, and other markers of vaginal health, and medicinal products
related to the treatment of diseases of the female reproductive system. The CytoCore product
pipeline for 2011 calls for the introduction of PadKit, an improved cytology preservative for use
with SoftPAP and PadKit, and possibly a novel cytological stain. In 2012, we expect to introduce
the AIPS Workstation and to introduce the AIPS Imager with assay reagents for the location-guided
screening of cervical cancer specimens in 2013. Reagents for use in the automated screening for
additional conditions such as endometrial and bladder cancer are expected to be introduced in late
2014.
Markets and Marketing Objectives
Diagnostic Focus
Our immediate chief objective is to achieve broad market acceptance of the SoftPAP collection
device and the CytoCore Solutions System as a new screening and diagnostic tool for cervical cancer
screening, offering an alternative to the current Pap test methods. It is estimated that there are
approximately 60 million annual Pap tests given in the United States. Worldwide, approximately 180
million tests are given and approximately 1.5 to 1.8 billion women require annual Pap testing. Many
studies have shown that between 70 and 80% of a persons entire healthcare expenditures over their
whole life occur in the last four to six months of life. As a result, more and more attention is
being given to the early detection of a disease or condition. Bio-molecular screening, diagnostic,
and treatment products consequently are being developed to detect disease states early so they can
be dealt with before they become life threatening and expensive to treat. We are designing and
developing its products to satisfy this paradigm shift and focus more on diagnostic methods and
tools for early detection.
Point of Care for All Populations
We also believe we are well positioned to capitalize on trends affecting the worlds
population. The female population of the world is approximately 3 billion, of which 2 billion fall
in the range where reproductive healthcare monitoring is necessary and effective. This group falls
into two sub-groups: (1) females in the United States and other countries where healthcare is
available to most, and where healthcare is more or less effective (estimated at between 300 and 400
million women), and (2) the remainder of the female world population, where healthcare is limited
or non-existent. We believe our products can address the needs of both of these groups, since the
principal requirements for both groups minimal cost, near point-of-care delivery, ease of use,
and reduced reliance on highly-trained and skilled professionals are the same. We are
developing our initial products to serve the needs of females in developed nations and economies,
but anticipate subsequent deployment of such products to less well-developed countries.
Within both developed and developing economies, there are macro trend drivers that are not
specific to female healthcare needs, including:
|
|
|
Increasing life spans, driving the demand for healthcare services up and
increasing the emphasis on developing screening tests for the early detection of
diseases; |
7
|
|
|
Limited infrastructure and the fact that a significant portion of the world
population lives in locations where the infrastructure does not support the
classical laboratory-based model of healthcare delivery, putting a premium on
point-of-care diagnostic testing; |
|
|
|
|
An increasingly mobile population, which has increased the pressure to minimize
the time between when a patient is tested and when the test result is available and
delivered; |
|
|
|
|
Increasing worldwide shortage of physicians and laboratory professionals who have
the skills and training needed to perform and interpret screening and diagnostic
tests, increasing the need for tests that can be performed and interpreted by
technicians and para-professionals; and |
|
|
|
|
Constrained funds available for healthcare, driving the need to reduce healthcare
costs. |
These trends are set against the major advances that are occurring in many areas related to
healthcare. These advances range from a better and more nuanced understanding of disease states to
the movement of genomics, proteomics and bioinformatics out of the research laboratory and into
routine medical practice. These are supported by rapid advances in information, optical and
software technology. This combination is making it possible to perform increasing numbers of
screening and diagnostic tests at or near the point of care. CytoCore is focused upon utilizing
these advances to provide products that address the needs of these worldwide markets.
Sales and Distribution
The SoftPAP has initially been targeted to the premium segment of the cervical cytology
sampling market. This premium segment comprises almost the entire cervical sampling market except
for public health programs and research hospitals. We expect that the SoftPAP will be primarily
delivered to these customers through local and regional distributors who specialize in the
value-added OB/GYN market.
In 2010, we engaged the services of Dr. Mauro Scimia as a sales representative. Dr. Scimia
will be focusing upon developing markets for Company products in the European Union and surrounding
regions and providing support to our distributors.
In 2010, we entered into an agreement with Prosper Channel for the distribution of SoftPAP in
China. We are presently working with Prosper Channel to register SoftPAP for sale in China and
expect to receive this approval late in the second quarter or early in the third quarter of 2011.
The AIPS Workstation will be marketed to small and medium-sized hospitals and reference
laboratories. The compact, low cost design of the workstation is intended to facilitate its
deployment at or in proximity to the point of care. Once the AIPS Workstation has been
successfully established in the laboratory market, our strategy is to form alliances with these
laboratories and other medical products distribution companies and utilize their sales forces to
broaden sales of the system to other markets, including hospitals, clinics, managed care
organizations and office-based physician groups. Our marketing strategy to these organizations will
vary depending upon the applicable cancer screening test.
We plan to sell cell preservatives in combination with the SoftPap product only. The
corresponding PadKit marketing strategy is being developed, but it is currently anticipated to be
based upon convenience kits containing PadKit and the preservative.
Many countries in which healthcare has been partially or fully nationalized utilize a tender
system in which contracts to supply a specified quantity of a product for a specified period of
time are periodically made available for bidding. CCI is taking the steps necessary to become
qualified to bid on tender offers in selected countries.
Government Regulation, Clinical Studies and Regulatory Strategy
The development, manufacture, sale, and distribution of medical devices are subject to
extensive governmental regulation worldwide. In the United States our products are regulated under
the Medical Device Amendments to the Food, Drug and Cosmetic Act (the FD&C Act) and cannot be
sold, shipped or promoted in interstate commerce without prior
8
authorization by the FDA. In the
European Union, medical devices are regulated under the Medical Device, In-Vitro Device and other
Directives that require that each product be CE Marked to show that it conforms to all of the
requirements of the applicable Directive(s) before it can be imported into or sold in the EU. The
regulatory systems in other major markets such as China and South America have been undergoing
substantial changes and now in many respects resemble the system in the EU. In particular, the CE
Mark is now accepted or required in essentially all significant markets other than the US. In
addition to having to obtain the appropriate regulatory approvals, the Company is also required to
register its products with the National Health Authority in any country in which it expects to do
business; may have its quality and manufacturing
systems inspected and/or audited by representatives of various National Health Authorities; and may
have to conform to additional regulations imposed by individual countries.
Under these regulations, we are subject to certain registration, record-keeping and reporting
requirements; our manufacturing facilities, or those of our strategic partners, may be obligated to
conform to specified quality standards, this compliance being subject to audits and inspections;
and we are subject to national, state and local laws relating to such matters as safe working
conditions, manufacturing practices and environmental protection. Failure to comply with these
regulations could have a material adverse effect on our future operations and may impose additional
costs and risks.
In the US, the FD&C Act generally bars selling, advertising, promoting, or other marketing of
medical devices that have not been authorized (approved or cleared) by the FDA. The promotion or
sale of medical devices for non-approved or off-label uses is prohibited. The FDA also regulates
the design and manufacture of medical devices. These regulations have been largely, but not
completely harmonized with the ISO quality system standards for medical devices that are used for
similar purposes in most other countries. This incomplete harmonization requires us to maintain
two separate, but equal quality systems and increases the cost of regulatory compliance. The FDA
and the corresponding regulatory agencies in other countries may withdraw product clearances or
approvals for failure to comply with these regulatory standards and may impose additional
sanctions.
In the US most low to moderate risk medical devices that have legally marketed predicates
receive clearance to market through a process described in Section 510(k) of the FD&C Act. In
order to receive clearance under this so-called 510(k) process, a product must be shown to be
substantially equivalent to an appropriate legally marketed predicate device. High risk
devices and devices that do not have a predicate require approval via a PMA submission in which
de-novo demonstration of the safety and efficacy must be established. Changes to a product, its
intended use, and/or its labeling often require the submission of another 510(k) or PMA
application. Obtaining approval to market via the PMA process takes substantially longer and is
far more expensive than obtaining clearance to market via the 510(k) notification process.
The e2 Collector, which is the predecessor to the SoftPAP collector, was cleared
for marketing by the FDA on May 31, 2002 and the SoftPAP collector received FDA clearance on
January 31, 2008. Although most future Company products are expected to qualify for premarket
clearance via the 510(k) process, some future products may require PMA approval.
In 2010 the FDA began a major review of the 510(k) process, which has resulted in the
announcement of a relatively small number of administrative changes. It is expected that
substantive changes, if any, will be announced during the last half of 2011 or during 2012. Some
of the proposed changes that are currently under consideration have the potential to substantially
increase the time and cost involved in obtaining marketing clearance via the 510(k) process.
In the US we are subject to various federal and state laws pertaining to healthcare fraud and
abuse, including federal and state anti-kickback laws and the federal Foreign Corrupt Practices
Act, make it illegal for an entity to solicit, offer, receive or pay remuneration or anything of
value in exchange for, or to induce, the referral of business or the purchasing, leasing or
ordering of any item or service paid for by Medicare, Medicaid or certain other federal healthcare
programs. These statutes have been broadly defined to prohibit a wide array of practices, and our
activities may subject the company and its partners to scrutiny under such laws. Violations may be
punishable by criminal and/or civil sanctions, including fines, as well as the exclusion from
participation in government-funded healthcare programs. Laws pertaining to these and related
matters also exist in other countries.
Each country has historically imposed its own unique regulations on medical products. In
recent years, however, there has been a trend toward the harmonization of these regulations
resulting in greater consistency between countries. This has resulted in a large and growing
number of countries (over 70 as of this writing) adopting the CE Mark as a central
9
element of their
regulatory process for medical devices. The US is the only major country that has not adopted the
CE Mark. In order for a product to be CE Marked, the manufacturer must demonstrate to the
satisfaction of the regulatory authorities that the product is safe and effective (conforms to the
Essential Requirements for that class of product) and that it is manufactured in accordance with
specified quality standards. In most countries the CE Mark is a pre-condition for medical device
registration and in some places such as the EU, is mandatory in order for a product to be imported
into or sold within the country or region. Failure to comply with the regulations pertaining to CE
Marking can result in product seizures and other sanctions.
The SoftPAP collector and the preservative are CE Marked to the Medical Device Directive and
the In-Vitro Device Directive, respectively. As our products are intended to be marketed globally,
we expect that all future products will be CE Marked to the applicable Directives and standards.
The CE Mark for a product must be renewed every five years and will generally also require renewal
if the requirements imposed by these Directives and standards change. This renewal increases the
cost of regulatory compliance. In addition, the specific quality system requirements imposed upon
a product are determined by the risk category into which the product is assigned by the applicable
Directives. All of our current and planned products are presently considered to be low risk
devices and are assigned to Class I which imposes the lowest level of quality system requirements.
If a new Company product falls within or a current is reclassified into a higher risk category, we
will be required to register our quality system to ISO 13485 in order to maintain the CE Mark on
the affected product(s). Our quality system presently conforms to the requirements of ISO 13485,
but we have not been formally registered to this standard. Registering a quality system to ISO
13485 and maintaining this registration will substantially increase the costs of regulatory
compliance.
Several voluntary systems such as GS-1/GTIN, GMDA and EDMA for the identification of medical
devices are presently in use in various parts of the world. The Global Harmonization Taskforce
(GHTF), which is comprised of representatives from major medical device regulatory agencies such as
the FDA, is in the process of developing a single unified medical device identification system
that, when it goes into effect, will be mandatory worldwide. Current proposals combine various
portions of the existing voluntary codes in order to construct the new unified identifiers which
would then be required to be registered with a central repository. We are well positioned to
comply with the currently proposed form of this new regulation as we have both company and product
specific GS-1/GTIN codes as well as product specific GMDA and EDMA for our current products and has
the mechanisms in place to obtain additional such codes in the future. The proposed regulations
include user fees that will increase our cost of regulatory compliance.
We are also required to comply with certain environmental regulations with respect to products
that are sold in the EU. One of these regulations is the Directive on Packaging and Packaging
Wastes that mandates the minimization of packaging; restricts the use of certain packaging
materials; and imposes requirements, including possible take-back provisions, with respect to the
recycling of packaging materials. All current Company products comply with the requirements of
this Directive. At present, we comply with the recycling portions of this Directive by ensuring
that all packaging materials are compatible with recycling programs that are in place in the EU.
However, in the future we may be required to take a more active role in the recycling of certain
types of products including possibly taking back and recycling of laboratory instruments.
Implementing a complaint take-back program will increase our operating and regulatory compliance
costs.
In the EU electronic products, including clinical laboratory instruments such as the AIPS
Imager and Workstation, are required to comply with two environmental Directives, one of which
requires that the manufacturer take back and recycle the electronic portions of these instruments
and the other (the so-called RoHS Directive) of which restricts the presence of certain materials
in electronic products. We comply with the RoHS Directive by requiring our suppliers to use only
RoHS complaint materials in the construction of our products. Upon commencement of instrument
sales in the EU, if ever, we expect that we will be required to comply with the take-back
requirements by contracting with an established electronic waste recycler in the EU. Such
contracts will increase our operating costs.
The REACH regulation, which requires the registration of all chemical products produced in
or imported into the EU is presently in its implementation phase. The long term impact of this
extremely complex multi-level regulation on the Company is unknown at present, but is anticipated
to be minimal in the near term as our sales of chemical products (stains, preservative, etc.) are
and are expected to continue to be at less than the threshold levels for registration and
reporting. An
10
increase in sales of such products above currently forecast levels and/or a
reduction in the applicable thresholds could potentially result in significant costs to the
Company.
Data from clinical trials and studies is often required in regulatory submissions and is
highly desirable for use in product marketing activities. In general, at least one trial or study
is necessary for each new product and additional studies or trials are needed to support new or
modified indications for use and new marketing claims.
Each medical device is required to have an expiration date beyond which it may no longer be
used. This expiration date is generally set very conservatively at the time of product
introduction and may then be extended if warranted and supported by realtime data. Since
SoftPAP was introduced, we have been collecting product life data from the field and has been
conducting internal stability tests. The field and laboratory data collected to date suggests
that the expiration
dating for SoftPAP can be extended by at least 50% and potentially more than 100% over its
original duration. We are initiating a clinical study, which is expected to be completed by the
end of the second quarter of 2011, to validate these observations and to determine whether, and by
what amount, SoftPAP expiration dating can be extended..
SoftPAP has FDA clearance and is CE Marked for the collection of samples for use in cervical
cancer screening. At the time that these approvals were obtained, the accepted standard of
clinical practice was to perform the initial screening by cytology and to use a HPV test to confirm
and further classify any abnormal cytological results that were obtained. Recently several
countries, most notably certain countries in the EU, have revised, or have begun revising their
accepted practice such that the initial screening is now to be performed using a HPV test with
reflex to cytological testing for confirmation and diagnosis of a positive HPV result. This
change in use does not affect the approvals presently held by SoftPAP, but a new clinical study
based upon this revision to clinical practice is needed for marketing purposes. The necessary
study protocol has been prepared and discussions with potential clinical sites are in progress. It
is presently anticipated that this study will be completed by no later than the first quarter of
2012. This same study will also provide additional validation data for the use of our preservative
with SoftPAP and an independent test of one of the proprietary cytology stains that we are
developing.
Several additional clinical trials and studies are planned, but will not be initiated until we
can obtain sufficient additional financial and operating resources. The largest of these planned
studies and trials is a formal clinical trial of PadKit in conjunction with our preservative for
the self-collection of samples for cytology and HPV testing in both the primary and reflex modes.
Other planned studies and trials include, but are not limited to, validation of certain stains and
markers for use with the AIPS Imager, obtaining additional indications for use for SoftPAP and
PadKit, and field validation of the AIPS Workstation.
Cost and Reimbursement
In the United States, laboratory customers bill most insurers (including Medicare) for
screening and diagnostic tests such as the Pap test. Insurers, such a private healthcare insurance
or managed care payers, in addition to Medicare, reimburse for the testing, with a majority of
these insurers using the annually-set Medicare reimbursement amounts as a benchmark in setting
their reimbursement policies and rates. Other private payers do not follow the Medicare rates and
may reimburse for only a portion of the testing or not at all. Outside of the United States,
healthcare providers and/or facilities are generally reimbursed through numerous payment systems
designed by governmental agencies, such as the National Health Service in the United Kingdom, the
Servicio Sanitaris Nazionale in Italy and the Spanish National Health System, as well as private
insurance companies and managed care programs. The manner and level of reimbursement will depend
on the procedures performed, the final diagnosis, the devices and/or drugs utilized, or any
combination of these factors, with coverage and payment levels determined in the payers
discretion.
Our ability to successfully commercialize the CytoCore Solutions System and future products
will depend, in part, on the extent to which coverage and reimbursement for such products will be
available from third-party payers in the United States such as Medicare, Medicaid, health
maintenance organizations and health insurers, and other public and private payers in foreign
jurisdictions. The coverage policies and reimbursement levels of these third-party payers may
impact the decisions of healthcare providers and facilities regarding which medical products they
purchase and the prices they are willing to pay for those products. In some countries, our ability
to commercialize products will also depend upon us becoming a qualified bidder on the tender offers
issued by the National Healthcare Authority. If we succeed in bringing products to the market,
11
we cannot be assured that third-party payers will pay for such products or establish and
maintain price levels sufficient for realization of an appropriate return on our investment in
product development. Additionally, we expect many payers to continue to explore cost-containment
strategies (e.g., competitive bidding for clinical laboratory services within the Medicare program,
so-called pay-for-performance programs implemented by various public and private payers, etc.)
that could potentially impact coverage and/or payment levels for current or future CytoCore
products.
Competition
Historically, competition in the healthcare industry has been characterized by the search for
technological innovations and efforts to market such innovations, and technological advances have
accelerated the pace of change in recent years. The cost of healthcare delivery has always been a
significant factor in markets outside of the United States. In recent years, the U.S. market has
also become much more cost conscious. We believe technological innovations incorporated into
certain of our products offer cost-effective benefits that address this particular market
opportunity.
Competitors may introduce new products that compete with ours, or those that we are
developing. We believe the portion of our research and development efforts devoted to continued
refinement and cost reduction of our products will permit us to remain or become competitive in the
markets in which we presently distribute or intend to distribute our products.
The market for our cancer screening and diagnostic product line is significant, but highly
competitive. We are currently not aware of any other company that is duplicating our efforts to
develop a fully-automated, objective analysis and diagnostic system for female reproductive-tract
cancer screening that can be used at the point of care. Nonetheless, we compete with several large
and well-established medical device companies, including companies with financial, marketing, and
research and development resources substantially greater than ours. There can be no assurance that
our technological innovations will provide us with a competitive advantage.
There are several companies that produce automated and quantitative microscopy instruments. In
the past, the market for these instruments has been primarily limited to research applications.
However, as a result of recent advances in the area of molecular diagnostics, we believe the market
for such instruments and applications will increase over the next several years. We believe our
instruments are the most versatile and cost-effective platforms available in the current market
whether as an outright purchase or a fee-for-use application.
In general, we believe that our products must compete primarily on the basis of clinical
performance, accuracy, functionality, quality, product features and effectiveness of the product in
standard medical applications. We also believe that cost control and cost effectiveness are
additional key factors in achieving or maintaining a competitive advantage. We focus a significant
amount of product development effort on producing systems and tests that will not add to overall
healthcare cost.
Specifically, there are several companies whose technologies are similar, adjunctive to, or
may overlap with ours. Of these companies, our primary competitors are Rovers and Wallach in the
area of cell collection devices and Cytyc and TriPath Imaging in specimen preparation and the
automated morphological screening of these specimens. None of these companies offer a complete
system comparable to CytoCore Solutions. In addition, both the Cytyc and TriPath systems are
closed and are focused exclusively on the cervical cytology market whereas CytoCore offers an
open system that is intended to address most of the 100+ types cytology tests that are currently
performed. Indirect competitors are largely companies such as Qiagen and Greiner that offer HPV
tests for use in cervical cancer screening. Our sample collection devices are suitable for use
with these tests and our cytology products are adjunctive or complementary to them. Companies such
as Ventana and Dako, which specialize in the preparation and evaluation of pathology, as opposed to
cytology, specimens could potentially enter market segments of interest to CytoCore at some point
in the future.
Operations
We conduct research and development work for the CytoCore Solutions System using a combination
of our full-time and part-time employees, contract researchers and independent consultants in our
Chicago, Illinois location. Where
12
appropriate we also utilize the services of contract product development companies, but we retain
the planning, management, QA/QC, validation and regulatory compliance portions of these projects
in-house.
We do not intend to invest capital to develop our own distribution and sales organizations, or
construct and maintain a medical-products manufacturing facility and all its related quality
systems requirements. Our strategy is to utilize the operations, quality systems and facilities of
contract manufacturers specializing in medical products manufacturing to meet our current and
future needs in the United States and abroad. This strategy covers manufacturing requirements
related to the CytoCore Solutions Systems chemical components, plastic and silicone parts for the
SoftPAP, and the instruments and other components of the AIPS workstation.
To this end, we have agreements, including for design and development work, with contract
manufacturers of medical devices to supply commercial quantities of the SoftPAP sample collection
device. These manufacturers began delivering commercial product to us in 2007 and have the capacity
to handle high volume production through facilities in both the United States and several foreign
countries. All of our machinery and tooling is located at our suppliers.
Intellectual Property
We rely on a combination of patents, licenses, trade names, trademarks, know-how, proprietary
technology, trade secrets and policies and procedures to protect our intellectual property. We
consider such security and protection a very important aspect of the successful development and
marketing of our products in the U.S. and foreign markets.
In the United States, we follow the practice of filing a provisional patent application for an
invention as soon as it has been determined that the invention meets the minimum standards for
patentability. While a provisional patent application does not provide any formal rights or
protections, it does establish an official priority date for the invention that carries over to any
utility patent applications that are derived from the provisional application within the next 12
months. A utility patent application begins the process that can culminate in the issuance of a
U.S. patent. We convert each outstanding provisional patent application into some number of
utility patent applications within this 12-month period. In most cases each provisional application
results in one utility filing. However, in some cases a single provisional application has
generated two independent utility filings or multiple (up to five) provisional applications have
been consolidated into a single utility application. During the examination of a utility
application, the U.S. Patent and Trademark Office may require us to divide the application into two
or more separate applications or we may file a continuation-in-part patent application that expands
upon the technology disclosed in an earlier patent application and which has the potential of
superseding the disclosure of the earlier application. For these reasons, estimating the number
of patents that are likely to be issued based upon the number of provisional and utility
applications filed is difficult.
Prior to filing a utility application in the United States, we review the application to
determine whether obtaining patent coverage for the invention outside of the United States is
necessary or desirable to support our business model. If so, a patent application is filed under
the Patent Cooperation Treaty (PCT) at the same time that the U.S. filing is made. Depending
upon the nature of the invention and business considerations, we typically nationalize PCT
applications in three to six countries.
As of December 2010, we had filed 12 U.S. utility patent applications. Three of the U.S.
utility applications have been issued as U.S. patents, two are pending, and seven have been
abandoned. One Chinese patent had been issued and one European case has been abandoned. One U.S.
and five foreign patent applications are filed and pending; in order to reduce the expenses related
to patent prosecution, we are currently taking only those actions needed to keep them in effect.
This group of patents and patent applications covers all aspects of the CytoCore Solutions System
including, but not limited to, the point of service instrument, the personal and physicians
collectors, and the slide-based test. As a result of the acquisition of AccuMed, we acquired 33
issued U.S. patents, one U.S. patent application, and nine foreign patents, of which a combined
total of 17 were transferred to a third party under a license agreement. Twenty-four additional
foreign patent applications primarily covering the AcCell and AcCell Savant technology and related
software were also acquired. We have recovered the AcCell-related patents and patent applications
from the third party.
We intend to prepare additional patent applications for processes and inventions arising from
our research and development process. The protections provided by a patent are determined by the
claims that are allowed by the patent
13
office that is processing the application. During the patent prosecution process it is not
unusual for the claims made in the initial application to be modified or deleted or for new claims
to be added to the application. For this reason, it is not possible to know the exact extent of
protection provided by a patent until it issues.
Patent applications filed prior to November 29, 2000 in the United States are maintained in
secrecy until any resulting patent is issued. As there have been examples of U.S. patent
applications that have remained in prosecution and, therefore, secret for decades, it is not
possible to know with certainty that any U.S. patent that we may own, file for or have issued to us
will not be pre-empted or impaired by patents filed before ours and that subsequently are issued to
others. Utility patent applications filed in the United States after November 29, 2000 are
published 18 months after the earliest applicable filing date. As this revised standard takes
full effect, the chances that such a submarine patent will impair our intellectual property
portfolio are significantly reduced. Foreign patent applications are automatically published 18
months after filing. As the time required to prosecute a foreign utility patent application
generally exceeds 18 months and the foreign patents use a first to file rather than a first to
invent standard, we do not consider submarine patents to be a significant consideration in our
patent protection outside of the United States.
Our products are or may be sold worldwide under trademarks that we consider to be important to
our business. We own the trademarks SoftPAP, CytoCore, CytoCore Solutions and Cocktail-CVX. We
may file additional U.S. and foreign trademark applications in the future.
Our future technology acquisition efforts will be focused toward those technologies that have
strong patent or trade secret protection.
We cannot be sure that patents or trademarks issued or which may be issued in the future will
provide us with any significant competitive advantages. We cannot be sure any of our patent
applications will be granted or that their validity or enforceability will not be successfully
challenged. The cost of any patent-related litigation could be substantial even if we were to
prevail. In addition, we cannot be sure that someone will not independently develop similar
technologies or products, duplicate our technology or design around the patented aspects of our
products. The protection provided by patents depends upon a variety of factors, which may severely
limit the value of the patent protection, particularly in foreign countries. We intend to protect
much of our core technology as trade secrets, either because patent protection is not possible or,
in our opinion, would be less effective than maintaining secrecy. However, we cannot be sure that
our efforts to maintain secrecy will be successful or that third parties will not be able to
develop the technology independently.
Research and Development Expenditures
Our research and development efforts are focused on introducing new products as well as
enhancing our existing product line. We utilize both in-house and contracted research and
development personnel, including in collaboration with universities, medical centers and other
entities. All of our research and development activities are conducted in the United States.
We believe research and development is critical to the success of our business strategy.
During the 2010 and 2009 fiscal years, our research and development expenditures were approximately
$275,000 and $372,000, respectively, all of which were charged to expense in our consolidated
statement of operations. Settlements to vendors related to research and development activities for
less than the recorded amounts totaled $64,000 and $457,000 for the fiscal years 2010 and 2009
respectively, and were credited to expenses.
Our research work in the area of chemical and biological components is expected to continue
for the foreseeable future as we seek to refine the current process and add additional capabilities
to our analysis procedure, including the detection of other forms of cancer and precursors to
cancer.
We anticipate the need to invest a substantial amount of capital in the research and
development process, including the cost of clinical trials, required to complete the development
and use of the CytoCore Solutions System and bring it to market.
Components and Raw Materials
14
Low-cost products are a key component of our business strategy. We designed the SoftPAP
collection device using widely available and inexpensive silicone and plastic materials. These
materials are available from numerous sources and can be fabricated into finished devices by a
variety of worldwide manufacturers based on our proprietary designs. Currently, we have
manufactured through contract manufacturers the SoftPAP collection device in Wisconsin and China,
with quality assurance occurring in our Chicago facility. These contract manufacturers have used
our machinery and tooling.
The instrument components of the laboratory version of the CytoCore Solutions System are also
available from a number of sources. Computers, cameras, automated slide-staining instruments and
automated slide-preparation instruments are currently available from several large manufacturers.
Due to certain regulatory requirements regarding the supply and manufacture of certain
products, we may not be able to establish additional or replacement sources for certain components
or materials. In the event we are unable to obtain sufficient quantities of raw materials or
components on commercially reasonable terms or in a timely manner, we would not be able to
manufacture our products on a timely and cost-competitive basis, which may have a material adverse
effect on our business and financial condition.
Working Capital Practices
We have financed our U.S. operations and research and development efforts by raising funds
through borrowing and the sale of equity securities. We will continue to use these methods to fund
our operations until such time as we are able to generate adequate revenues and profits from the
sale of some or all of our products.
We believe that future sales of the CytoCore Solutions System or other products into foreign
markets may result in collection periods that may be longer than those expected for domestic sales
of these products. Our strategy will be to use down payments, letters of credit or other secured
forms of payment, whenever possible, in sales of products in foreign markets.
Employees
As of April 4, 2011, we employed a total of six full-time employees. We also utilize
independent consultants in the United States on an as-needed basis.
Financial Information About Foreign and Domestic Operations and Export Sales
Markets outside of North America are an important factor in our business strategy. Any
business that operates on a worldwide basis and conducts its business in one or more local
currencies is subject to the risk of fluctuations in the value of those currencies against the
dollar, as well as foreign economic conditions. Such businesses are also subject to changing
political climates, differences in culture and the local practices of doing business, as well as
North American and foreign government actions such as export and import rules, tariffs, duties,
embargoes and trade sanctions. We do not regard these risks, however, as a significant deterrent
to our strategy to introduce our CytoCore Solutions System to foreign markets in the future. As
we begin to market and sell our CytoCore Solutions System, we will closely review our foreign
operational practices. We will attempt to adopt strategies to minimize the risks of changing
economic and political conditions within foreign countries.
During the fiscal year ended December 31, 2010, we did not have any foreign operations.
You should carefully consider the following risk factors that affect our business. Such risk
factors could cause our actual results to differ materially from those that are expressed or
implied by forward-looking statements contained herein. Some of the risks described relate
principally to our business and the industry in which we operate. Others relate principally to the
securities market and ownership of our capital stock. The risks and uncertainties described below
are not the only ones we face. Additional risks are described elsewhere in this report under the
Item 1 Business, Item 3 Legal Proceedings, and Item 7 Managements Discussion and Analysis
of Financial Condition and Results of Operation sections, among others.
15
Other risks and uncertainties that we are unaware of, or that we currently deem immaterial,
also may become important factors that affect us. Our business, financial condition or results of
operations could be materially and adversely affected by any of these risks, and the trading price
of our common stock could decline. The discussion of our risk factors should be read in
conjunction with the financial statements and notes thereto included herein.
Risks Related to Our Business
We have a history of operating losses and there is substantial doubt as to our ability to
continue as a going concern.
Our expenses have exceeded our revenues since our inception, and our accumulated deficit at
December 31, 2010 was $97,448,000. We have sold only a very limited amount of our CytoCore
Solutions System products to date and cannot be certain as to when, if ever, that sales of our
products might occur. We estimate that we have sufficient cash on hand to fund our operations only
until April 2011. Our losses have resulted from research and development costs, sales and
marketing expenses and other general operating expenses. We expect to continue to devote resources
to marketing, product development and other research and development activities and cannot predict
when, if ever, that revenues will be sufficient to fund our operations. We, therefore, expect to
continue to incur significant losses in the near future. Due to the substantial losses we have
incurred and our current limited financial resources, our independent registered public accounting
firm has noted in its report on our financial statements that these conditions raise substantial
doubt as to our ability to continue as a going concern. Our financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that may result from the outcome of this uncertainty.
Moreover, the going concern explanatory paragraph may make obtaining additional financing more
difficult or costly.
We have limited financial resources and we are not certain we will be able to obtain
additional financing to maintain operations and fund the development of future products.
Our ability to continue operations depends upon our raising additional funds during 2011. We
estimate that we have sufficient cash on hand to fund operations only until April 2011. Until such
time as our products achieve market acceptance and generate sufficient revenues, we will continue
raising funds for operating purposes primarily from the sale of Company securities. Lack of
funding may affect our overall ability to operate our business, including the ability to employ
adequate staff and conduct ongoing studies and clinical trials of our products. Failure to raise
adequate capital to meet our business needs could materially jeopardize our financial condition,
our ability to conduct business, and in the extreme case to discontinue operations and liquidate.
There can be no assurance that we will be able to secure necessary funds.
We currently depend on the sale of a single product and product line.
We have sold only a very limited amount of our CytoCore Solutions System products to date and
cannot be certain as to when, if ever, sales of our products might occur. Only one shipment of
product was made in 2010. In the foreseeable future, we expect to derive most of our revenues from
the sale of the SoftPAP cell collection device, and the other components of the CytoCore Solutions
System. Our net sales and earnings will, therefore, be heavily dependent on the sale of these
products. If we are unable to successfully develop and commercialize such products as well as
other new or improved products, our business, sales and profits will be materially impaired.
Our future success will depend on our ability to develop new products and respond to
technological changes in the markets in which we compete.
Our long-term ability to generate product-related revenue will depend in part on our ability
to identify products and product candidates that may utilize the different components of the
CytoCore Solutions System, including our drug delivery system and slide-based tests. If internal
efforts do not generate sufficient product candidates, we will need to identify third parties that
wish to collaborate with us to develop new products and applications. Our ability to successfully
pursue third-party relationships will depend in part on our ability to negotiate acceptable license
and related agreements. Even if we are successful in establishing collaborative arrangements, they
may never result in the successful development or commercialization of any product candidate or the
generation of any sales or royalty revenues.
16
In addition, the markets for our products and services are characterized by rapid
technological developments and innovations. Our success will depend in large part on our ability
to correctly identify emerging trends, enhance capabilities, and develop and manufacture new
products quickly, in a cost-effective manner, and at competitive prices. The development of new and
enhanced products is a complex and costly process. We may need to make substantial capital
expenditures and incur significant research and development costs to develop and introduce such new
products and enhancements. Our choices for developing products may prove incorrect if customers do
not adopt the products we develop or if the products ultimately prove to be medically or
commercially unviable. Development schedules also may be adversely affected as the result of the
discovery of performance problems. If we fail to timely develop and introduce competitive new
products, our business, financial condition and results of operations would be adversely affected.
Our products are subject to government regulation and they may not receive necessary
government approvals.
The development, manufacture, sale and use of our products in the United States is subject to
extensive regulation, by the FDA as well as other governmental agencies at both the federal and
state level. We must meet significant FDA requirements before we receive clearance to market our
products. Included in these FDA requirements may be the performance of lengthy and expensive
clinical trials to prove the safety and efficacy of the products. We have limited experience in
conducting and maintaining the preclinical and clinical trials necessary for regulatory approval,
and face the risk that results in later trials may be inconsistent with results from earlier
trials. A number of companies have suffered significant setbacks in advanced clinical trials, even
after promising early trial results.
Delays in receiving governmental approvals can be costly in terms of lost sales opportunities
and increased clinical trial costs. The speed with which we complete such trials and receive
approval will depend on several factors, many of which are beyond our control, including but not
limited to, the rate of patient enrollment and retention, negative tests results, analysis of data
obtained from testing activities and changes in regulatory policies. The FDA is in the early
stages of a system level review that is widely expected to result in significant changes in the way
that medical devices are regulated in the United States. Similarly, the European Union is in the
later stages of revising the directives that apply to the regulation of medical devices in the EU,
and other countries, particularly in Asia, are undertaking similar efforts.
In 2008, we successfully completed a clinical trial for the SoftPAP collector and received
both FDA clearance to market this device in the United States and the CE Mark that is required to
market SoftPAP in the European Union. Future products will require additional clinical trials and
filings for regulatory approval to market in the United States, European Union, and other
jurisdictions. We cannot be certain that the results of these future trials will result in
regulatory approval to market these products, or that approval, if granted, will not be limited to
specific indications for use or product claims. Obtaining regulatory approval is expensive,
time-consuming and uncertain, and is expected to become even more so as a consequence of
legislative and regulatory changes and initiatives that have recently been initiated in the United
States, European Union and other jurisdictions.
Sales of medical devices and diagnostic tests outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to obtain regulatory
clearance in a foreign country may be longer or shorter than that required for FDA marketing
clearance. Export sales of certain devices that have not received FDA marketing clearance may be
subject to regulations and permits, which may restrict our ability to export the products to
foreign markets. If we are unable to obtain FDA clearance for our products, we may need to seek
foreign manufacturing agreements to be able to produce and deliver our products to foreign markets.
We cannot be certain that we will be able to secure such foreign manufacturing agreements on
acceptable terms, if at all.
Once a product gains regulatory approval, whether in the United States or abroad, the product
remains subject to regulatory requirements, including adverse event reporting. Failure to comply
with post-approval requirements can, among other things, result in warning letters, recalls, fines,
injunctions and suspensions or revocations of marketing licenses. Any enforcement action, even if
unsuccessful, would be time-consuming, expensive, and potentially damaging to our reputation.
Finally, we may be restricted or prohibited from marketing or manufacturing a product, even
after obtaining product approval, if any unknown problems arise with respect to the product, its
use or manufacture. With the widespread use of any product or device, serious adverse events may
occur. Any safety issues could cause us to suspend or cease marketing our approved products,
possibly subject us to substantial liabilities, and adversely affect our ability to generate
revenues.
17
Changes in third-party reimbursement may negatively affect us.
Widespread adoption and commercial acceptance of our SoftPAP device and the CytoCore Solutions
System in the United States and other countries is in part dependent upon the ability of healthcare
providers and laboratories to secure adequate reimbursement from third-party payers such as private
insurance plans, managed care organizations, Medicare and Medicaid, and foreign governmental
healthcare agencies. We cannot guarantee that third parties will add our products to the coverage
and that reimbursement will in fact be provided, that it will continue to be available, or that
reimbursement levels will be adequate to enable healthcare providers and laboratories in the United
States and other countries to use our products instead of conventional methods or existing
therapies.
Reimbursement and healthcare payment systems in international markets vary significantly by
country and include both government-sponsored healthcare and private insurance. There can be no
assurance that foreign third-party payers will provide or continue to provide coverage, which
third-party reimbursement will be made available at adequate levels, if at all, for our products
under any such foreign reimbursement system or that healthcare providers or clinical laboratories
will use our products in lieu of other methods. We also will be required to secure adequate
reimbursement for any new products we develop or acquire, and we may not be able to do so
successfully.
Our international operations expose us to additional risks.
We expect that international sales will account for a significant portion of our future
revenues in and believe international sales are a key element to our future success. As a result,
we may be subject to the risks of doing business internationally, including:
|
|
|
imposition of tariffs or embargoes, |
|
|
|
|
trade barriers and disputes, |
|
|
|
|
regulations related to customs and export/import matters, |
|
|
|
|
fluctuations in foreign economies and currency exchange rates, |
|
|
|
|
longer payment cycles and difficulties in collecting accounts receivable, |
|
|
|
|
the complexity and necessity of using foreign representatives and consultants, |
|
|
|
|
tax uncertainties and unanticipated tax costs due to foreign taxing regimes, |
|
|
|
|
the difficulty of managing and operating an enterprise spanning several
countries, including difficulties in maintaining effective communications with
employees and customers due to distance, language and cultural barriers, |
|
|
|
|
the uncertainty of protection for intellectual property rights and differing
legal systems generally, |
|
|
|
|
compliance with a variety of laws, and |
|
|
|
|
economic and geopolitical developments and conditions, including international
hostilities, armed conflicts, acts of terrorism and governmental reactions,
inflation, trade relationships and military and political alliances. |
We may not be able to compete with companies that are larger and have more resources.
We compete in the highly competitive medical device and diagnostics marketplace and have
several U.S. and foreign competitors, both publicly-traded and privately-held. Most of these
companies have substantially greater financial, technical and research and development resources,
established sales and marketing organizations and distribution networks, greater name recognition
and longer-standing relationships with customers. Competitors with greater financial resources can
be more aggressive in marketing campaigns, can survive sustained price reductions in order to gain
market share, and can devote greater resources to support existing products and develop new
products. Any period of sustained price reductions for our products would have a material adverse
effect on the Companys financial condition and results of operations. We may not be able to
compete successfully in the future and competitive pressures may result in price reductions, loss
of market share or otherwise have a material adverse effect on our financial condition and results
of operations.
18
It is also possible that competing products will emerge that may be superior in quality,
effectiveness and performance and/or less expensive than our products, or that similar technologies
may render our products obsolete or uncompetitive and prevent us from achieving or sustaining
profitable operations. In addition, many of our competitors have significantly greater experience
in conducting preclinical testing and clinical trials of products and obtaining regulatory
approvals to market such products. Accordingly, our competitors may succeed in obtaining FDA
approval for products more rapidly, which may give them an advantage in achieving market acceptance
of their products.
We may not be able to market our products.
Our success and growth depend on the market acceptance of the SoftPAP collection device and
the CytoCore Solutions System. We do not intend to maintain a direct sales force to market and
sell our products. Therefore, in order to successfully market and sell our products, we must be
able to negotiate profitable distribution, marketing and sales agreements with organizations that
have direct sales forces calling on domestic and foreign market participants that may use our
products. We would not have the ability to control any such third party distributors and such
third parties may focus resources on other products that generate larger fees or commissions for
them. If we are not able to negotiate such agreements on terms acceptable to us, if at all, we may
be forced to market our products through our own sales force. We cannot be certain that we will be
successful in developing and training such a sales force, should one be required, or that we will
have the financial resources to carry out such development and training.
The accuracy, performance and cost of our products are critical to our business and
reputation, and we are subject to product liability.
As noted above, we are dependent on the sale of the SoftPAP collection device and the CytoCore
Solutions System. Due in part to increased competitive pressures in the healthcare industry to
reduce costs, our ability to gain market acceptance of our products will depend on our ability to
keep product costs low and/or demonstrate that any increased cost of using our products is offset
by the increased accuracy and performance achieved by using them. In particular, we need to
convince healthcare providers, insurance companies and other third-party payers, as well as
clinical laboratories, of the clinical benefits and cost-effectiveness of our products.
In addition, the sale and use of our products entail a risk of product failure, product
liability or other claims. Coverage is becoming increasingly expensive, and we may not be able to
obtain adequate coverage at an acceptable cost in the future. Any product liability claims and
related litigation would likely be time-consuming and expensive, may not be adequately covered by
our insurance coverage, and may delay or terminate research and development efforts, regulatory
approvals and commercialization activities.
Occasionally, some of our products may have quality issues resulting from the design or
manufacture of the product or, in the case of the AIPS platform, the hardware and software used in
the product. Often these issues can be discovered prior to shipment and may result in shipping
delays or even cancellation of orders by customers. Other times problems could be discovered after
the products have shipped, which would require us to resolve issues in a manner that is timely and
least disruptive to our customers. Such pre-shipment and post-shipment problems would have
ramifications for CytoCore, including cancellation of orders, product returns, increased costs
associated with product repair or replacement, and a negative impact on our goodwill and
reputation.
We may not be able to adequately protect our intellectual property.
Our success in large part depends on our ability to maintain the proprietary nature of our
technologies, trade secrets and other proprietary information. To protect our intellectual
property and proprietary information, we rely primarily on patent, copyright, trademark and trade
secret laws, as well as internal procedures and contractual provisions. We hold a variety of
patents and trademarks and have applied for a number of additional patents and trademarks with the
U.S. Patent and Trademark Office and foreign patent authorities. We intend to file additional
patent and trademark applications as dictated by our research and development projects and business
interests. We cannot be certain that any of the currently pending patent or trademark
applications, or any of those which may be filed in the future, will be granted or that they will
provide any meaningful protection for our products or technologies or any competitive advantage.
In order to provide protection, patents and trademarks must be enforced, which is costly and
time-consuming, and trade secret and copyright
19
laws afford only limited protection. In addition, the laws and enforcement mechanisms of some
foreign countries may not offer the same level of protection as do the laws of the United States.
Legal protections of our rights may be ineffective in such countries, and technologies developed in
such countries may not be protected in jurisdictions where protection is ordinarily available. Our
inability to protect our intellectual property both in the United States and abroad would have a
material adverse effect on our financial condition and results of operations.
We protect much of our core technology as trade secrets because our management believes that
patent protection would not be possible or would be less effective than maintaining secrecy, and we
have in place certain internal procedures and contractual provisions designed to maintain such
secrecy. Despite our efforts to safeguard and maintain our proprietary rights, we may not be
successful in doing so. The steps taken by us may be inadequate to deter unauthorized parties from
misappropriating our technologies or prevent them from obtaining and using our proprietary
information, products and technologies. Moreover, our competitors may independently develop similar
technologies or design around patents issued to us.
If we fail to protect, defend and maintain the intellectual property rights associated with
our products or if we are subject to a third-party claim of infringement, the competitive position
of our products could be impaired. We may be required to obtain licenses from third parties to
avoid infringing third-party patents or other proprietary rights, yet there can be no assurance
that such licenses would be available to us on acceptable terms, if at all. If we are unable to
obtain required third-party licenses, we may be delayed in or prohibited from developing,
manufacturing or selling products that require such licenses. In addition, infringement,
interference and other intellectual property claims and proceedings, with or without merit, are
expensive and time-consuming to litigate, divert resources, and could adversely affect our
business, financial condition and operating results.
We may not be able to maintain effective product distribution channels.
We currently rely primarily on third-party distributors for the sale and distribution of our
products. Our relationships with these distributors, therefore, must remain positive. We have a
limited a history of working with these companies and have only limited control over their
performance. We cannot predict the success of these relationships or the efforts of these
companies in marketing the SoftPAP and our other products. Our sales and marketing efforts,
including those of our distributors, may not be sufficient to successfully compete against more
extensive and well-funded operations of certain of our competitors. Only one of our existing
distributors purchased any product from us in 2010. In addition, we must manage sales and marketing
personnel in numerous countries around the world with the concomitant difficulties in maintaining
effective communications due to distance, language and cultural barriers.
Our quarterly operating results may fluctuate and our future revenues and profitability are
uncertain.
We anticipate substantial fluctuations in our future operating results. A number of factors
contribute to such fluctuations, including but not limited to:
|
|
|
introduction and market acceptance of new products and product enhancements by
both us and our competitors, |
|
|
|
|
timing and execution of distribution and sale contracts, |
|
|
|
|
competitive conditions in the medical device and diagnostic markets, |
|
|
|
|
product development, sales and marketing expenses, |
|
|
|
|
third-party reimbursement levels, and |
|
|
|
|
changes in general economic conditions. |
The loss of existing key management and technical personnel or the inability to attract new
hires could have a detrimental effect on the Company.
Our success depends on identifying, hiring, training, and retaining qualified professionals.
Competition for qualified employees in our industry is intense and we expect this to remain so for
the foreseeable future. If we were unable to attract and hire a sufficient number of employees, or if a significant number of our current employees
or any of our senior managers resign, we may be unable to complete or maintain existing projects or
develop and implement new projects of similar scope
20
and revenue. Our success is particularly dependent on the retention of existing management and
technical personnel, including Robert F. McCullough, Jr., our Chief Executive Officer and Chief
Financial Officer, and Richard A. Domanik, Ph.D., our Chief Operating Officer. We do not have an
employment with either of our executive officers and do no maintain a key man life insurance policy
on any of our executive officers. The loss or unavailability of the services of these executives
could impede our ability to effectively manage our operations.
We may need to expand our operations and we may not effectively manage any future growth.
As of December 31, 2010, we employed six full-time persons. In the event our products and
services obtain greater market acceptance, we may be required to expand our management team and
hire and train additional technical and skilled personnel. We may need to scale up our operations
in order to service our customers, which may strain our resources, and we may be unable to manage
our growth effectively. If our systems, procedures, and controls are inadequate to support our
operations, growth could be delayed or halted, and we could lose our opportunity to gain
significant market share. In order to achieve and manage growth effectively, we must continue to
improve and expand our operational and financial management capabilities. Any inability to manage
growth effectively could have a material adverse effect on our business, results of operations, and
financial condition.
Risks Related to Our Common Stock
Trading in our common stock has been limited, there is no significant trading market for our
common stock, and purchasers of our common stock may be unable to sell their shares.
Our common stock is currently eligible for quotation on the OTC Bulletin Board, however
trading to date has been limited. If activity in the market for shares of our common stock does
not increase, purchasers of our shares may find it difficult to sell their shares. We currently do
not meet the initial listing criteria for any registered securities exchange or the Nasdaq Stock
Market. The OTC Bulletin Board is a less recognized market than the foregoing exchanges and is
often characterized by low trading volume and significant price fluctuations. These and other
factors may further impair our stockholders ability to sell their shares when they want to and/or
could depress our stock price. As a result, stockholders may find it difficult to dispose of, or to
obtain accurate quotations of the price of, our securities because smaller quantities of shares
could be bought and sold, transactions could be delayed and security analyst and news coverage of
our Company may be limited. These factors could result in lower prices and larger spreads in the
bid and ask prices for our shares of common stock.
The historically volatile market price of our common stock may affect the value of our
stockholders investments.
The market price of our common stock has in the past been highly volatile. In fiscal years
2010 and 2009, the price of our common stock traded in a range of $0.01 to $0.84. This volatility
is likely to continue for the foreseeable future. Factors affecting potential volatility include:
|
|
|
announcements of new products or technology by us or our competitors; |
|
|
|
|
announcements of the FDA relating to products and product approvals; |
|
|
|
|
announcements of private or public sales of securities; |
|
|
|
|
ability to finance our operations; |
|
|
|
|
announcements of mergers, acquisitions, licenses and strategic agreements; |
|
|
|
|
fluctuations in operating results; and |
|
|
|
|
general economic and other external market factors. |
In addition, the occurrence of any of the risks described in this Risk Factors section could have a
material adverse impact on the price of our common stock.
21
We have never been paid dividends on our common stock and do not anticipate paying dividends
in the foreseeable future.
We have never declared or paid a cash dividend or distribution on our common stock and we do
not anticipate doing so for the foreseeable future. Our ability to declare dividends on our common
stock is further limited by the terms of certain of our other securities, including several series
of our preferred stock. We intend to reinvest any funds that might otherwise be available for the
payment of dividends in the further development of our business. Accordingly, investors seeking
cash dividends should not purchase our shares.
There are currently outstanding a substantial number of securities convertible into shares of
our common stock and we intend to raise additional funds in the future through issuances of shares
of common stock or securities convertible into shares of our common stock which will be dilutive to
existing shareholders or impose operational restrictions.
We are authorized to issue up to 10,000,000 shares of preferred stock. As of December 31,
2010, we had 47,250 shares of Series A convertible preferred stock outstanding, which convert into
approximately 2,064 shares of our common stock; 93,750 shares of Series B convertible preferred
stock outstanding, which convert into approximately 37,500 shares of our common stock; 38,333
shares of Series C convertible preferred stock outstanding, which convert into approximately 19,167
shares of our common stock; 175,000 shares of Series D convertible preferred stock outstanding,
which convert into approximately 175,000 shares of our common stock; and 19,222 shares of Series E
convertible preferred stock outstanding, which convert into approximately 52,861 shares of our
common stock. There are cumulative dividends due on the Series B, Series C, Series D, and Series E
convertible preferred stock, which may be paid in kind in shares of our common stock. Our
Certificate of Incorporation permits our Board of Directors to issue the remaining 5,143,137
undesignated shares of preferred stock with such voting rights, if any, designations, rights,
preferences and limitations as the Board may determine. At December 31, 2010, we had outstanding
warrants to purchase an aggregate 4,084,709 shares of our common stock and outstanding options to
purchase 10,000 shares of our common stock. The issuance of shares of our common stock upon the
conversion of our preferred stock, or upon exercise of outstanding options and warrants, would
cause dilution of existing stockholders percentage ownership of the Company. Holders of our
common stock do not have preemptive rights, meaning that current stockholders do not have the right
to purchase any new shares in order to maintain their proportionate ownership in the Company. Such
stock issuances and the resulting dilution could also adversely affect the price of our common
stock.
In addition, we intend to raise additional capital in the future to fund our operations
through sales of shares of our common stock or securities convertible into shares of our common
stock, as well as issuances of debt. Such additional financing will be dilutive to our
shareholders, and debt financing, if available, may involve restrictive covenants which may limit
our operating flexibility. If additional capital is raised through the issuances of shares of our
common stock or securities convertible into shares of our common stock, the percentage ownership of
existing shareholders will be reduced. These shareholders may experience additional dilution in
net book value per share and any additional equity securities may have rights, preferences and
privileges senior to those of the holders of our common stock.
Applicable SEC rules governing the trading of penny stocks may limit the trading and
liquidity of our common stock which may affect the trading price of our common stock.
Our common stock is a penny stock as defined under Rule 3a51-1 of the Exchange Act, and is,
therefore, subject to SEC rules and regulations that impose limitations upon the manner in which
our common stock can be publicly traded. Penny stocks generally are equity securities with a per
share price of less than $5.00 (other than securities registered on some national securities
exchanges or quoted on NASDAQ). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker-dealer also must provide the customer with current bid and
offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in
the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealers presumed control over the market, and monthly account
statements showing the market value of each penny stock held in the customers account. In
addition, broker-dealers who sell these securities to persons other than established customers and
accredited investors must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchasers written agreement to the transaction.
Consequently, these
22
requirements may have the effect of reducing the level of trading activity, if any, of our
common stock and reducing the liquidity of an investment in our common stock.
Provisions of our certificate of incorporation, bylaws and Delaware law may make a contested
takeover of our Company more difficult.
Certain provisions of our certificate of incorporation, bylaws and the General Corporation Law of
the State of Delaware (DGCL) could deter a change in our management or render more difficult an
attempt to obtain control of us, even if such a proposal is favored by a majority of our
stockholders. For example, we are subject to the provisions of the DGCL that prohibit a public
Delaware corporation from engaging in a broad range of business combinations with a person who,
together with affiliates and associates, owns 15% or more of the corporations outstanding voting
shares (an interested stockholder) for three years after the person became an interested
stockholder, unless the business combination is approved in a prescribed manner. Our certificate
of incorporation also includes undesignated preferred stock, which may enable our board of
directors to discourage an attempt to obtain control of us by means of a tender offer, proxy
contest, merger or otherwise. Finally, we are currently authorized to issue 500 million shares of
common stock. Our Board of Directors has the authority to issue a significant number of shares of
our common stock without further stockholder approval. Each of the foregoing may have an
anti-takeover effect of delaying or preventing a change of control which may be beneficial to our
stockholders.
We occupy approximately 5,627 square feet of leased space at 414 N. Orleans St., Suites 503
and 510, Chicago, Illinois 60654, under a five-year lease that expires in October 2013. This space
houses our executive offices, research laboratory, and engineering development facilities. We
consider our facilities to be well utilized, well maintained, and in good operating condition.
Further, we consider the facilities to be suitable for their intended purposes and to have
capacities adequate to meet current and projected needs for our operations.
|
|
|
Item 3. |
|
Legal Proceedings |
MedPlast Elkhorn, Inc. In May 2009, MedPlast Elkhorn, Inc. (MedPlast) filed suit against us
in the Circuit Court, Walworth County, Wisconsin (Case No. 09 CV00721). MedPlast alleges that we
failed to pay for certain tools and materials used in the manufacturing of our products. MedPlast
is seeking payment of $377,000. We have answered the complaint and intend to vigorously defend
this matter.
SEC Civil Action. In January 2011, the Securities and Exchange Commission (SEC) filed a
civil injunction action against us, Daniel J. Burns, the former Chairman of our Board of Directors,
and Robert F. McCullough, Jr., Chairman of the Board, Chief Executive Officer and Chief Financial
Officer, in the United States District Court sitting in the Northern District of Illinois. The SEC
alleged that between 2003 and 2008, we paid compensation to unregistered broker/dealers and failed
to accurately report the beneficial ownership of certain of our officers and directors in our SEC
filings. In February, 2011, we consented to the entry of a final judgment which permanently
restrains and enjoins us from violating Section 14(a) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), Section 15(a) of the Exchange Act, and from aiding and abetting
others in such violations. In connection with the foregoing settlement, we agreed that for a
period of at least two years we will establish and comply with internal policies and procedures
designed to prevent us from future violations of certain federal securities laws.
|
|
|
Item 4. |
|
Removed and Reserved. |
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities |
Market Information
23
Our common stock is quoted on the Over-the-Counter Bulletin Board (the OTCBB) under the
symbol CYOE.OB. The following table lists the high and low bid information for our common stock
for the periods indicated, as reported on the OTCBB. These quotations reflect inter-dealer prices,
may not include retail mark-ups, mark-downs, or commissions, and may not reflect actual
transactions.
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
Year Ended December 31, 2010 |
|
|
|
|
|
|
|
|
1st Quarter |
|
$ |
.20 |
|
|
$ |
.05 |
|
2nd Quarter |
|
$ |
.22 |
|
|
$ |
.11 |
|
3rd Quarter |
|
$ |
.15 |
|
|
$ |
.025 |
|
4th Quarter |
|
$ |
.085 |
|
|
$ |
.019 |
|
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
1st Quarter |
|
$ |
0.84 |
|
|
$ |
0.34 |
|
2nd Quarter |
|
$ |
0.47 |
|
|
$ |
0.25 |
|
3rd Quarter |
|
$ |
0.33 |
|
|
$ |
0.08 |
|
4th Quarter |
|
$ |
0.30 |
|
|
$ |
0.05 |
|
Holders
As of April 4, 2011, we had approximately 407 record holders of shares of our common stock.
Dividends
We have not paid a cash dividend on shares of our common stock, and our Board of Directors is
not contemplating paying dividends at any time in the foreseeable future. The terms of certain of
our securities, including our Series B, C, D and E preferred stock, prohibit us from declaring any
dividends on our common stock (or any other stock junior to such security) except for dividends
payable in shares of stock of the Company of any class junior to such security, or redeem or
purchase or permit any subsidiary to purchase any shares of common stock or such junior stock, or
make any distributions of cash or property among the holders of the common stock or any junior
stock by the reduction of capital stock or otherwise, if any dividends on the security are then in
arrears.
We paid non-cash dividends, in the form of newly issued shares of our common stock, amounting
to $7.00 during 2009 to holders of shares of our preferred stock who elected to convert such shares
and cumulative dividends due thereon, into shares of our common stock. There were no conversions in
2010. We have a contingent obligation to pay cumulative dividends on various series of our
convertible preferred stock in the aggregate amount of approximately $2,471,100 at December 31,
2010, which we intend to pay through the issuance of shares of our common stock, if and when the
holders of the preferred shares elect to convert their shares into common stock.
Stock Transfer Agent
Our stock transfer agent is BNY Mellon Investor Services, 480 Washington Boulevard, Jersey
City, NJ 07310 and its telephone number is (800) 522-6645.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2010, we issued 833,333 shares of restricted common
stock and three year warrants to purchase 416,667 shares of common stock at an exercise price of
$0.06 per share to a limited number of accredited investors in consideration of gross cash proceeds
of $50,000.
During the quarter ended December 31, 2010, we issued 350,000 shares of common stock to a
non-executive employee in consideration of services rendered.
24
During the quarter ended December 31, 2010, a holder of a promissory note converted $19,500 of
principal into 1,060,626 shares of common stock at a conversion price of approximately $0.018 per
share.
During the quarter ended December 31, 2010, we issued three year warrants to a non-executive
employee to purchase 2,000 shares of common stock at an exercise price of $0.03 per share in
consideration of services rendered.
We issued the foregoing securities in reliance on the safe harbor and exemptions from
registration provided by Section 4(2) of the Securities Act of 1933, as amended, for sales to a
limited number of accredited investors, employees, service providers, or creditors with whom we had
prior relationships, without engaging in any general solicitation, and without payment of
underwriter discounts or commissions to any person.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are developing an integrated family of cost-effective products for the detection, diagnosis
and treatment of cancer under the trade name of CytoCore Solutions®. CytoCore Solutions products
are intended to address sample collection, specimen preparation, specimen evaluation (including
detection/screening and diagnosis), treatment and patient monitoring within vertical markets
related to specific cancers. Current CytoCore Solutions products are focused upon cervical cancer.
We plan that this focus will later be expanded to include other gynecological cancers as well as
bladder, lung, and breast cancers, among others. Within each of these markets, we anticipate that
the CytoCore Solutions products will be sold as individual value-added drop-in replacements for
existing products and as integrated systems that improve the efficiency and effectiveness of
clinical and laboratory operations.
The science of medical diagnostics has advanced significantly during the past decade. Much of
this advance has come as a result of new knowledge of the human genome and related proteins, which
form the foundation of cell biology and the functioning of the human body. Our goal is to utilize
this research as a base to develop screening and diagnostic testing products for cancer and
cancer-related diseases. We believe that the success of these products will improve patient care
through more accurate test performance, wider product availability and more cost-effective service
delivery. We have developed an FDA-cleared sample collection device and are developing and testing
stains and reagents for use with the AIPS system to screen for various cancers.
Our strategy is to develop products through internal development processes, strategic
partnerships, licenses and acquisitions. This strategy has required and will continue to require
additional capital. As a result, we will incur substantial operating losses until we are able to
successfully market some, or all, of our products.
We launched sales of the SoftPAP® cervical cell collector in the fourth quarter of fiscal
2007. We believe the revenues from this device along with additional capital will allow us to
complete the development of the other components of the CytoCore Solutions System, including the
AIPS Workstation, AIPS Imager, and genetic biological markers used for the development of the
various protein antibodies that allow for the detection of abnormal cervical, uterine, endometrial
and bladder cancer cells.
Outlook
We have incurred significant operating losses since its inception. Management expects that
significant on-going operating expenditures will be necessary to successfully implement our
business plan and to develop, manufacture and market its products. Implementation of our plans will
be contingent upon securing substantial additional financing. During the year ended December 31,
2010, we raised approximately $1.2 million through the sale of common stock, proceeds from the
issuance of convertible debt, and advances from related parties. In order to successfully
implement our business plan, we will have to obtain additional capital. If we are unable to obtain
additional capital or generate profitable sales revenues, we may be required to curtail product
development and other activities and in the extreme case, cease operations. No assurances can be
given about our ability to obtain capital. The consolidated financial statements presented herein
do not include any adjustments that might result from the outcome of this uncertainty.
25
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of consolidated 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 periods. Actual results could differ from those estimates.
We believe that the following critical accounting policies affect our more significant
estimates and judgments used in the preparation of our consolidated financial statements:
Management believes that it is reasonably possible that the following material estimates
affecting the financial statements could significantly change in the coming year: (1) estimates
concerning the method of depreciation or the useful life of the equipment used in the production of
SoftPAP collection kits, (2) estimates as to the valuation allowance for the amounts recorded and
held as inventory of goods and property and equipment and,(3) estimates of possible litigation
losses.
Results of Operations
Fiscal Year Ended December 31, 2010 as compared to Fiscal Year Ended December 31, 2009
Revenue
Revenues of $30,000 for the fiscal year ended December 31, 2010 represented a decrease of
$14,000, or 32%, from revenues of $44,000 in fiscal 2009. The decrease was a result of decreased
sales of our SoftPAP cervical cell collector totaling $3,000, a reduction in service revenue of
$1,000, and a reduction in licensing fees of $10,000.
Costs and Expenses
Cost of Revenues
Cost of revenues represents the cost of the product sold, freight, and other costs of selling
our products. For the year ended December 31, 2010, cost of revenues totaled $1,000, a decrease of
$2,000 or 67% from cost of revenues of $3,000 for the year ended December 31, 2009.
Research and Development
Research and development expenses include industrial design and engineering covering the
disposable and instrument components of CytoCore Solutions System, payments to medical and
engineering consultants for advice related to the design and development of our products and their
potential uses in the medical technology marketplace, and payroll-related costs for in-house
engineering, scientific, laboratory, software development, and research management staff.
For the 2010 fiscal year, research and development expenses were $275,000 before a reduction
of $64,000 from a settlement with a former employee, resulting in a net expense of $211,000.
Expenses for 2009 were $372,000 before a reduction of $457,000 from a non-cash settlement with a
vendor, resulting in a net credit balance of $85,000. The expenses for the year ended December 31,
2010 were $275,000 representing a decrease of $97,000 or 26% from expenses of $372,000 in 2009. Of
the $97,000 decrease in R&D expenses, $6,000 related to reduced fees paid to medical consultants,
$86,000 related to reduced personnel costs after the $64,000 settlement with a former employee, and
$5,000 related to costs incurred for the ongoing improvement of the SoftPAP cervical collection
device,
Selling, General and Administrative
26
For the year ended December 31, 2010, selling, general and administrative expenses were
$1,669,000 after a reduction totaling $71,000 from a settlement with a vendor, representing a 45%
decrease from SG&A expenses of $3,022,000 for the year
ended December 31, 2009. Of this $1,353,000 decrease, $208,000 related to a reduction in employee
compensation expense, $494,000 in professional fees for legal and accounting services including a
$71,000 benefit from a settlement with a vendor, $34,000 relating to reduced investor and public
relations expenses, $42,000 relating to a reduction in marketing costs, $47,000 relating to reduced
travel expenses, $68,000 relating to insurance expense, $340,000 reduction in director fees,
$75,000 relating to a reduction in franchise taxes, $14,000 in computer expense, $17,000 in rent
expense, and $20,000 in printing costs. These reductions were partially offset by increases in
other costs totaling $6,000.
Other Income (Expense)
Interest expense increased by $147,000 to $181,000 for the year ended December 31, 2010 from
$34,000 in 2009. During 2010, CCI recorded a non-cash totaling $109,000 for interest on related
party advances.
During the year ended December 31, 2010, we recorded a non-cash benefit of $334,000 resulting
from the remeasurement of the derivative liability as described in Note 11 to the financial
statements and $55,000 from the amortization of debt discount.
We recorded a provision for valuation of certain fixed assets in the amount of $399,000for the
year ended December 31, 2010.
We recorded a non-cash charge of $222,000 for the year ended December 31, 2009 resulting from
a preliminary legal settlement that was settled in 2010.
We also recorded a provision for valuation of finished goods inventory totaling $400,000 for
the year ended December 31, 2009.
Net Loss
The net loss for the year ended December 31, 2010, totaled $2,097,000, as compared to
$3,552,000 for 2009, a decrease of $1,455,000 or 41%. Of this decrease, $1,353,000 related to
decreases in SG&A expenses, $2,000 represented a decrease from cost of revenues exceeding revenues,
$222,000 resulting from the cost of a legal settlement and $400,000 representing a reduction in the
provision for inventory valuation in 2009 and $334,000 resulting from the non-cash benefit derived
from the remeasurement of the derivative liability. These decreases were partially offset by an
increase of $296,000 related to R&D costs, an impairment charge to fixed assets totaling $399,000,
$147,000 relating to an increase in interest expense including a non-cash charge of $109,000 and
$14,000 related to a reduction in revenues.
The net loss applicable to common stockholders which reflects the unpaid and undeclared
preferred stock dividends from the period decreased to $2,363,000 for the year ended December 31,
2010 from $3,818,000 for the year ended December 31, 2009, a decrease of $1,450,000 or 38%. In
addition to the changes reported above, cumulative dividends on the Companys outstanding Series E
convertible preferred stock converted into common stock totaled $7.00 for the year ended December
31, 2009. There was no divided recorded in 2010. The net loss per common share for each of the
years ended December 31, 2010 and December 31, 2009 was $0.05 and $0.09, respectively, on
45,354,805 and 41,874,890 weighted average common shares outstanding, respectively.
Liquidity and Capital Resources
Our capital resources and liquidity needs have been met from sales of our debt and equity
securities to individual and institutional investors.
Research and development, clinical trials and other studies of the components of our CytoCore
Solutions System, conversions from designs and prototypes into product manufacturing, sales and
marketing efforts, medical consultants and advisors, and research, administrative, and executive
personnel are and will continue to be the principal basis for our cash requirements. We have
provided operating funds for the business since our inception through private offerings of debt and
27
equity securities to limited numbers of U.S. and foreign investors. We will be required to make
additional offerings in the future to support the operations of the business until we are able to
generate sufficient income from the sale of our products.
We used $1,121,000 and $1,637,000 during 2010 and 2009, respectively, to fund our operating
activities. We also used $36,000 and $71,000 in 2010 and 2009, respectively, for the purchase of a
license and of tooling and equipment.
At December 31, 2010 we had cash on hand of $13,000, as compared to 2009 where we had checks
issued in excess of cash on hand totaling $5,000. We were able to raise $1,170,000 of cash through
the sale of common stock, the issuance of convertible debt, and proceeds of advances from related
parties during the fiscal year ended December 31, 2010. This cash was used to fund operations,
including research and development activities, and the purchase of a license. We currently have
enough cash on hand to fund operations into April, 2011. We will need approximately $1,200,000 of
additional financing to continue to conduct operations at current levels over the next twelve
months. We continue to meet with qualified investors and although no assurance can be
given, we believe will be able to raise capital to fund operations in the immediate future until we can be
self-sufficient through operations, although no assurance can be given about our ability to obtain
such capital. We do not have any material commitments for capital expenditures.
Our operations have been, and will continue to be, dependent upon managements ability to
raise operating capital through the issuance and sale of debt and equity securities and advances
from certain of our affiliates. We have incurred significant operating losses since inception of
the business. We expect that significant on-going operating expenditures will be necessary to
successfully implement our business plan and develop, manufacture and market our products. If we
are unable to obtain adequate additional financing or generate profitable sales revenue, or
negotiate a favorable settlement plan with creditors, we may be unable to continue its product
development and other activities and may be forced to cease operations. The consolidated financial
statements presented do not include any adjustments that might result from the outcome of this
uncertainty.
Off-Balance Sheet Arrangements
As of December 31, 2010, we did not have any relationships with unconsolidated entities or
financial partners, such as entities often referred to as structured finance or special purpose
entities, established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such relationships.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements for the years ended December 31, 2010 and 2009, together
with the report of L J Soldinger Associates LLC dated April 5, 2011, and the notes thereto, are
filed as part of this Annual Report on Form 10-K commencing on page F-1 and are incorporated herein
by reference.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) was carried out by us under the
supervision and with the participation of our chief executive officer, who serves as our principal
executive officer and principal financial officer. Based upon that evaluation, our chief executive
officer concluded that as of December 31, 2010, our disclosure controls and procedures were
effective to ensure (i) that information we are required to disclose in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms and (ii) that such information is
accumulated and communicated to management, including our chief executive officer, in order to
allow timely decisions regarding required disclosure.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision
and with the participation of our management,
28
including our chief executive officer who serves as
our principal executive officer and principal financial officer, we conducted an assessment of the
effectiveness of our internal control over financial reporting. In making this assessment, we used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(''COSO) in Internal Control
Integrated Framework. Based on managements assessment based on the criteria of the COSO, we
concluded that, as of December 31, 2010, the Companys internal control over financial reporting is
effective at the reasonable assurance level.
Our internal control system was designed 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 in the U.S. Our internal control over
financial reporting 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 the assets of the Company; |
|
|
(ii) |
|
provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with accounting principles generally accepted in the
U.S., and that receipts and expenditures of the Company are being
made only in accordance with authorization of management and
directors of the Company; and |
|
|
(iii) |
|
provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
the Companys assets that could have a material effect on our
consolidated financial statements. |
This annual report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform
and Consumer Protection Act, which permits us to provide only managements report in this annual
report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth
fiscal quarter ended December 31, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B Other Information
None.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Board of Directors and Executive Officers
|
|
|
|
|
|
|
Name |
|
Age |
|
Positions with the Company |
Robert F. McCullough, Jr.
|
|
|
56 |
|
|
Chief Executive Officer, Chief
Financial Officer and Chairman of the
Board of Directors |
|
|
|
66 |
|
|
Director |
|
|
|
58 |
|
|
Director |
|
|
|
63 |
|
|
Director |
Richard A. Domanik, Ph.D.
|
|
|
64 |
|
|
Chief Operating Officer |
29
Board of Directors
We believe that our Board should be composed of individuals with sophistication and experience
in many substantive areas that impact our business. We believe that experience, qualifications, or
skills in the following areas are most important: accounting and finance; design, innovation and
engineering; strategic planning; human resources and development
practices; and board practices of other corporations. These areas are in addition to the personal
qualifications described in this section. We believe that all of our current Board members possess
the professional and personal qualifications necessary for board service, and have highlighted
particularly noteworthy attributes for each Board member in the individual biographies below. The
principal occupation and business experience, for at least the past five years, of each current
director is as follows:
Robert F. McCullough, Jr. was elected Chief Financial Officer and director of the Company in
September 2005 and Chief Executive Officer of the Company in October 2007. Mr. McCullough was
appointed to serve as Chairman of the Board of Directors on April 21, 2009. Since October 2003, Mr.
McCullough has also served as President and as a Portfolio Manager of Summitcrest Capital, Inc., a
money management firm and registered investment adviser, which is a holder of approximately 4.9% of
our issued and outstanding common stock. From April 1999 to July 2003, Mr. McCullough served as a
Portfolio Manager at Presidio Management, a money management firm. Prior to this, Mr. McCullough
served as a manager with the accounting firm of Ernst & Whinney (now Ernst & Young) and also served
as a financial analyst, a portfolio manager and a Chief Financial Officer of several private
companies. Mr. McCullough has a Masters of Business Administration in finance and is a Certified
Public Accountant. Mr. McCullough possesses particular knowledge and experience in accounting and
finance, organizational leadership and strategic planning that strengthen the Boards collective
qualifications, skills, and experience. In a civil action brought by the SEC in January 2011, the
SEC alleged that Mr. McCullough failed to report transactions in Company securities, failed to
accurately report his beneficial ownership of Company securities in our proxy statement, and aided
and abetted us in violating Section 15(a) of the Exchange Act. In February 2011, Mr. McCullough
consented to the entry of a final judgment pursuant to which he was permanently restrained and
enjoined from violating Section 14(a) of the Exchange Act, Section 16(a) of the Exchange Act, and
from aiding and abetting violations of Section 15(a) of the Exchange Act and paid a civil penalty
in the amount of $100,000.
John H. Abeles, M.D. has been a director of the Company since May 1999. Dr. Abeles is
President of MedVest, Inc., a venture capital and consulting firm he founded in 1980. He is also
General Partner of Northlea Partners, Ltd., a family investment partnership. Dr. Abeles previously
served as a senior medical executive at Sterling Drug Company, Pfizer, Inc. and Revlon Healthcare,
Inc. and subsequently was a medical analyst at Kidder, Peabody & Co. Dr. Abeles is a director of a
number of companies operating in the medical device and healthcare fields, including
publicly-traded companies DUSA Pharmaceuticals, Inc. and CombiMatrix Corp. Dr. Abeles has also
served as a director of I-Flow Corporation (now a subsidiary of Kimberly Clark Corporation) and
Oryx Technology Corp. Dr. Abeles possesses particular knowledge and experience in medical
education, venture capital and finance, and the pharmaceutical industry that strengthen the Boards
collective qualifications, skills, and experience.
Alexander M. Milley has been a director of the Company since 1989. Mr. Milley is currently
President, Chief Executive Officer and Chairman of the Board of ELXSI Corp., a publicly-held
holding company with subsidiaries operating in the restaurant and environmental inspection
equipment industries. Mr. Milley has served as Chairman and CEO of ELXSI since September 1989, and
was elected President of that company in August 1990. He is also President and Chairman of the
Board of Azimuth Corporation, a holding company with subsidiaries operating in the trade show
exhibit, retail environment design, and electrical components and fastener distribution industries.
From 1988 until 2004, Mr. Milley served as a director and Vice President of Contempo Design, Inc.,
a designer and manufacturer of trade show exhibits. Contempo Design, Inc. filed a petition a
petition under Chapter 11 of the federal Bankruptcy Code in 2004. Mr. Milley was Chairman of the
Board and Chief Executive Officer of Bell National Corporation, our predecessor, until December
1998 and was President of Bell National from August 1990 until December 1998. Mr. Milley is the
founder, President, sole director and majority stockholder of Milley Management, Inc., a private
investment and management-consulting firm. Mr. Milley is also a director and executive officer of
Cadmus Corporation, a private investment and management consulting firm, and Winchester National,
Inc., an investmet holding company. Mr. Milley possesses particular knowledge and experience in
finance, management, marketing and public company governance that strengthen the Boards collective
qualifications, skills, and experience.
30
Clinton H. Severson was elected to the Board of Directors in November 2006. Mr. Severson has
served as President, Chief Executive Officer and a director of the Board of Directors of Abaxis,
Inc., a northern California-based provider of portable technology, tools and services used for
medical diagnostics sold to customers and distributors worldwide, since 1996. Prior to his assuming
the CEO position of Abaxis, where he was appointed Chairman of the Board in 1998, Mr. Severson
served as President and CEO for over seven years at MAST Immunosystems, Inc., a privately-held
medical
diagnostic company. Mr. Severson possesses particular knowledge and experience in international
business, management and finance that strengthen the Boards collective qualifications, skills, and
experience.
Executive Officer
Richard A. Domanik, Ph.D. has been our Chief Operating Officer since October 2007. From May
2007 until August 2008, he also served as our President. Since 2001, Dr. Domanik has been the
principal at R. Domanik Consulting, Inc., a consulting firm specializing in the development and
manufacture of medical and clinical diagnostic devices and instruments and intellectual property
management. Between 2002 and 2006, Dr. Domanik served as Director of Technology Development of
ZelleRX Corporation, a biotechnology start-up in the field of cellular therapeutics for the
treatment of cancer. Dr. Domanik also served as Director of Technology of Xomix, Ltd., a
biotechnology consulting company, between 2001 and 2007. From 1999 to 2001, Dr. Domanik served as
our Chief Technology Officer and Vice President-Technology. He also served as Chief Technology
Officer and Vice President of AccuMed International, which we acquired in 2001, from 1994 to 1999.
Prior to his work with CytoCore and its subsidiaries, Dr. Domanik worked for over 15 years at
Abbott Laboratories where he held several positions, including Laboratory Manager and Senior
Systems Engineer. Dr. Domanik is intimately familiar with both the products offered by us as well
as our industry. Dr. Domanik has a long history of working with us and also has provided
consulting services to assist other entities with the design, development and manufacture of
medical devices. He also has extensive technology and intellectual property experience, all of
which contribute to his effective management of the Company as its Chief Operating Officer.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors, and holders
of more than 10% of the outstanding shares of our common stock, to file initial reports of
ownership and reports of changes in ownership with the Commission. They are also required to
furnish us with copies of all Section 16(a) forms that they file with the SEC. Based solely on our
review of copies of such forms received by us and/or any written representations from such persons
that no other reports were required with respect to 2010, we believe that all Section 16(a) filing
requirements were satisfied in a timely fashion during our fiscal year ended December 31, 2010,
except that Mr. McCullough failed to file Form 4s in connection with certain sales of Company
securities.
Code of Ethics
We have adopted our Code of Ethics and Business Conduct for Officers, Directors and Employees
that applies to all of our officers, directors and employees, including our principal executive
officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions. We filed the code as an exhibit to our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2003, as filed with the Commission on April 14, 2004. The
Code of Ethics is also available on our website at www.cytocoreinc.com.
Board of Directors and Committee Information
Our Board has determined that Dr. Abeles and Messrs. Milley and Severson are independent as
set forth in the rules and regulations of The Nasdaq Stock Market, including Rule 5605, and Rule
10A-3 of the Exchange Act. The Company does not utilize any other definition or criteria for
determining the independence of a director or nominee, and no other transactions, relationships, or
other arrangements exist to the Boards knowledge or were considered by the Board, other than as
may be discussed herein, in determining an individuals independence.
The Board of Directors currently has three standing committees the Audit Committee, the
Compensation Committee and the Nominating and Corporate Governance Committee. The Compensation
Committee and Nominating and Corporate Governance Committees were established by the Board in 2008.
31
Audit Committee
The Audit Committee currently consists of Mr. Milley (Chairman), Dr. Abeles and Mr. Severson,
each of whom is independent under applicable independence requirements. The Board of Directors has
determined that Mr. Milley qualifies
as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K
promulgated under the Exchange Act.
The Audit Committee acts pursuant to a written charter, which charter authorizes the
committees overview of the financial operations and management of the Company, including a
required review process for all quarterly, annual, and special filings with the Commission, review
of the adequacy and efficacy of the accounting and financial controls of the Company as well as the
quality of accounting principles and financial disclosure practices, and communications with the
Companys independent registered public accounting firm and members of financial management. A
copy of the Audit Committees charter was filed as an appendix to the Companys definitive proxy
statement for its 2007 annual stockholders meeting, as filed with the SEC on May 15, 2007, and is
available on our website. The Audit Committee met four times in 2010.
Stockholder Nominations
There were no material changes to the procedures by which stockholders may recommend nominees
to our board of directors during the 2010 fiscal year.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth the compensation earned by the Companys principal executive
officer, and each of the Companys two most highly compensated executive officers other than the
principal executive officer whose compensation exceeded $100,000 (collectively, the Named
Executive Officers), during the years ended December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
|
|
|
Name |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
and |
|
|
|
|
|
Salary |
|
|
Compensation |
|
|
Total |
|
Principal Position |
|
Year |
|
|
($) |
|
|
($) |
|
|
($) |
|
Robert F.
McCullough, Jr. (1)
CEO, CFO and
Chairman of the
Board |
|
|
2010 |
|
|
$ |
45,000 |
(2) |
|
|
|
|
|
$ |
45,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
$ |
180,000 |
(2) |
|
$ |
15,000 |
(3) |
|
$ |
180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard A. Domanik,
Ph.D. (4)
COO |
|
|
2010 |
|
|
$ |
150,000 |
(5) |
|
|
|
|
|
$ |
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
$ |
150,000 |
(5) |
|
|
|
|
|
$ |
150,000 |
|
|
|
|
(1) |
|
Mr. McCullough has served as our Chief Executive Officer since October 2007 and as our
Chief Financial Officer since September 2005. |
|
(2) |
|
Mr. McCullough voluntarily reduced his salary in 2010 and has deferred payment of his
salary earned in 2010 and 2009. |
|
(3) |
|
Represents the fair value, in accordance with ASC 718, of reducing the exercise price
of warrants originally issued for compensationto purchase 435,000 shares of common stock
exercised in 2009. |
32
|
(4) |
|
Dr. Domanik has served as our Chief Operating Officer since October 2007, and has also
served as our President from May 2007 until August 2008. |
|
|
(5) |
|
Dr. Domanik has deferred payment of his salary earned in 2010 and 2009. |
Outstanding Equity Awards at Fiscal Year-End
Our named executive officers did not own any outstanding equity awards as of December 31,
2010.
Narrative Disclosure to Summary Compensation Table
During 2009, Mr. McCullough exercised warrants to purchase 485,000 shares of restricted common
stock in connection with our offer to all warrant holders to permit exercise of such warrants at
the reduced exercise price of $0.25 per share in exchange for the reduction of $121,000 of debt
owed by us to such warrant holders. We recorded a charge of $15,000 related to this warrant
modification for those warrants which were originally issued as stock based compensation. We made
this warrant modification available to all holders of warrants to purchase shares of our common
stock.
Mr. McCullough earned an annual salary of $45,000 and $180,000 in 2010 and 2009, respectively,
and has elected to defer payment of such salary. We do not have any employment agreement with Mr.
McCullough.
We have not entered into an employment agreement with Dr. Domanik, although the basic terms of
his compensation have been established. Specifically, we pay Dr. Domanik an annual salary of
$150,000, standard benefits as provided to other employees, and reimbursement of reasonable
business expenses. Dr. Dominick elected to defer salary totaling $150,000 and $131,250 for the
2010 and 2009 fiscal years, respectively.
Equity Incentive Plan and Employee Stock Purchase Plan
In 1999, we adopted the 1999 Equity Incentive Plan and the 1999 Employee Stock Purchase Plan,
both of which expired in 2009. For additional information, see Equity Compensation Plan
Information in Item 11 below.
Potential Payments Upon Termination or Change-in-Control
We do not offer or have in place any formal severance, change in control or similar
compensation programs for our officers or employees. Rather, we individually negotiate with those
employees for whom such compensation is deemed necessary. We do not currently have an agreement
with any officer with respect to severance, change of control or a similar circumstance. We are
obligated to provide warrants to our outside directors upon the occurrence of certain changes in
control. For more information, see Compensation of Directors below.
Compensation of Directors
The following table sets forth certain information regarding the compensation of directors for
our 2010 fiscal year.
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
or Paid in Cash |
|
|
Total |
|
Name(1) |
|
($) |
|
|
($)(3) |
|
John H. Abeles, M.D. |
|
$ |
20,000 |
(2) |
|
$ |
20,000 |
|
Alexander M. Milley |
|
$ |
20,000 |
(2) |
|
$ |
20,000 |
|
Clinton H. Severson |
|
$ |
20,000 |
(2) |
|
$ |
20,000 |
|
|
|
|
(1) |
|
Mr. McCullough has been omitted from this table as he is a management member of our board of
directors and is not separately compensated for his service on the board of directors. |
33
|
|
|
(2) |
|
Represents accrued but unpaid director fees with respect to fiscal year 2010. This amount does
not include fees payable to each director in the amount of $30,000, which were accrued but unpaid
in 2009 and have not been paid to date. |
|
(3) |
|
As of December 31, 2010, each of our directors is entitled to receive 100,000 shares of common
stock in connection with a stock bonus provided to each of our directors in 2009. In addition to
the amounts shown above, Dr. Abeles is the holder of warrants to purchase an aggregate 62,500
shares of the Companys common stock. These warrants were granted in September 2006 at an exercise
price of $2.00 per share were fully vested upon issuance, and have a term of five years. Mr. Milley
is the holder of warrants to purchase an aggregate 62,500 shares of the Companys common stock.
These warrants were granted in September 2006 at an exercise price of $2.00 per share were fully
vested upon issuance, and have a term of five years. |
Narrative Disclosure to Director Compensation Table
We currently pay our directors a quarterly fee of $5,000 as compensation for their service on
our board of directors. Since 2009, our directors have deferred receipt of such fees. We also
reimburse all directors for their reasonable expenses incurred in connection with attendance at
meetings of the board of directors. In addition, all outside directors are entitled to receive
warrants to purchase 25,000 shares of our common stock when our annual revenues reach $20 million
and warrants to purchase an additional 25,000 shares of common stock when our annual revenues reach
$50 million. The exercise price of such warrants will be at a 33% discount to the average trading
price of the common stock during the 45 days prior to the date we achieve each revenue milestone.
Upon our acquisition, all outside directors will receive (1) warrants to purchase 62,500
shares of common stock at $2.50 per share if we are acquired for more than $10.00 per share; (2)
warrants to purchase 87,500 shares of common stock at $5.00 per share if we are acquired for more
than $20.00 per share; and (3) warrants to purchase 125,000 shares of common stock at $7.50 per
share if we are acquired for more than $30.00 per share.
In November 2006, the Board also approved an arrangement whereby we are obligated to reimburse
Messrs. McCullough and Milley and Dr. Abeles, for certain tax effects in connection with the
exercise of warrants issued in September 2006. We are obligated to pay to each individual 39% of
the taxable value of such warrants when exercised, payable within three months of such exercise,
such payment to occur only if we are acquired or certain other conditions are met. There have been
no reimbursements to date.
During 2009, our Board of Directors voted to issue to each of its members (other than its
employee-director member, Robert F. McCullough) a bonus of 100,000 shares of restricted shares of
our common stock. As of December 31, 2010, the shares have not been issued.
For information on other consideration received by directors or their affiliates from the
Company, see Transactions with Related Persons, Promoters and Certain Control Persons in Item 13
below.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Common Stock
The following table sets forth certain information, as of April 4, 2011 with respect to
holdings of our common stock by (i) each person known by us to be the beneficial owner of more than
5% of the total number of shares of common stock outstanding as of such date, (ii) each of our
directors and executive officers, and (iii) all directors and executive officers as a group.
Except as otherwise indicated, the address of each person is c/o CytoCore, Inc., 414 N. Orleans
Street, Suite 510, Chicago, Illinois 60610.
34
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of |
|
|
Percent |
|
Name and Address of Beneficial Owner |
|
Beneficial Ownership(1) |
|
|
of Class |
|
Robert F. McCullough |
|
|
3,889,353 |
(2) |
|
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
NeoMed Innovations III L.P. Parkvein 55
N-0256 Oslo, Norway |
|
|
2,875,800 |
(3) |
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
John H. Abeles, M.D. |
|
|
385,598 |
(4) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Richard A. Domanik, Ph.D. |
|
|
127,272 |
(5) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Alexander M. Milley |
|
|
965,450 |
(6) |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
Clinton H. Severson |
|
|
110,000 |
(7) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
All current directors and executive
officers as a group (5 persons) |
|
|
5,477,673 |
|
|
|
10.7 |
% |
|
|
|
* |
|
Less than one percent |
|
(1) |
|
Unless otherwise indicated, each of the persons named in the table has sole voting and
investment power with respect to the shares set forth opposite such persons name. With
respect to each person or group, percentages are calculated based on the number of shares
beneficially owned, including shares that may be acquired by such person or group within 60
days of March 25, 2011 upon the exercise of stock options, warrants or other purchase rights,
but not the exercise of options, warrants or other purchase rights held by any other person.
There were 51,407,709 shares of common stock outstanding as of the close of business on April
4, 2011. |
|
(2) |
|
Includes (i) 2,187,500 shares owned by Summitcrest Capital L.P., of which Mr. McCullough is
President of the General Partner; and (ii) an aggregate 166,205 shares owned by various trusts
of which Mr. McCullough is trustee as follows: MJM Educational Trust (15,000) shares, PFM
Educational Trust (15,000 shares), CDM Educational Trust (15,000) shares and the MPC Trust
(121,205 shares). |
|
(3) |
|
Includes 217,000 shares of common stock issuable upon exercise of warrants |
|
(4) |
|
Includes: (i) 213,098 shares owned by Northlea Partners, Ltd., of which Dr. Abeles is General
Partner; (ii) 62,500 shares of common stock issuable upon exercise of warrants; and (iii)
100,000 shares of common stock awarded in 2009 that have not yet been issued. Dr. Abeles
disclaims beneficial ownership of all shares owned by, or issuable to, Northlea Partners
except shares attributable to his 1% interest in Northlea Partners as General Partner. |
|
(5) |
|
Includes 100,000 shares of common stock awarded in 2009 that have not yet been issued. |
|
(6) |
|
Includes: (i) 149,551 shares held by Azimuth Corporation, of which Mr. Milley is President
and Chairman of the Board of Directors, 429,255 shares held by Cadmus Corporation, of which
Mr. Milley is President and a director, 80,282 shares held by Milley Management, Inc., of
which Mr. Milley is President, sole director and majority stockholder, and 23,710 shares held
by Winchester National, Inc., of which Mr. Milley is a director and executive officer; (ii)
62,500 shares of common stock issuable upon exercise of warrants; and (iii) 100,000 shares of
common stock awarded in 2009 that have not yet been issued. An aggregate of 402,890 shares of
common stock held directly by Mr. Milley, Cadmus Corporation, Winchester National and Milley
Management have been pledged to ELXSI Corp., of which Mr. Milley is President, Chief Executive
Officer and Chairman of the Board. |
|
(7) |
|
Includes 100,000 shares of common stock awarded in 2009 that have not yet been issued. |
35
Series E Convertible Preferred Stock
The following table sets forth certain information, as of April 4, 2011 with respect to
holdings of our Series E Convertible Preferred Stock by (i) each person known by us to be the
beneficial owner of more than 5% of the total number of
shares of common stock outstanding as of such date, (ii) each of our directors and executive
officers, and (iii) all directors and executive officers as a group.
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of |
|
|
Percent |
|
Name and Address of Beneficial Owner(1) |
|
Beneficial Ownership |
|
|
of Class |
|
Kevin F. Flynn June 1992 Non-Exempt Trust |
|
|
6,667 |
(2) |
|
|
34.7 |
% |
120 South LaSalle Street
Chicago, IL 60602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolf Lagerquist |
|
|
2,000 |
(3) |
|
|
10.4 |
% |
4522 CO Road 21 NE
Elgin, MN 55932 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
No executive officers or directors own any shares of Series E Convertible Preferred Stock. |
|
(2) |
|
Converts into 35,157 shares of common stock, including shares issuable upon payment of
cumulative dividends. |
|
(3) |
|
Converts into 10,564 shares of common stock, including shares issuable upon payment of
cumulative dividends. |
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
remaining available |
|
|
|
|
|
|
|
|
|
for future issuance |
|
|
|
Number of securities |
|
|
Weighted-average |
|
|
under equity |
|
|
|
to be issued upon |
|
|
exercise price of |
|
|
compensation plans |
|
|
|
exercise of |
|
|
outstanding |
|
|
(excluding |
|
|
|
outstanding options, |
|
|
options, warrants |
|
|
securities reflected |
|
|
|
warrants and rights |
|
|
and rights |
|
|
in column (a)) |
|
Plan category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity Compensation Plans Approved by Security Holders |
|
|
|
|
|
|
|
|
|
|
|
|
1999 Equity
Incentive Plan (as
amended)
Terminated in
2009 |
|
|
10,000 |
|
|
$ |
2.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation
Plans Not Approved
by Security Holders |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for financial and
IR services (1) |
|
|
404,696 |
|
|
$ |
2.05 |
|
|
|
|
|
Warrants issued for officer,
director and
employee
compensation (2) |
|
|
635,000 |
|
|
$ |
1.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,049,696 |
|
|
$ |
1.97 |
|
|
|
|
|
|
|
|
1) |
|
We have included warrants in agreements for providers of investor relations and/or public
relations services. Warrants were also issued to financial advisors as remuneration for the
procurement of equity, debt and preferred stock convertible into equity. |
|
2) |
|
We have issued warrants in lieu of cash payment for employment services, for achieving
certain goals or for other corporate reasons. During fiscal year 2010, a non-executive
employee was issued 13,000 warrants. |
Equity Incentive Plan and Employee Stock Purchase Plan
36
In 1999, we adopted the 1999 Equity Incentive Plan (the Incentive Plan), which provided for
the issuance to consultants, officers, non-employee directors and key employees of shares of common
stock pursuant to stock options (incentive and non-qualified), restricted stock, stock appreciation
rights (SARs) and performance shares and units. Grants under the Incentive Plan are exercisable
at fair market value determined as of the date of grant in accordance with the terms of
the Incentive Plan. Grants vest to recipients immediately or ratably over periods ranging
from two to five years, and expire five to ten years from the date of grant. The Incentive Plan
became effective on June 1, 1999 and expired on June 1, 2009. No options have been granted
pursuant to our Incentive Plan or otherwise to executive officers or directors in the last two
fiscal years. Although the Incentive Plan has expired, as of December 31, 2010, there were options
to purchase 10,000 shares of common stock outstanding under the Incentive Plan.
In 1999, we adopted the 1999 Employee Stock Purchase Plan (the Purchase Plan). The Purchase
Plan offered employees the opportunity to purchase shares of common stock of CytoCore through a
payroll deduction plan at 85% of the fair market value of such shares at specified enrollment
measurement dates. The Purchase Plan expired in May 2009.
Changes in Control
We are not aware of any arrangements (including any pledge by any person of our securities),
the operation of which did or may at a subsequent date result in a change of control.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The following section sets forth information regarding transactions since January 1, 2009, or
any currently proposed transactions, between us and certain related persons. For more information
on the compensation received by our directors and officers, and the beneficial ownership of equity
securities of the Company by such individuals, see Item 11 Executive Compensation and Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
above
Board of Directors
During 2009, the Board of Directors, including former directors Daniel J. Burns, Philip
Bradley Hall, M.D. and David J. Weissberg, M.D., voted to issue to each of its members (other than
its employee-director member, Robert F. McCullough) a bonus of 100,000 shares of restricted,
unregistered common stock. The shares were valued at $0.40 per share and we recorded a charge of
$280,000 for the aggregate issuance of 700,000 shares of common stock during 2009. None of the
700,000 shares authorized for issuance have been issued to date.
Robert F. McCullough, Jr., Chairman, Chief Executive Officer and Chief Financial Officer
During 2009, Mr. McCullough exercised warrants to purchase 485,000 shares of restricted,
unregistered common stock at a modified price of $0.25 in exchange for the reduction of $121,000 of
debt owed us to him. We recorded a charge of $15,000 related to this warrant modification. This
warrant modification was made available by us to all holders of warrants to purchase shares of our
common stock. These shares were issued in 2010.
During 2009, in lieu of salary, we issued to Mr. McCullough 39,459 shares of restricted common
stock for services rendered in 2008. We valued the common stock at $0.50 per share for an aggregate
value of $20,000 using the fair value method.
Mr. McCullough and a member of his family loaned to us an aggregate $1,013,000 and $866,000
during the 2010 and 2009 fiscal years, respectively. Of the $866,000 loaned during 2009, $121,000
was cancelled in connection with the exercise of the warrants discussed above. The remaining
outstanding balance of $1,972,750 is payable upon demand and does not accrue interest.
Related Person Transaction Approval Policy
37
We recognize that related person transactions can present potential or actual conflicts of
interest and create the appearance that our decisions are based on considerations other than the
best interests of us and our stockholders. The Board of Directors, therefore, adopted a written
policy in May 2008 that requires the review, approval or ratification of all such transactions by
the Nominating Committee of the Board of Directors in accordance with the procedures established
for such transactions.
For these purposes, a related person transaction is any transaction, arrangement or
relationship (or series of similar transactions, arrangements or relationships) in which the
Company or any subsidiary is, was or will be a participant and in which a related person has, had
or will have a direct or indirect interest. A related person includes executive officers,
directors, nominees for election as a director, five percent holders, and any immediate family
members of the foregoing. It also includes entities in which any of the foregoing is employed or
is a partner or principal or in a similar position, or in which such person has a five percent or
greater beneficial ownership interest.
In advance of each regularly scheduled Nominating Committee meeting, management must propose
those transactions to be entered into by us for the coming calendar quarter, including the material
terms of such transactions, the parties involved, the interests of the related person(s) in such
transactions, and the proposed aggregate value of each such transaction (if calculable). After
review, the Nominating Committee must approve or disapprove such transactions and at each
subsequently scheduled meeting, management must update the Nominating Committee as to any material
change to those proposed transactions. If advance approval of a related person transaction is not
feasible, such transactions may be preliminarily entered into by management, subject to
ratification by the Nominating Committee at its next meeting. A transaction also may be approved
by the Chairman of the Nominating Committee, who possesses delegated authority to act between
meetings, in circumstances where it is not practicable or desirable for us to wait until the next
committee meeting.
Review and evaluation of a related person transaction include an examination of all material
facts and relevant factors, including without limitation:
|
|
|
the risks and benefits of such transaction to us; |
|
|
|
|
the extent of the related persons interest in the transaction; |
|
|
|
|
the impact on a directors independence in the event the related person involved in the
transaction is a director, an immediate family member or an affiliated entity; |
|
|
|
|
if applicable, the availability of other sources of comparable products and services;
and |
|
|
|
|
whether such transaction is on terms no less favorable than terms generally available to
an unaffiliated third party under the same or similar circumstances. |
The Nominating Committee shall approve or ratify only those transactions that, in light of
known circumstances, are in, or are not inconsistent with, the best interests of the Company and
our stockholders, as the Nominating Committee determines in good faith. The committee may also
determine to provide standing approval of certain types of transactions. No director shall
participate in any discussion or approval of a related person transaction for which he or she is a
related person, except that the director is required to provide all material information concerning
such transaction as requested by the Nominating Committee or the Board of Directors.
Director Independence
Upon consideration of the criteria and requirements regarding director independence set forth
in Rules 5000(a)(19) and 5605(a)(2) of the rules of the NASDAQ Stock Market, we have determined
that Dr. Abeles and Messrs. Milley and Severson, who constitute a majority of our board of
directors, are independent. With regard to our audit committee, the board of directors has
determined that Dr. Abeles and Messrs. Milley and Severson, who constitute all members of the audit
committee, are independent with respect to the independence criteria for audit committee members
set forth in Rule 5605(a)(2) of the rules of the Nasdaq Stock Market and Rule 10A-3(b)(1) of the
Exchange Act.
38
Item 14. Principal Accountant Fees and Services
L J Soldinger Associates LLC (LJSA) served as our independent registered pubic accounting
firm each of the fiscal years ending December 31, 2010 and 2009.
Fees
The following table presents fees for the professional services rendered by LJSA for fiscal
years 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
Services Performed |
|
2010 |
|
|
2009 |
|
Audit Fees(1) |
|
$ |
95,000 |
|
|
$ |
128,000 |
|
Audit-Related Fees(2) |
|
|
|
|
|
|
|
|
Tax Fees(3) |
|
$ |
5,000 |
|
|
|
|
|
All Other Fees(4) |
|
|
|
|
|
|
|
|
Total Fees |
|
$ |
100,000 |
|
|
$ |
128,000 |
|
|
|
|
(1) |
|
Audit fees represent fees billed for professional services rendered for the
audit of our annual financial statements and review of the financial statements
included in our quarterly reports or services that are normally provided in connection
with statutory and regulatory filings or engagements. |
|
(2) |
|
Audit-related fees represent fees billed for assurance and related services
reasonably related to the performance of the audit or review of our financial
statements not reported in (1) above, including those incurred in connection with
securities registration and/or other issues resulting from that process. |
|
(3) |
|
Tax fees represent fees billed for professional services rendered for tax
compliance, tax advice and tax planning services. |
|
(4) |
|
All other fees principally would include fees billed for products and services
provided by the accountant, other than the services reported under the three captions
above. |
Pre-Approval Policies
As required by applicable law, the Audit Committee is responsible for the appointment,
compensation, retention and oversight of the work of our independent registered public accounting
firm. In connection with such responsibilities, the Audit Committee is required, and it is the
Audit Committees policy, to pre-approve the audit and permissible non-audit services (both the
type and amount) performed by our independent registered public accounting firm in order to ensure
that the provision of such services does not impair the firms independence, in appearance or fact.
The Audit Committee pre-approved all audit services provided to us during fiscal 2010.
Non-audit services provided to us during fiscal year 2010 were for tax compliance.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(*) Denotes an exhibit filed herewith.
|
|
|
Exhibit No. |
|
Description |
|
|
Certificate of Incorporation of the Company (Incorporated
herein by reference to Exhibit 3.1 to the Companys Current
Report on Form 8-K dated September 26, 2001.) |
|
|
|
|
|
By-laws of the Company. (Incorporated herein by reference to
Appendix E to the 1999 Proxy Statement.) |
|
|
|
39
|
|
|
Exhibit No. |
|
Description |
|
|
Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock of the Company (Incorporated
herein by reference to Exhibit 3.5 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2000, as
filed with the SEC on March 29, 2001) |
|
|
|
Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of the Company (Incorporated
herein by reference to Exhibit 3.6 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2000, as
filed with the SEC on March 29, 2001) |
|
|
|
|
|
Section 6 of Article VII of the By-laws of the Company, as
amended. (Incorporated herein by reference to Exhibit 3.3 to
the Companys registration statement on Form S-4 (Reg. #
333-61666), as filed with the SEC on May 25, 2000) |
|
|
|
|
|
Certificate of Designation, Preferences and Rights of Series C
Convertible Preferred Stock (Incorporated herein by reference
to Exhibit 3.4 to the Companys registration statement on Form
S-2 (Reg. # 333-83578), as filed with the SEC on February 28,
2002) |
|
|
|
|
|
Certificate of Amendment of Certificate of Designation,
Preferences and Rights of Series C Convertible Preferred
Stock. Incorporated herein by reference to Exhibit 3.5 to the
Companys registration statement on Form S-2 (Reg. #
333-83578), as filed with the SEC on February 28, 2002) |
|
|
|
|
|
Certificate of Amendment of Amended Certificate of
Designation, Preferences and Rights of Series C Convertible
Preferred Stock. Incorporated herein by reference to Exhibit
3.6 to the Companys registration statement on Form S-2 (Reg.
# 333-83578), as filed with the SEC on February 28, 2002) |
|
|
|
|
|
Certificate of Designations, Preferences and Rights of Series
D Convertible Preferred Stock. Incorporated herein by
reference to Exhibit 3.7 to the Companys registration
statement on Form S-2 (Reg. # 333-83578), as filed with the
SEC on February 28, 2002) |
|
|
|
|
|
Certificate of Designation, Preferences and Rights of Series E
Convertible Preferred Stock. Incorporated herein by reference
to Exhibit 3.8 to the Companys registration statement on Form
S-2 (Reg. # 333-83578), as filed with the SEC on February 28,
2002) |
|
|
|
|
|
Certificate of Amendment to Certificate of Incorporation of
the Company, dated August 5, 2004. (Incorporated herein by
reference to Exhibit 3.1 to the Companys Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2004, as filed with
the SEC on August 16, 2004) |
|
|
|
|
|
Certificate of Amendment to Certificate of Incorporation,
dated June 22, 2006. (Incorporated herein by reference to
Exhibit 3.1 to the Companys Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2006, as filed with the SEC on
August 21, 2006) |
|
|
|
|
|
Certificate of Amendment to Certificate of Incorporation of
the Company, dated June 22, 2007. (Incorporated herein by
reference to Exhibit 3.1 to the Companys Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2007, as filed with
the SEC on August 17, 2007.) |
|
|
|
|
|
Certificate of Amendment to Certificate of Incorporation of
the Company, dated November 19, 2007. (Incorporated herein by
reference to Exhibit 3.14 to the Companys Annual Report on
Form 10-KSB for the year ended December 31, 2007, as filed
with the SEC on April 2, 2008) |
|
|
|
|
|
Registration Rights Agreement in connection with $7 million
maximum offering of Units completed in March 2008.
(Incorporated herein by reference to Exhibit 4.22 to the
Companys Annual Report on Form 10-KSB for the year ended
December 31, 2007, as filed with the SEC on April 2, 2008) |
40
|
|
|
Exhibit No. |
|
Description |
|
|
Form of Warrant in connection with $7 million maximum offering
of Units completed in March 2008. (Incorporated herein by
reference to Exhibit 4.23 to the Companys Annual Report on
Form 10-KSB for the year ended December 31, 2007, as filed
with the SEC on April 2, 2008) |
|
|
|
|
|
Service agreement with Cell Solutions, LLC. Dated October 9,
2009 (Incorporated herein by reference to Exhibit 10.25 to the
Companys annual report on Form 10-K for the year ended
December 31, 2009, filed with the SEC on May 15, 2010) |
|
|
|
|
|
Distribution service agreement with Amsino International, Inc.
dated April 14, 2010(Incorporated herein by reference to
Exhibit 10.28 to the Companys annual report on Form 10-K for
the year ended December 31, 2009, filed with the SEC on May
15, 2010) |
|
|
|
|
|
Consulting agreement with Dr. Mauro Scimia dated April 14,
2010 (Incorporated herein by reference to Exhibit 10.27 to the
Companys annual report on Form 10-K for the year ended
December 31, 2009, filed with the SEC on May 15, 2010) |
|
|
|
|
|
Distribution service agreement with Guanngdong Prosper Channel
Medicine Company dated November 30, 2010 (Incorporated herein
by reference to Exhibit 10.1 to the Companys current report
on Form 8-K, filed with the SEC on December 3, 2010) |
|
|
|
|
|
Code of Ethics and Business Conduct of Officers, Directors and
Employees of CytoCore, Inc. (Incorporated herein by reference
to Exhibit 99.1 to the Companys annual report on Form 10-KSB
for the year ended December 31, 2003, filed with the SEC on
April 14, 2004) |
|
|
|
|
|
Subsidiaries of the Company (Incorporated herein by reference
to Exhibit 21 to the Companys annual report on Form 10-KSB
for the year ended December 31, 2007, filed with the SEC on
April 3, 2008) |
|
|
|
|
|
Consent of L J Soldinger Associates LLC |
|
|
|
|
|
Certification of the Chief Executive Officer and Chief
Financial Officer of the Company pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
Certification of the Chief Executive Officer and Chief
Financial Officer of the Company pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
CYTOCORE, INC.
|
|
|
By: |
/s/ Robert McCullough, Jr.
|
|
|
|
Robert McCullough, Jr. |
|
|
|
Chief Executive Officer and
Chief Financial Officer
|
|
|
|
|
|
|
Date:
|
April 11, 2011 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Robert McCullough, Jr.
Robert McCullough, Jr.
|
|
Chief Executive Officer and Chief
Financial Officer
(Principal Accounting Officer and Director)
|
|
April 11, 2011 |
|
|
|
|
|
/s/ Alexander M. Milley
Alexander M. Milley
|
|
Director
|
|
April 11, 2011 |
|
|
|
|
|
/s/ John Abeles, M.D.
John Abeles, M.D.
|
|
Director
|
|
April 11, 2011 |
|
|
|
|
|
/s/ Clint Severson
Clint Severson
|
|
Director
|
|
April 11, 2011 |
42
Report of Independent Registered Public Accounting Firm
To The Board of Directors and
Stockholders of CytoCore, Inc.
We have audited the accompanying consolidated balance sheet of CytoCore, Inc. and Subsidiaries as
of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders
deficit, and cash flows for the years then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CytoCore, Inc. and Subsidiaries as of
December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the
Companys recurring losses from operations and resulting dependence upon access to additional
external financing, raise substantial doubt concerning its ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ L J Soldinger Associates LLC
April 5, 2011
Deer Park, Illinois
F-1
CYTOCORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13 |
|
|
$ |
|
|
Accounts receivable |
|
|
9 |
|
|
|
17 |
|
Inventories. net of reserve for valuation of $400,000 for the years ended
December 31, 2010 and 2009 |
|
|
108 |
|
|
|
574 |
|
Prepaid expenses and other current assets |
|
|
25 |
|
|
|
44 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
155 |
|
|
|
635 |
|
Fixed assets, net |
|
|
1,055 |
|
|
|
1,846 |
|
Licenses, patents, and technology, net of amortization |
|
|
62 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
Inventories, non-current |
|
|
785 |
|
|
|
325 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,057 |
|
|
$ |
2,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit) |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Checks issued in excess of amounts on deposit |
|
$ |
|
|
|
$ |
5 |
|
Account payable |
|
|
1,765 |
|
|
|
2,102 |
|
Accrued payroll costs |
|
|
1,395 |
|
|
|
818 |
|
Accrued expenses |
|
|
597 |
|
|
|
1,225 |
|
Advances from related parties |
|
|
1,766 |
|
|
|
763 |
|
Notes payable |
|
|
175 |
|
|
|
70 |
|
Derivative liability |
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
5,797 |
|
|
|
4,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity (Deficit): |
|
|
|
|
|
|
|
|
Preferred stock; $0.001 par value; 10,000,000 shares authorized; 373,555 shares issued and outstanding at December 31,
2010 and 2009, respectively (Liquidation value of all classes of preferred stock of $2,876 at December 31, 2010). |
|
|
1,492 |
|
|
|
1,492 |
|
Common stock, $0.001 par value; 500,000,000 shares authorized; 48,379,042 and 42,173,810 shares issued and issuable and
48,359,833 and 42,154,601 shares outstanding at December 31, 2010 and 2009, respectively |
|
|
48 |
|
|
|
42 |
|
Additional paid-in capital |
|
|
92,572 |
|
|
|
92,106 |
|
Treasury stock at cost: 19,209 shares at December 31, 2010 and 2009 |
|
|
(327 |
) |
|
|
(327 |
) |
Accumulated deficit |
|
|
(97,448 |
) |
|
|
(95,351 |
) |
Accumulated comprehensive lossCumulative translation adjustment |
|
|
(77 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
(3,740 |
) |
|
|
(2,115 |
) |
|
|
|
|
|
|
|
|
Total liabilities and stockholders |
|
$ |
2,057 |
|
|
$ |
2,868 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
CYTOCORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Net Sales |
|
$ |
30 |
|
|
$ |
44 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Research and development (net of settlement of
compensation expense of $64,000 for the year ended December
31, 2010 and the settlement of trade debt of $457,000 for the
year ended December 31, 2009) |
|
|
211 |
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
Provision for fixed asset impairment |
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for inventory valuation |
|
|
|
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (net of settlement of
trade debt of $71,000 for the year ended December 31, 2010) |
|
|
1,669 |
|
|
|
3,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses |
|
|
2,280 |
|
|
|
3,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(2,250 |
) |
|
|
(3,296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(72 |
) |
|
|
(34 |
) |
Interest expense related party |
|
|
(109 |
) |
|
|
|
|
Provision for legal settlement |
|
|
|
|
|
|
(222 |
) |
|
|
|
|
|
|
|
|
|
Benefit from derivative liability |
|
|
334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
153 |
|
|
|
(256 |
) |
|
|
|
|
|
|
|
Loss from operations before income taxes |
|
|
(2,097 |
) |
|
|
(3,552 |
) |
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(2,097 |
) |
|
|
(3,552 |
) |
Preferred stock dividends unpaid and undeclared |
|
|
(266 |
) |
|
|
(266 |
) |
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(2,363 |
) |
|
$ |
(3,818 |
) |
|
|
|
|
|
|
|
Basic and fully diluted net loss per common share |
|
$ |
(0.05 |
) |
|
$ |
(0.09 |
) |
|
|
|
Weighted average number of common shares outstanding |
|
|
45,688,465 |
|
|
|
41,874,890 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CYTOCORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net loss |
|
|
(2,097 |
) |
|
$ |
(3,552 |
) |
Noncash charge for legal settlement |
|
|
|
|
|
|
222 |
|
Depreciation |
|
|
392 |
|
|
|
379 |
|
Amortization of license |
|
|
100 |
|
|
|
100 |
|
(Decrease) increase in allowance for doubtful accounts |
|
|
|
|
|
|
(7 |
) |
Interest expense imputed upon related party advances |
|
|
109 |
|
|
|
|
|
Provision for inventory valuation |
|
|
|
|
|
|
400 |
|
Provision for fixed asset impairment |
|
|
399 |
|
|
|
|
|
Amortization of discount |
|
|
55 |
|
|
|
|
|
Non-cash interest related to warrant modification |
|
|
|
|
|
|
21 |
|
Stock issued for compensation |
|
|
36 |
|
|
|
|
|
Stock and warrants issued to non-employees for services |
|
|
36 |
|
|
|
5 |
|
Non-cash compensation expense |
|
|
1 |
|
|
|
2 |
|
Stock issued to directors for compensation |
|
|
|
|
|
|
350 |
|
Gain on settlements of trade indebtedness and accrued liability |
|
|
(135 |
) |
|
|
(457 |
) |
Benefit from derivative liability |
|
|
(334 |
) |
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
8 |
|
|
|
26 |
|
Inventories |
|
|
6 |
|
|
|
(131 |
) |
Prepaid expenses and other current assets |
|
|
19 |
|
|
|
14 |
|
Checks issued in excess of deposits |
|
|
(5 |
) |
|
|
5 |
|
Accounts payable |
|
|
(264 |
) |
|
|
61 |
|
Accrued expenses |
|
|
553 |
|
|
|
925 |
|
|
|
|
|
|
|
|
Net cash used for operating activities |
|
|
(1,121 |
) |
|
|
(1,637 |
) |
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchase of license |
|
|
(36 |
) |
|
|
(61 |
) |
Capital purchases |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(36 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
100 |
|
|
|
|
|
Proceeds from the issuance of convertible debt |
|
|
75 |
|
|
|
|
|
Proceeds from related parties |
|
|
1,013 |
|
|
|
885 |
|
Proceeds from exercise of warrants and options |
|
|
|
|
|
|
270 |
|
Payments on note |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,170 |
|
|
|
1,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) increase in cash and cash equivalents |
|
|
13 |
|
|
|
(553 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
|
|
|
|
553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
13 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transaction during the year for: |
|
|
|
|
|
|
|
|
Issuance of common stock and warrants in settlement of a lawsuit |
|
$ |
538 |
|
|
$ |
|
|
Payment of accrued wages with common stock |
|
$ |
36 |
|
|
$ |
31 |
|
Warrant exercised with debt in satisfaction of related party advances and other liabilities |
|
$ |
|
|
|
$ |
168 |
|
Note Payable issued in payment of account payable resulting in a gain of $71,000 |
|
$ |
69 |
|
|
$ |
|
|
Conversion of note payable in to common stock |
|
$ |
20 |
|
|
$ |
|
|
The Company recorded a derivative liability resulting from potential excess shares and
a reduction in additional paid in capital |
|
$ |
378 |
|
|
$ |
|
|
Common stock issued for advances from related party |
|
$ |
10 |
|
|
$ |
|
|
Common stock issued for accrued expenses |
|
$ |
36 |
|
|
$ |
|
|
Payment of director fees with common stock |
|
$ |
|
|
|
$ |
195 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CYTOCORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumalated |
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Par Value $0.001 |
|
|
Par Value $0.001 |
|
|
Treasury Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Deficit |
|
January 1, 2009 |
|
|
373,559 |
|
|
$ |
1,492 |
|
|
|
41,226,903 |
|
|
$ |
41 |
|
|
|
19,209 |
|
|
$ |
(327 |
) |
|
$ |
91,065 |
|
|
$ |
(91,799 |
) |
|
$ |
(74 |
) |
|
$ |
398 |
|
Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,552 |
) |
|
|
|
|
|
|
(3,552 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,555 |
) |
Series E preferred stock and
cumulative dividends
converted to common stock |
|
|
(4 |
) |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants |
|
|
|
|
|
|
|
|
|
|
869,614 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
438 |
|
Common stock issued for
compensation |
|
|
|
|
|
|
|
|
|
|
61,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
576 |
|
Common stock issued for
services |
|
|
|
|
|
|
|
|
|
|
16,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Warrants issued for compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Warrants issued for services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
373,555 |
|
|
$ |
1,492 |
|
|
|
42,173,810 |
|
|
$ |
42 |
|
|
|
19,209 |
|
|
$ |
(327 |
) |
|
$ |
92,106 |
|
|
$ |
(95,351 |
) |
|
$ |
(77 |
) |
|
$ |
(2,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,097 |
) |
|
|
|
|
|
|
(2,097 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,097 |
) |
Exercise of warrants |
|
|
|
|
|
|
|
|
|
|
485,000 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock |
|
|
|
|
|
|
|
|
|
|
1,333,333 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
Charge for derivative liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(378 |
) |
|
|
|
|
|
|
|
|
|
|
(378 |
) |
Common stock issued for
compensation |
|
|
|
|
|
|
|
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
36 |
|
Common stock issued for
services |
|
|
|
|
|
|
|
|
|
|
150,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
36 |
|
Common stock issued for
settlement of lawsuit |
|
|
|
|
|
|
|
|
|
|
2,658,800 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
505 |
|
Common stock issued for debt |
|
|
|
|
|
|
|
|
|
|
66,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Conversion of note for Common
Stock |
|
|
|
|
|
|
|
|
|
|
1,060,626 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
Interest imputed on related party
advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
109 |
|
Warrants issued settlement of
lawsuit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
Warrants issued compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
373,555 |
|
|
$ |
1,492 |
|
|
|
48,379,042 |
|
|
$ |
48 |
|
|
|
19,209 |
|
|
$ |
(327 |
) |
|
$ |
92,572 |
|
|
$ |
(97,448 |
) |
|
$ |
(77 |
) |
|
$ |
(3,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
F-5
CYTOCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular data in thousands, except per share amounts)
Note 1. The Company and Basis of Presentation
CytoCore, Inc. (CCI, CytoCore or the Company) was incorporated as Ampersand Medical
Corporation in Delaware in December 1998.
In September 2001, following the Companys acquisition of AccuMed International, Inc.
(AccuMed) via the merger of AccuMed into a wholly-owned subsidiary of CCI, the Company changed
its corporate name to Molecular Diagnostics, Inc. in order to better represent its operations and
products. On June 16, 2006, the shareholders ratified a proposal to change the Companys name from
Molecular Diagnostics, Inc. to CytoCore, Inc., which change was effected in Delaware on June 22,
2006. Except where the context otherwise requires, CCI, CytoCore, the Company, we and
our refers to CytoCore, Inc. and our subsidiaries and predecessors.
Currently, CCI has one product for sale its SoftPap collector. CCI is developing, and plans
to sell an integrated family of cost-effective products for the detection, diagnosis and treatment
of cancer under the trade name of CytoCore Solutions®. CytoCore Solutions products are intended
to address sample collection, specimen preparation, specimen evaluation (including
detection/screening and diagnosis), treatment and patient monitoring within vertical markets
related to specific cancers. Current CytoCore Solutions products are focused upon cervical cancer.
CCI plans that this focus will later be expanded to include other gynecological cancers as well as
bladder, lung, and breast cancers, among others. Within each of these markets CCI anticipates that
the CytoCore Solutions products will be sold as individual value-added drop-in replacements for
existing products and as integrated systems that improve the efficiency and effectiveness of
clinical and laboratory operations.
Going Concern
The Company has incurred significant operating losses since its inception and has an
accumulated deficit at December 31, 2010 of $97,448,000. Management expects that significant
on-going operating expenditures will be necessary to successfully implement CCIs business plan and
develop, manufacture and market its products. These circumstances raise substantial doubt about
CCIs ability to continue as a going concern. Implementation of the Companys plans and its
ability to continue as a going concern depend upon its securing substantial additional financing.
For the year ended December 31, 2010, the Company sold 1,333,333 shares of restricted, unregistered
common stock at an average price of $0.075. CCI received proceeds totaling $100,000.
CCI has only enough cash to operate into April 2011. Managements plans include efforts to
obtain additional capital, although no assurances can be given about the Companys ability to
obtain such capital. If the Company is unable to obtain adequate additional financing or generate
profitable sales revenues, or negotiate a favorable settlement plan with creditors, it will be
unable to continue its product development and other activities and may be forced to cease
operations. The consolidated financial statements presented herein do not include any adjustments
that might result from the outcome of this uncertainty.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements included herewith include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company balances and transactions have
been eliminated in consolidation.
Use of Estimates
F-6
The preparation of consolidated 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 periods. Actual results could differ from those estimates.
Management believes that it is reasonably possible that the following material estimates
affecting the financial statements could significantly change in the coming year: (1) estimates
concerning the method of depreciation or the useful life of the equipment used in the production of
SoftPAP® collection kits, (2) estimates as to the valuation allowance for the amounts recorded and
held as inventory of goods and property and equipment and, (3) estimates of possible litigation
losses.
Revenue Recognition
CCI recognizes revenue from product sales in accordance with Staff Accounting Bulletin No.
104, Revenue Recognition, when the following criteria are met: shipment of a product or license
to customers has occurred and there are no remaining Company obligations or contingencies;
persuasive evidence of an arrangement exists; sufficient vendor-specific, objective evidence exists
to support allocating the total fee to all elements of the arrangement; the fee is fixed or
determinable; and collection is probable.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at
the time of purchase to be cash equivalents.
Inventory
As of December 31, 2010 and 2009, inventory consisted of purchased parts totaling $269,000 and
$272,000, and finished goods held for sale totaling $624,000 and $627,000, respectively. Inventory
is valued at the lower of cost or market, using the first in, first out method. As of December 31,
2009, the Company in testing for lower of cost or market determined a writedown of a portion of the
value of the finished goods inventory totaling $400,000 was required in the financial statements.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and are depreciated
using the straight-line method over the assets estimated useful lives. Principal useful lives are
as follows:
|
|
|
Furniture and fixtures |
|
5 years |
Laboratory equipment |
|
5 years |
Computer and communications equipment |
|
3 years |
Design and tooling |
|
5 years |
Machinery and equipment |
|
7 years |
Leasehold improvements |
|
Useful life or term of lease,whichever is shorter |
|
|
|
Normal maintenance and repairs for property and equipment are charged to expense as incurred,
while significant improvements are capitalized.
Licenses, Patents, and Technology
Licenses, patents, and purchased technology are recorded at their acquisition cost. Costs to
prepare patent filings are expensed when incurred. Costs related to abandoned or denied patents are
written off at the time of abandonment or denial. Amortization is begun as of the date of
acquisition or upon the grant of the final patent. Costs are amortized over the assets
F-7
useful
life, which ranges from two to 17 years. The Company assesses licenses, patents, and technology
periodically for impairment.
Impairment or Disposal of Long-Lived Assets
At each balance sheet date or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, management of the Company evaluates the
recoverability of such assets. An impairment loss is recognized if the amount of undiscounted cash
flows is less than the carrying amount of the asset, in which case the asset is written down to
fair value. The fair value of the asset is measured by either quoted market prices or the present
value of estimated expected future cash flows using a discount rate commensurate with the risks
involved.
Research and Development Costs
Research and development costs are charged to operations as incurred. CCI conducts a portion
of its research activities under contractual arrangements with scientists, researchers,
universities, and other independent third parties.
Stock Based Compensation
We follow the guidance of FASB Accounting Standards Codification Section 78-10, which requires
that share-based payments be reflected as an expense based upon the grant-date fair value of those
awards. The expense is recognized over the remaining vesting periods of the awards, if any.
Foreign Currency Translation
The functional currency of the Companys foreign operations is the local currency.
Accordingly, all assets and liabilities are translated into U.S. dollars using year-end exchange
rates, and all revenues and expenses are translated using average exchange rates during the year.
Fair Value of Financial Instruments
The carrying value of accounts receivable, accounts payable, accrued expenses and notes
payable approximate their respective fair values due to their short maturities.
Other Comprehensive Income (Loss)
Translation adjustments related to the Companys foreign dormant subsidiary are included in
other comprehensive loss and reported separately in stockholders equity (deficit).
Net Loss Per Share
Basic loss per share is calculated based on the weighted-average number of outstanding common
shares. Diluted loss per share is calculated based on the weighted-average number of outstanding
common shares plus the effect of dilutive potential common shares, using the treasury stock method.
CCIs calculation of diluted net loss per share excludes potential common shares as of December 31,
2010 and 2009 as the effect would be anti-dilutive (i.e. would reduce the loss per share).
In accordance with SEC Accounting Series Release 280 the Company computes its income or loss
applicable to common stock holders by subtracting dividends on preferred stock, including
undeclared or unpaid dividends if cumulative, from it reported net loss and reports the same on the
face of its statement of operations.
Income Taxes
CCI follows the liability method in accounting for income taxes. Under this method, deferred
tax assets and liabilities are determined based on differences between financial reporting carrying
amounts and the respective tax bases of assets and liabilities, and are measured using tax rates
and laws that are expected to be in effect when the differences are
F-8
expected to be recovered or
settled. Valuation allowances are provided against deferred tax assets if it is more likely than
not that the deferred tax assets will not be realized.
The Company follows the guidance of FASB ASC 740-10 which relates to the Accounting for
Uncertainty in Income Taxes , which seeks to reduce the diversity in practice associated with the
accounting and reporting for uncertainty in income tax positions. This Interpretation prescribes a
comprehensive model for financial statement recognition, measurement, presentation and disclosure
of uncertain tax positions taken or expected to be taken in income tax returns.
Risks from Concentrations
Revenues were derived solely from two customers in 2010 and 2009.
Recent Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-13, CompensationStock Compensation (Topic 718)Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee
share-based payment award with an exercise price denominated in the currency of a market in which a
substantial portion of the entitys equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an entity would not
classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU
2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2010. The Company expects the adoption of this standard will not have a
material effect on its results of operation or its financial position.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855)Amendments to
Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement
for an SEC filer to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include financial statements
revised as a result of either correction of an error or retrospective application of U.S. GAAP. The
FASB also clarified that if the financial statements have been revised, then an entity that is not
an SEC filer should disclose both the date that the financial statements were issued or available
to be issued and the date the revised financial statements were issued or available to be issued.
The FASB believes these amendments remove potential conflicts with the SECs literature. The
Company adopted ASU 2010-09 upon issuance and such adoption had no effect on its results of
operation or its financial position.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 includes
new disclosure requirements related to fair value measurements, including transfers in and out of
Levels 1 and 2 and information about purchases, sales, issuances and settlements for Level 3 fair
value measurements. This update also clarifies existing disclosure requirements relating to levels
of disaggregation and disclosures of inputs and valuation techniques. ASU 2010-06 was effective
for interim and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The Company adopted ASU
2010-06 upon issuance and such adoption did not have a material impact on the Companys financial
statements.
In April 2010, the Financial Accounting Standards Board, or FASB, issued Accounting Standard
Update No. 2010-17, Milestone Method of Revenue Recognition (ASU No. 2010-17), which provides
guidance on defining a milestone and determining when it may be appropriate to apply the milestone
method of revenue recognition for research or development transactions. Prior to the issuance of
ASU No. 2010-17, authoritative guidance on the use of the milestone method did not exist. ASU No.
2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim
periods within those years, beginning on or after June 15, 2010. Alternatively, ASU No. 2010-17 can
be adopted retrospectively for all prior periods. We do not expect the adoption of ASU No. 2010-17
to have a material impact on our financial statements or results of operations.
F-9
In December 2010, the FASB issued an accounting standard update 2010-29 that addresses the
disclosure of supplementary pro forma information for business combinations. This update clarifies
that when public entities are required to disclose pro forma information for business combinations
that occurred in the current reporting period, the pro forma information should be presented as if
the business combination occurred as of the beginning of the previous fiscal year when comparative
financial statements are presented. This update is effective prospectively for business
combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2010. Early adoption is permitted. The Company believes this guidance will have no
effect on our consolidated financial statements.
In October 2009, the FASB issued a new accounting standard that addresses the accounting for
multiple-deliverable revenue arrangements to enable vendors to account for deliverables separately
rather than as a combined unit. This new standard addresses how to separate deliverables and how to
measure and allocate arrangement consideration to one or more units of accounting. Existing
accounting standards require a vendor to use objective and reliable evidence of fair value for the
undelivered items or the residual method to separate deliverables in a multiple-deliverable
arrangement. Under the new standard, it is expected that multiple-deliverable arrangements will be
separated in more circumstances than under current requirements. The new standard establishes a
hierarchy for determining the selling price of a deliverable for purposes of allocating revenue to
multiple deliverables. The selling price used will be based on vendor-specific objective evidence
if available, third-party evidence if vendor-specific objective evidence is not available, or
estimated selling price if neither vendor-specific objective evidence nor third-party evidence is
available. The new standard must be prospectively applied to all revenue arrangements entered into
in fiscal years beginning on or after June 15, 2010 and became effective for us on January 1, 2011.
We believe this guidance will have no effect on our consolidated financial statements.
In June 2009, the FASB issued a new accounting standard that amends the accounting and
disclosure requirements for the consolidation of variable interest entities. This new standard
removes the previously existing exception from applying consolidation guidance to qualifying
special-purpose entities and requires ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity. Before this new standard, generally accepted accounting
principles required reconsideration of whether an enterprise is the primary beneficiary of a
variable interest entity only when specific events occurred. This new standard is effective as of
the beginning of each reporting entitys first annual reporting period that begins after November
15, 2009, for interim periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. This new standard became effective for us on January 1, 2010. The
adoption of this standard did not impact our consolidated financial statements.
During June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17,
Consolidations (ASC 810) Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities (ASU 2009-17). ASU 2009-17 amended the consolidation guidance
applicable to variable interest entities (VIE) and changed the approach for determining the
primary beneficiary of a VIE. Among other things, the new guidance requires a qualitative rather
than a quantitative analysis to determine the primary beneficiary of a VIE; requires continuous
assessments of whether an enterprise is the primary beneficiary of a VIE; enhances disclosures
about an enterprises involvement with a VIE; and amends certain guidance for determining whether
an entity is a VIE. This accounting guidance was effective for annual periods beginning after
November 15, 2009 and was effective for the Company beginning in the first quarter of fiscal 2010.
The adoption of this standard had no impact on the Companys results of operations or financial
position.
Note 3. Fixed Assets
Fixed assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Furniture and fixtures |
|
$ |
47 |
|
|
$ |
47 |
|
Laboratory equipment |
|
|
508 |
|
|
|
508 |
|
Computer and communications equipment |
|
|
261 |
|
|
|
261 |
|
Design and tooling |
|
|
1,204 |
|
|
|
1,204 |
|
Machinery and equipment |
|
|
777 |
|
|
|
777 |
|
Construction in progress |
|
|
|
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
2,797 |
|
|
|
3,196 |
|
Less accumulated depreciation and amortization |
|
|
(1,742 |
) |
|
|
(1,350 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
1,055 |
|
|
$ |
1,846 |
|
|
|
|
|
|
|
|
F-10
For the years ended December 31, 2010 and 2009, depreciation expense was $392,000 and
$379,000, respectively. The Company did not allocate any of the depreciation expense of the
machinery and equipment or the design and tooling into inventory as there was no manufacturing.
This depreciation was included as a selling, general and administrative expense as excess idle
time.
During 2010 when the Company tested its fixed assets for recoverability, it determined that
the value associated with its construction in progress was diminished and recorded an impairment of
$399,000 to adjust the value to zero.
During the second quarter of 2009, a supplier filed suit against CCI alleging that the Company
owes it approximately $377,000. This supplier had previously placed a lien on all of the Companys
machinery and equipment. See Note 10 -Legal Proceedings for additional information regarding this
claim.
Note 4. Licenses, Patents, and Technology
Licenses, patents, and technology include the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Licenses |
|
$ |
320 |
|
|
$ |
220 |
|
Patent costs |
|
|
133 |
|
|
|
133 |
|
LabCorp Technology Agreement |
|
|
260 |
|
|
|
260 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
713 |
|
|
|
613 |
|
Less accumulated amortization |
|
|
(651 |
) |
|
|
(551 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
62 |
|
|
$ |
62 |
|
|
|
|
|
|
|
|
During 2008, the Company purchased a license for certain technology for an initial total of
$200,000. In addition, CCI is obligated to make future payments totaling $100,000 upon obtaining
certain milestones under the agreement. During the year ended December 31, 2010, CCI made payments
of $36,000 and is obligated to make eight additional monthly payments of $8,000 on this liability.
The Company is amortizing the initial license over its estimated useful life of two years, and will
amortize the additional payments over one year. All patent costs and technology have been fully
amortized.
Note 5. Accrued Expenses
Accrued expenses include the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Accrued interest |
|
$ |
60 |
|
|
$ |
363 |
|
Reserve for legal settlement |
|
|
|
|
|
|
220 |
|
Accrued taxes |
|
|
268 |
|
|
|
214 |
|
Accrued compensation |
|
|
90 |
|
|
|
40 |
|
Other accrued expenses |
|
|
179 |
|
|
|
388 |
|
|
|
|
|
|
|
|
Total |
|
$ |
597 |
|
|
$ |
1,225 |
|
|
|
|
|
|
|
|
F-11
Note 6. Notes Payable
Notes payable at December 31 consist of:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Asher Enterprises, Inc., $75,000 Convertible Promissory Note issued March 9, 2010;
interest rate 8% per annum, due December 10, 2010 |
|
$ |
56 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
White White & Van Etten PC, $68,750 non-interest bearing Promissory Note issued
September 30, 2010; payable in eleven equal payments of $6,250; due
August 24, 2011 |
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xillix Technologies Corporation, $361,000 Promissory Note issued June 26, 1998; interest
rate Canadian Prime plus 6% per annum; represents a debt of AccuMed;
due December 27, 1999 |
|
|
34 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate 9% per annum |
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
Ventana Medical Systems, Inc., $62,946 Promissory Note issued November 30, 2003; due
December 31, 2003; interest at 8% per annum payable after December 31, 2003 |
|
|
21 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
$ |
175 |
|
|
$ |
70 |
|
|
|
|
|
|
|
|
On September 2010, the Company made a settlement with White White & Van Etten (White), CCI
owed White $140,000. As a result of this settlement, CCI issued a non-interest bearing promissory
note in the principal amount of $68,750 payable in 11 monthly payments of $6,250 and White forgave
the remaining $71,000. The Company recorded the benefit as a reduction of selling, general and
administration expense. The CCI also imputed interest totaling $2,000 on this note at the rate of
5% per annum and is amortizing the interest over the term of the note. As of December 31, 2010, CCI
has made three payments.
In March 2010, the Company received $75,000 in exchange for a convertible promissory note
payable to Asher Enterprises (Asher), including unpaid interest, and is convertible into common
stock at any time. The note accrues interest at 8% and is unsecured. The conversion price is
variable and is determined as 58% of the average of the lowest three trading prices during the ten
trading day period prior to the conversion notice. As a result, the Company has recorded a
discount of $55,000 and a liability equal to the fixed monetary amount known at inception for the
conversion option. The discount will be amortized over the term of the note using the effective
interest method. Upon issuance of the shares to settle the liability, equity will be increased by
the amount of the liability and no gain or loss will be recognized or any difference between the
fixed monetary amount known at inception and the ending market price. During 2010 CCI recorded a
charge of $55,000 for amortization of the discount and recorded the charge against the derivative
liability. During the fourth quarter of 2010, Asher converted $19,500 of principal due under the
note into an aggregate 1,060,626 shares of common stock at an average conversion price of $0.0184
per share.
The Company has failed to make principal and interest payments when due and is in breach of
certain warranties and representations under the notes included above, except for White. Such notes
require the holder to notify CCI in writing of a declaration of default at which time a cure
period, as specified in each individual note, would commence. CCI has not received any written
declarations of default from holders of its remaining outstanding notes payable.
During year ended December 31, 2010, the Company was advanced $1,013,000 from related parties.
These advances are non-interest bearing and are due on demand. However, using an 8% annual interest
rate the Company has recorded a non-cash interest expense totaling $109,000 on the outstanding
balances.
Note 7. Stockholders Equity
Earnings (loss) per share
A reconciliation of the numerator and the denominator used in the calculation of earnings
(loss) per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Basic and Diluted: |
|
|
|
|
|
|
|
|
Reported net loss (in thousands) |
|
$ |
(2,097 |
) |
|
$ |
(3,552 |
) |
Less unpaid and undeclared preferred stock dividends |
|
|
(266 |
) |
|
|
(266 |
) |
|
|
|
|
|
|
|
Net loss applicable to common stockholder |
|
$ |
(2,363 |
) |
|
$ |
(3,818 |
) |
Weighted average common shares outstanding |
|
|
45,688,465 |
|
|
|
41,874,890 |
|
Net loss per common share |
|
$ |
(.05 |
) |
|
$ |
(.09 |
) |
|
|
|
|
|
|
|
F-12
Stock options and warrants to purchase 4,094,709 and 3,471,197 shares and preferred stock
convertible into 550,483 and 522,045 shares for the years ended December 31, 2010, and 2009,
respectively, were not included in the computation of diluted loss per share applicable to common
stockholders, as they are anti-dilutive as a result of net losses for the years ended December 31,
2010 and 2009, respectively.
Preferred Stock
A summary of the Companys preferred stock as of December 31 is as follows:
A summary of the Companys preferred stock as of December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued & |
|
|
Preferred Stock Dividends |
|
|
|
|
|
|
|
Outstanding |
|
|
Undeclared and Unpaid |
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering |
|
Authorized |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Series A convertible |
|
|
590,197 |
|
|
|
47,250 |
|
|
|
47,250 |
|
|
|
|
|
|
|
|
|
Series B convertible, 10%
cumulative |
|
|
1,500,000 |
|
|
|
93,750 |
|
|
|
93,750 |
|
|
|
37,500 |
|
|
|
37,500 |
|
Series C convertible, 10%
cumulative |
|
|
1,666,666 |
|
|
|
38,333 |
|
|
|
38,333 |
|
|
|
11,500 |
|
|
|
11,500 |
|
Series D convertible, 10%
cumulative |
|
|
300,000 |
|
|
|
175,000 |
|
|
|
175,000 |
|
|
|
175,000 |
|
|
|
175,000 |
|
Series E convertible, 10%
cumulative |
|
|
800,000 |
|
|
|
19,222 |
|
|
|
19,222 |
|
|
|
42,173 |
|
|
|
42,173 |
|
Undesignated Preferred Series |
|
|
5,143,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Preferred Stock |
|
|
10,000,000 |
|
|
|
373,555 |
|
|
|
373,555 |
|
|
|
266,173 |
|
|
|
266,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Preferred Stock Terms
Series A Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$4.50 per share, $212,625 |
Conversion Price:
|
|
$103.034 per share |
Conversion Rate:
|
|
0.04367Liquidation Value divided by Conversion Price ($4.50/$103.034) |
Voting Rights:
|
|
None |
Dividends:
|
|
None |
Conversion Period:
|
|
Any time |
Series B Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$4.00 per share, $375,000 |
Conversion Price:
|
|
$10.00 per share |
Conversion Rate:
|
|
0.40Liquidation Value divided by Conversion Price ($4.00/$10.00) |
Voting Rights:
|
|
None |
Dividends:
|
|
10%QuarterlyCommencing March 31, 2001 |
Conversion Period:
|
|
Any time |
Cumulative dividends in arrears at December 31, 2010 were $370,000 |
Series C Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$3.00 per share, $115,000 |
Conversion Price:
|
|
$6.00 per share |
Conversion Rate:
|
|
0.50Liquidation Value divided by Conversion Price ($3.00/$6.00) |
|
|
|
Voting Rights:
|
|
None |
Dividends:
|
|
10%QuarterlyCommencing March 31, 2002 |
Conversion Period:
|
|
Any time |
Cumulative dividends in arrears at December 31, 2010 were $105,000 |
F-13
Series D Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$10.00 per share, $1,750,000 |
Conversion Price:
|
|
$10.00 per share |
Conversion Rate:
|
|
1.00Liquidation Value divided by Conversion Price ($10.00/$10.00) |
Voting Rights:
|
|
None |
Dividends:
|
|
10%QuarterlyCommencing April 30, 2002 |
Conversion Period:
|
|
Any time |
Cumulative dividends in arrears at December 31, 2010 were $1,605,000 |
Series E Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$22.00 per share, $422,888 |
Conversion Price:
|
|
$8.00 per share |
Conversion Rate:
|
|
2.75Liquidation Value divided by Conversion Price ($22.00/$8.00) |
Voting Rights:
|
|
Equal in all respects to holders of common shares |
Dividends:
|
|
10%QuarterlyCommencing May 31, 2002 |
Conversion Period:
|
|
Any time |
Cumulative dividends in arrears at December 31, 2010 were $391,000 |
Issuance of Securities
Common Stock
During the quarter ended December 31, 2010, CCI received proceeds of $50,000 and issued
833,333 shares of restricted unregistered common stock and warrants to purchase 416,667 shares of
restricted unregistered common stock at a price of $0.06 per share. For the year ended December 31,
2010, the Company received proceeds of $100,000 and issued 1,333,333 shares of restricted
unregister common stock and warrants to purchase 666,333 shares of restricted unregistered shares
of common stock at an average exercise price of $0.07 per share. The warrants have a term of three
years.
During the quarter ended March 31, 2010, a settlement agreement was approved by the court and
CCI issued 2,658,800 shares of restricted unregistered common stock and a warrant to purchase
217,000 shares of restricted unregistered common stock to NeoMed Innovation III L.P. The Company
valued the common stock at $0.19 per share for a total of $505,000 using fair value and the warrant
at $33,000 using the Black-Scholes method. The warrant has a term of three years and is
exercisable immediately. The aggregate cost totaling $538,000 was recorded as other expense in
2009.
Also in the first quarter of 2010, CCI issued 31,637 shares of restricted, unregistered common
stock valued at an average $0.19 per share to a consultant as payment for services rendered. The
Company recorded the value of the common stock at $6,000 and recorded the amount as a selling,
general and administrative expense. The Company also issued 119,169 vested shares of restricted,
unregistered common stock valued at a weighted average $0.19 per share to a consultant as payment
for services rendered. The Company recorded the value of the common stock at $30,000 and recorded
the amount as a selling, general and administrative expense in 2009 and issued the shares in the
second quarter of 2010.
During the quarter ended December 31, 2010, the Company issued 350,000 shares of restricted,
unregistered common stock valued at $0.06 per share to a non-executive employee. The Company
recorded the value of the common stock at $21,000 and recorded the amount as a selling, general and
administrative expense. During the year ended December 31, 2010, CCI issued an aggregate 450,000
vested shares of restricted, unregistered common stock valued at $0.08 per share to a non-executive
employee. The Company recorded the value of the common stock at $36,000 and recorded the amount as
a selling, general and administrative expense.
F-14
Also during the fourth quarter of 2010, a holder of a note converted $19,500 of principal into
1,060,626 shares of common stock at an average fair value of $0.018 per share.
During the quarter ended September 30, 2010, CCI issued 66,667 shares of restricted,
unregistered common stock value at $0.15 per share using fair value for the settlement of debt
totaling $10,000.
On March 23, 2009, the Company offered to all holders of warrants to purchase shares of the
Companys common stock the option to exercise their warrants at a reduced exercise price of $0.25
per share. The original offer expired on April 23, 2009 and was subsequently extended until May 23,
2009. During the year ended December 31, 2009, the Company received gross proceeds of $214,000 from
the exercise of warrants for an aggregate 854,371 shares of unregistered, restricted common stock
in connection with its offer. In addition, our former Chairman of the Board of Directors and our
Chief Executive Officer exercised warrants to purchase an aggregate 670,000 share of unregistered
restricted common stock through the reduction of $168,000 of debt. CCI recorded a charge of $21,000
related to this warrant modification and recorded the amount as interest expense. In addition,
holders of warrants to purchase 28,292 exercised their warrants at the original exercise price. CCI
received approximately $56,000 from these exercises.
During the year ended December 31, 2009, Board of Directors voted to accept, in lieu of
payment for $311,000 due to them, 778,194 shares of restricted, unregistered common stock. The
common stock was valued at a fair value of $0.40 per share. The shares have not been issued by the
transfer agent.
For the year ended December 31, 2009, CCI received proceeds totaling $270,000 and reduced its
debt by $168,000 from the exercise of warrants to purchase an aggregate 1,552,663 shares of
unregistered, restricted common stock. CCI issued 485,000 shares of restricted unregistered common
stock during the year ended December 31, 2010. As of December 31, 2010, 193,333 shares were not yet
issued by the transfer agent.
In the first quarter of the 2009 fiscal year, as described in Note 8 below, the Company issued
to two of its executive officers an aggregate 61,144 shares of restricted, unregistered common
stock valued at $0.50 per share as compensation for services rendered in 2008. The shares were
valued at $31,000, and such amount was recorded as compensation in 2008.
Also, in 2009 the Board of Directors granted each director a bonus of 100,000 shares of
restricted, unregistered common stock for services rendered. The shares granted totaled 700,000 and
were valued at $0.40 per share. The Company recorded a charge of $280,000 as a selling, general and
administrative expense.
In 2009 CCI also issued 16,129 shares of unregistered, restricted common stock to a consultant
and were valued at $0.31 per share. The Company recorded a charge of $5,000 as a selling, general
and administrative expense.
Warrants
During the quarter ended December 31, 2010, CCI issued warrants to a non-executive employee to
purchase 2,000 shares of restricted, unregistered common stock at an exercise price of $0.03 per
share. The warrants were valued at $57 using the Black-Scholes valuation model and recorded the
amount as a selling, general and administrative expense. For the year ended December 31, 2010, the
Company issued warrants to a non-executive employee to purchase an aggregate 13,000 shares of
restricted, unregistered common stock at an average exercise price of $0.10 per share. The warrants
were valued at $1,000 using the Black-Scholes valuation model and recorded the amount as a selling,
general and administrative expense.
During the three months ended December 31, 2009, the Company issued warrants to purchase 2,000
shares of common stock at an exercise price of $0.04 per share to an employee. During the year
ended December 31, 2009, the Company issued warrants to purchase 13,000 shares of common stock with
a weighted average exercise price of $0.16 per share to an employee. CCI valued the warrants at
$2,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation
expense. These warrants have a term of three years and are immediately exercisable.
Conversions of Preferred Stock
F-15
During the year ended December 31, 2009, a holder of four shares of Series E Convertible
Preferred Stock of CCI elected to convert such preferred shares and accrued and unpaid dividends
thereon into 20 unregistered shares of the Companys common stock. Dividends on these preferred
shares were $7.00.
Application of Black-Scholes Valuation Model
In applying the Black-Scholes valuation model, the Company used the following assumptions for
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Expected volatility |
|
|
141% - 265 |
% |
|
|
171% - 250 |
% |
Expected term (years) |
|
|
.21 - 3 |
|
|
|
1 1/2 |
|
Risk-free interest rate |
|
|
1.00 |
% |
|
|
1.00 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Forfeiture rate |
|
|
0 |
% |
|
|
0 |
% |
Resulting weighted average grant date fair value |
|
$ |
0.15 |
|
|
$ |
0.16 |
|
Expected volatility is based solely on historical volatility of our common stock over the
period commensurate with the expected term of the warrants or stock options. The expected term
calculation is based upon the expected term the warrant or option is to be held, which in most
cases is one-half of the term of the warrant or option. The risk-free interest rate is based upon
the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity that is
commensurate with the expected term of the stock options. The dividend yield of zero is based on
the fact that we have never paid cash dividends on our common stock and we have no present
intention to pay cash dividends.
Warrants
At December 31, 2010, the Company had the following outstanding warrants to purchase shares of
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrant |
|
|
Warrant Shares |
|
|
Exercise Price |
|
|
Weighted Average |
|
|
|
Shares Outstanding |
|
|
Exercisable |
|
|
(not weighted) |
|
|
Years until Expiration |
|
|
|
|
4,000 |
|
|
|
4,000 |
|
|
$ |
0.03 |
|
|
|
2.78 |
|
|
|
|
418,667 |
|
|
|
418,667 |
|
|
$ |
0.06 |
|
|
|
2.75 |
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
$ |
0.09 |
|
|
|
1.62 |
|
|
|
|
259,000 |
|
|
|
259,000 |
|
|
$ |
0.10 |
|
|
|
2.89 |
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
$ |
0.17 |
|
|
|
0.86 |
|
|
|
|
9,000 |
|
|
|
9,000 |
|
|
$ |
0.20 |
|
|
|
1.39 |
|
|
|
|
217,000 |
|
|
|
217,000 |
|
|
$ |
0.50 |
|
|
|
2.14 |
|
|
|
|
7,000 |
|
|
|
7,000 |
|
|
$ |
0.61 |
|
|
|
0.68 |
|
|
|
|
25,000 |
|
|
|
25,000 |
|
|
$ |
1.00 |
|
|
|
0.16 |
|
|
|
|
5,000 |
|
|
|
5,000 |
|
|
$ |
1.45 |
|
|
|
0.33 |
|
|
|
|
490,833 |
|
|
|
490,833 |
|
|
$ |
1.50 |
|
|
|
0.32 |
|
|
|
|
5,000 |
|
|
|
5,000 |
|
|
$ |
1.70 |
|
|
|
0.25 |
|
|
|
|
240,095 |
|
|
|
240,095 |
|
|
$ |
1.80 |
|
|
|
0.92 |
|
|
|
|
10,000 |
|
|
|
10,000 |
|
|
$ |
1.89 |
|
|
|
0.53 |
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
$ |
1.90 |
|
|
|
0.43 |
|
|
|
|
2,092,417 |
|
|
|
2,092,417 |
|
|
$ |
2.00 |
|
|
|
0.33 |
|
|
|
|
1,000 |
|
|
|
1,000 |
|
|
$ |
2.23 |
|
|
|
0.25 |
|
|
|
|
283,266 |
|
|
|
283,266 |
|
|
$ |
2.25 |
|
|
|
0.29 |
|
|
|
|
10,000 |
|
|
|
10,000 |
|
|
$ |
3.25 |
|
|
|
0.25 |
|
|
|
|
1,431 |
|
|
|
1,431 |
|
|
$ |
3.50 |
|
|
|
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,084,709 |
|
|
|
4,084,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
Note 8. Equity Incentive Plan and Employee Stock Purchase Plan
On May 25, 1999, CCI stockholders approved the establishment of the 1999 Equity Incentive Plan
effective as of June 1, 1999 (the Plan). The Plan provided that the Board may grant various forms
of equity incentives to directors and employees, including but not limited to Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights, and Restricted Stock Awards.
Grants under the Plan are exercisable at fair market value determined as of the date of grant in
accordance with the terms of the Plan. Grants vest to recipients immediately or ratably over
periods ranging from two to five years, and expire five to ten years from the date of grant.
On May 23, 2000, stockholders approved an amendment to the Plan, which increased the number of
shares of common stock allocated for use in the Plan from 200,000 shares to 300,000 shares. On June
21, 2002, stockholders approved a second amendment to the Plan, which increased the number of
shares allocated for use in the Plan from 300,000 shares to 550,000 shares. On July 29, 2004,
stockholders approved a third amendment to the Plan, which increased the number of shares for use
in the Plan from 550,000 to 2,000,000 shares. The Plan terminated in June 2009.
The Board of Directors has also granted warrants to purchase common stock of CCI that are not
covered by the terms of the Plan.
For the year ended December 31, 2009. The Company did not grant any options under the Plan or
otherwise.
During the year ended December 31, 2010, the Company issued a non-executive employee
warrants to purchase an aggregate 13,000 shares of common stock with exercise prices of $0.03 and
$0.10 per share. The Company valued these warrants at $1,000 using the Black-Scholes valuation
model. The warrants have a term of three years and are immediately exercisable.
During the quarter ended March 31, 2009, CCIs Chief Executive Officer and Chief Operating
Officer elected to receive a portion of their compensation, totaling 39,459 and 21,685 shares
respectively, in restricted, unregistered common stock for services rendered in 2008. CCI valued
the common stock at $0.50 per share for an aggregate total of $31,000 using the fair value method
and recorded such value as compensation expense in 2008.
During the quarter ended June 30, 2009, our former Chairman of the Board of Directors and our
Chief Executive Officer exercised warrants to purchase an aggregate 670,000 shares of unregistered,
restricted common stock at a modified price of $0.25 through the reduction of $168,000 of debt. CCI
recorded a charge of $21,000 related to this warrant modification and recorded the amount as
interest expense for the three months ended June 30, 2009.
The fair value of each stock option and warrant award was determined as of the date of grant
using the Black-Scholes option-pricing model with the following assumptions in each of the years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Expected volatility |
|
|
141% - 265 |
% |
|
|
171% - 250 |
% |
Expected term (years) |
|
|
.21 -3 |
|
|
|
1 1/22 |
|
Risk-free interest rate |
|
|
1.00 |
% |
|
|
1.00 |
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Forfeiture rate |
|
|
0 |
% |
|
|
0 |
% |
Resulting weighted average grant date fair value |
|
$ |
0.09 |
|
|
$ |
0.16 |
|
Expected volatility is based solely on historical volatility of our common stock over the
period commensurate with the expected term of the warrants or stock options. The expected term
calculation is based upon the expected term the warrant or option is to be held, which in most
cases is one-half of the term of the warrant or option. The risk-free interest rate is based upon
the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity that is
commensurate with the expected term of the stock options. The dividend yield of zero is based on
the fact that we have never paid cash dividends on our common stock and we have no present
intention to pay cash dividends.
F-17
As of December 31, 2010, there were no unrecognized compensation costs related to unvested
share-based compensation arrangements since all costs related to grants in 2010 or previous years
were fully recognized as of December 31, 2010.
A summary of the Companys stock option activity and related information follows:
1999 Stock Option Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
Remaining |
|
|
|
|
|
|
|
Exercise |
|
|
Intrinsic |
|
|
Contractual |
|
|
|
Options |
|
|
Price |
|
|
Value |
|
|
Life (Years) |
|
Outstanding at December 31, 2008 |
|
|
110,786 |
|
|
$ |
2.974 |
|
|
$ |
0.00 |
|
|
|
0.15 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(100,786 |
) |
|
$ |
2.000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
10,000 |
|
|
$ |
11.940 |
|
|
$ |
0.00 |
|
|
|
1.42 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
10,000 |
|
|
$ |
11.940 |
|
|
$ |
0.00 |
|
|
|
0.42 |
|
Warrants and options issued outside of the Plan for employee compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
Remaining |
|
|
|
Options and |
|
|
Exercise |
|
|
Intrinsic |
|
|
Contractual |
|
|
|
Warrants |
|
|
Price |
|
|
Value |
|
|
Life (Years) |
|
Outstanding at December 31, 2008 |
|
|
1,384,000 |
|
|
$ |
1.80 |
|
|
$ |
7,000 |
|
|
|
|
|
Granted |
|
|
13,000 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(595,000 |
) |
|
$ |
1.60 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
802,000 |
|
|
$ |
2.05 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
13,000 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(180,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
635,000 |
|
|
$ |
1.91 |
|
|
|
|
|
|
|
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the Annual Meeting of Stockholders on May 25, 1999, CCI stockholders also approved the 1999
Employee Stock Purchase Plan (the Purchase Plan). The Purchase Plan offered employees the
opportunity to purchase shares of common stock of CCI through a payroll deduction plan at 85% of
the fair market value of such shares at specified enrollment measurement dates. The Purchase Plan
terminated during the second quarter of 2009. There was no activity in the Purchase Plan in 2009.
Note 9. Leases
The current facilities lease is for a term of five years terminating on October 31, 2013, with
one option to terminate the lease with nine months notice on October 31, 2011. The lease provides
for initial annual rental payments of approximately $127,000, increasing each year to reach
$150,000 in the final year of the lease. Total rental expense related to the Companys headquarters
location during the years ended December 31, 2009 and 2008 was $133,000 and $136,000, respectively.
F-18
Future minimum annual lease payments under these leases as of December 31, 2010 are:
|
|
|
|
|
|
|
Operating |
|
Year |
|
Leases |
|
|
|
(in thousands) |
|
2011 |
|
$ |
141 |
|
2012 |
|
|
145 |
|
2013 |
|
|
124 |
|
2014 |
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
Total |
|
$ |
410 |
|
|
|
|
|
Note 10. Income Taxes
The provision for income taxes consists of the following for the years ended December 31, 2010
and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Federal |
|
$ |
|
|
|
$ |
|
|
State and local |
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Current |
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense |
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010 and 2009, the provision for income taxes differs from
the expected tax provision computed by applying the U.S. federal statutory rate to income before
taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Statutory U.S. federal rate |
|
|
(34.0 |
)% |
|
|
(34.0) |
% |
Permanent differences |
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
34.0 |
% |
|
|
34.0 |
% |
Provision for income tax
expense(benefit) |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
The significant components of the Companys deferred tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards |
|
$ |
29,527 |
|
|
$ |
29,000 |
|
Non-cash compensation |
|
|
189 |
|
|
|
156 |
|
Writedown of intangibles |
|
|
38 |
|
|
|
9 |
|
Provision for inventory adjustment |
|
|
136 |
|
|
|
136 |
|
Provision for fixed asset impairment |
|
|
136 |
|
|
|
|
|
F-19
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Accrued Liabilities |
|
|
(11 |
) |
|
|
24 |
|
Allowance and reserves |
|
|
|
|
|
|
5 |
|
|
|
|
Total Deferred Tax Assets |
|
|
30,015 |
|
|
|
29,330 |
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset |
|
|
30,015 |
|
|
|
29,330 |
|
Valuation Allowance |
|
|
(30,015 |
) |
|
|
(29,330 |
) |
|
|
|
Net Deferred Tax Asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
At December 31, 2010 and 2009, CytoCore had net operating loss carry forwards for U.S. federal
income tax of approximately $69.9 million and $68.6 million and state income tax of approximately
$82.3 million and $81.1 million respectively, which will begin to expire in 2018 and 2017,
respectively. In September 2001, the Company acquired 100% of the outstanding stock of AccMed
International, Inc. by means of merger of AccuMed into a wholly-owned subsidiary of the Company.
AccuMed had a net operating loss carry forward for U.S. federal income tax purposes. For federal
tax purposes, the acquired NOL is subject to limitation as prescribed under IRC Section 382 to
approximately $6.2 million. The net operating loss carry forward began expiring at approximately
$415,000 per year, starting December 31, 2006. At December 31, 2010 total net operating loss carry
forward from AccuMed is approximately $3.0 million.
For financial reporting purposes, the entire amount of deferred tax assets related principally
to the net operating loss carry forwards has been offset by a valuation allowance due to
uncertainty regarding the realization of the assets. The valuation allowance increased by
approximately $0.6 million and $0.7 million for the years ended December 31, 2010 and 2009,
respectively.
Tax Uncertainties
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109. The interpretation prescribes recognition and measurement parameters for the financial
statement recognition and measurement of tax positions taken or expected to be taken in the
Companys tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized
is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being
realized upon ultimate settlement.
Pursuant to FIN 48, the Company has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as open tax years in these
jurisdictions. The periods subject to examination for the Companys tax returns are for the years
2008 and 2009. The Company believes that its income tax filing positions and deductions would be
sustained on audit and does not anticipate any adjustments that would result in a material change
to its financial position. Therefore, no reserves for uncertain income tax positions have been
recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment
related to the adoption of FIN 48.
The following table summarizes the activity related to the Companys gross unrecognized tax
benefits (in millions):
|
|
|
|
|
|
|
Amount |
|
Gross Unrecognized tax benefits at December 31, 2009 |
|
$ |
|
|
Increases in tax positions for current year |
|
|
|
|
Settlements |
|
|
|
|
Lapse in statute of limitations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrecognized tax benefits at December 31, 2010 |
|
$ |
|
|
|
|
|
|
The Company is subject to U.S. federal income tax including state and local jurisdictions.
Currently, no federal or state income tax returns are under examination by the respective taxing
jurisdictions.
F-20
The Companys accounting policy is to recognize interest and penalties related to uncertain tax
positions in income tax expense. The Company has not accrued interest for any periods.
Note 11. Derivative Liability
In March 2010, as discussed in Note 7, the Company issued a note with a variable conversion
feature. This resulted in the Company having an aggregate number of shares of common stock issued
as well as instruments convertible or exercisable into common shares that potentially may exceed
the number of the Companys total authorized common shares. Consequently, the Company is required
to record a liability for the potential excess of shares over the authorized amount. The Company is
required to revalue this liability no less than every quarter. The Company determined that the
excess shares were related to warrants issued and outstanding as of March 31, 2010. Based upon the
Financial Accounting Standards Board (FASB) guidance, the Company determined the fair value of
these excess shares using the Black-Scholes valuation model. As a result, the Company recorded an
initial liability of $313,000. The Company increased the liability and reduced additional paid in
capital by $173,000 as a result of an additional derivative liability for new warrants and
convertible preferred stock. As of December 31, 2010, the Company remeasured this liability, and
the Company reduced this liability to $44,000 and correspondingly recorded an unrealized benefit of
$96,000. Also included in the derivative liability balance at December 31, 2010 is $55,000 from a
note discounted as described in Note 7. As a result, the derivative liability has a balance of
$99,000 as December 31, 2010.
Note 12. Commitments and contingencies
Legal Proceedings
Settled in 2010
NeoMed Innovation III L.P. In October 2007, NeoMed Innovation III L.P. (NeoMed) filed suit
against the Company in the United State District Court, Eastern District of Illinois (Case No. 07C
5721). NeoMed alleged that the Company breached a contract with NeoMed. The alleged contract
provided among other things that the Company would exchange two existing notes for a new note in
the principal amount of $1,110,000 with an interest rate of 12%, payable on July 31, 2003 at the
option of the holder in the form of common stock valued at $1.50 (adjusted for stock splits and
equity raised at lower valuations). In 2006, the Company paid to NeoMed $1,060,000 and accrued
interest calculated at 7% totaling $318,913. Despite accepting this payment, NeoMed demanded that
the Company honor the alleged contract.
In April 2009, the Company entered into a tentative settlement agreement with NeoMed. The
terms of the agreement provided that the Company would issue to NeoMed 2,658,800 shares of
restricted, unregistered common stock and a warrant to purchase 217,000 shares of restricted
unregistered common stock at an exercise price of $0.50 per share. As a result of the tentative
settlement, the Company made an additional provision totaling $948,000, which was charged to other
expense in the first quarter of 2009. In February 2010, the settlement agreement was approved by
the court and CCI issued 2,658,800 shares of restricted unregistered common stock and a warrant to
purchase 217,000 shares of restricted unregistered common stock to NeoMed. The warrant has a term
of three years and is exercisable immediately. As a result of the settlement becoming final, CCI
reduced the $948,000 provision to $222,000 in the fourth quarter. The $726,000 credit was applied
to other expense.
Wildman, Harrold, Allen & Dixon LLP. In November 2009, Wildman, Harrold, Allen & Dixon
(Wildman) filed suit against the Company in the Circuit Court of Cook County Illinois (Case No.
2009-L-013902). Wildman alleged that the Company failed to pay for legal services in the amount of
$41,407. In January 2010, the Company entered into a Confession of Judgment and a payment plan with
Wildman. The Company has made all of the required payments and believes that it has no further
obligation.
Pending as of December 31, 2010
MedPlast Elkhorn, Inc. In May 2009, MedPlast Elkhorn, Inc. (MedPlast) filed suit against the
Company in the Circuit Court, Walworth County, Wisconsin (Case No. 09 CV00721). MedPlast alleges
that the Company has failed to pay
F-21
for certain tools and materials used in the manufacturing of the
Companys products. MedPlast is asking for payment of $377,000. The Company believes that it has
made adequate provision for any obligation to MedPlast.
Securities and Exchange Commission
SEC Civil Action. In January 2011, the Securities and Exchange Commission (SEC) filed a
civil injunction action against the Company, Daniel J. Burns, the former Chairman of the Board of
Directors of the Company, and Robert F. McCullough, Jr., Chairman of the Board, Chief Executive
Officer and Chief Financial Officer of the Company, in the United States District Court sitting in
the Northern District of Illinois. The SEC alleged that between 2003 and 2008, the Company paid
compensation to unregistered broker/dealers and failed to accurately report the beneficial
ownership of certain of our officers and directors in our SEC filings. In February, 2011, the
Company consented to the entry of a final judgment which permanently restrains and enjoins the
Company from violating Section 14(a) of the Securities Exchange Act of 1934, as amended (the
Exchange Act), Section 15(a) of the Exchange Act, and from aiding and abetting others in such
violations. In connection with the foregoing settlement, the Company agreed that for a period of
at least two years it will establish and comply with internal policies and procedures designed to
prevent it from future violations of certain federal securities laws.
As a result of the SEC complaint, the company learned that false billing for expense had been
submitted to it by a former board member noted in the complaint.
Other claims
Other Creditors. CCI was a party to a number of other proceedings, informal demands, or debt
for services brought by former unsecured creditors to collect past due amounts for services. CCI is
attempting to settle these demands and unfilled claims. CCI does not consider any of these claims
to be material.
During the year ended December 31, 2010, CCI entered into a settlement with a vendor to pay
$69,000. As a result, the vendor forgave $71,000 of debt. The settlement was recorded as a
reduction in Selling, General and administration expense. Also in fourth quarter of 2010, a former
employee entered into a settlement with CCI. The Company paid the former employee $15,000 and
recorded a reduction of $64,000 in Research and Development.
In 2009, a vendor entered into a non-cash settlement releasing the Company from an obligation
totaling $457,000. The settlement was recorded as a reduction in Research and Development expense.
Commitments
The Company has entered into long term commitments with a distributer in China
As a result of cash constraints experienced by the Company, the Illinois Franchise Taxes due
for the year 2010 and 2009 have not been paid. CCI believes that it has made adequate provision for
the liability including penalties and interest.
Note 13. Related Party Transactions
During the year ended December 31, 2010, the Company was advanced $1,013,000 from related
parties. These advance are payable upon demand and are non-interest bearing.
During the year ended December 31, 2009, the Company was advanced $884,000 from related
parties. Of these advances, $121,000 was used to exercise warrants held by the lender in lieu of
the Company receiving cash payments. This resulted in a remaining balance of $763,000 as of
December 31, 2009. These advance are payable upon demand and are non-interest bearing.
Our Chief Executive Officer exercised warrants to purchase an aggregate 485,000 shares of
unregistered restricted common stock at a modified price of $0.25 through the reduction of $121,500
of debt. CCI recorded a charge of $15,000 related to this warrant modification for those warrants
which were originally issued as stock based compensation. These shares were issued in 2010
In 2009, our former Chairman of the Board Daniel J. Burns exercised warrants to purchase an
aggregate 185,000 shares of unregistered, restricted common stock at a modified price of $0.25
through the reduction of $46,000 of debt owed
F-22
by CCI to him. This warrant modification was made
available by the Company to all holders of warrants to purchase shares of the common stock of the
Company.
Note 13. Subsequent Events
Through April 8, 2011, the Company received additional advances of $245,000 from a related
party to fund operations. These advances are non-interest bearing and are due on demand.
Also during the first quarter of 2011, Asher Enterprises, Inc. converted $30,000 of principal
due under their note into 3,025,812 shares of common stock at an average conversion price of $0.01
per share.
F-23