UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
| ¨ | 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 | 36-4296006 | |
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
| 414 North Orleans Street, Suite 510 | ||
| Chicago, IL 60654 | ||
| (Address of Principal Executive Offices) | ||
| (312) 222-9550 | ||
| (Registrant’s Telephone Number, Including Area Code) | ||
| (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨ (not required)
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 Rue 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer ¨ | Accelerated Filer ¨ |
| Non-Accelerated Filer ¨ | Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
common STOCK, $0.001 par value, AT May 11, 2013: 79,112,710
CYTOCORE, Inc.
Quarterly Report on Form 10-Q
Table of contents
| Page | ||
| PART I. – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | |
| a) Condensed Consolidated Balance Sheets – March 31, 2013(unaudited) and December 31, 2012 | 2 | |
| b) Condensed Consolidated Statements of Operations — Three months ended March 31, 2013 and March 31, 2012 (unaudited) | 3 | |
| c) Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2013 and March 31, 2012 (unaudited) | 4 | |
| d) Notes to Unaudited Condensed Consolidated Financial Statements | 5 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 |
| Item 4. | Controls and Procedures | 12 |
| Part II. — Other Information | ||
| Item 1. | Legal Proceedings | 13 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 13 |
| Item 3. | Defaults upon Senior Securities | 13 |
| Item 6. | Exhibits | 13 |
| SIGNATURES | 14 | |
| EXHIBIT INDEX | 15 | |
| Exhibit 31.1 Section 302 Certification | ||
| Exhibit 32.1 Section 906 Certification | ||
| 1 |
Part I. — Financial Information
Item 1. Financial Statements
CYTOCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
| March 31, | December 31, | |||||||
| 2013 | 2012* | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 7 | $ | 39 | ||||
| Accounts receivable | 25 | 134 | ||||||
| Prepaid expenses and other current assets | 10 | 10 | ||||||
| Total current assets | 42 | 183 | ||||||
| Fixed assets, net | 51 | 79 | ||||||
| Total assets | $ | 93 | $ | 262 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | 458 | 681 | ||||||
| Accrued payroll costs | 2,886 | 2,705 | ||||||
| Advances payable to related parties | 3,230 | 3,175 | ||||||
| Accrued expenses | 744 | 903 | ||||||
| Notes payable | 70 | 70 | ||||||
| Total current liabilities | 7,388 | 7,534 | ||||||
| Stockholders’ Deficit: | ||||||||
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; 373,355 and shares issued and outstanding at March 31, 2013 and December 31, 2012 (Liquidation value of all classes of preferred stock $2,871 at March 31, 2013) | 1,487 | 1,487 | ||||||
| Common stock, $0.001 par value; 500,000,000 shares authorized; 79,112,710 and 69,812,062 shares issued and issuable and 79,093,501 and 69,792,853 shares outstanding at March 31, 2012 and December 31, 2011, respectively | 79 | 78 | ||||||
| Additional paid-in-capital | 93,487 | 93,407 | ||||||
| Treasury stock: 19,209 shares at March 31, 2013 and December 31, 2012 | (327 | ) | (327 | ) | ||||
| Accumulated deficit | (102,021 | ) | (101,917 | ) | ||||
| Total stockholders’ deficit | (7,295 | ) | (7,272 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 93 | $ | 262 | ||||
* Derived from audited information
See accompanying notes to these condensed consolidated financial statements.
| 2 |
CYTOCORE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2013 | 2012 | |||||||
| Net sales | $ | 11 | $ | 24 | ||||
| Operating expenses | ||||||||
| Cost of revenues | 6 | 16 | ||||||
| Research and development | 81 | 73 | ||||||
| Selling, general, and administrative, (net of adjustment of trade debt of $193,000 and reduction in accrued franchise tax for the three months ended March 31, 2013) | (35 | ) | 459 | |||||
| Total operating expenses | 52 | 548 | ||||||
| Operating Income (loss) | (41 | ) | (524 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense – related party | (61 | ) | (54 | ) | ||||
| Interest expense | (2 | ) | (3 | ) | ||||
| Total other income (expense) | (63 | ) | (57 | ) | ||||
| Net loss | (104 | ) | (581 | ) | ||||
| Preferred stock dividend | (66 | ) | (66 | ) | ||||
| Net loss applicable to common stockholders | $ | (170 | ) | $ | (647 | ) | ||
| Basic and diluted net loss per common share | $ | (0.00 | ) | $ | (0.01 | ) | ||
| Weighed average number of common shares outstanding | 78,610,477 | 67,163,767 | ||||||
See accompanying notes to these condensed consolidated financial statements.
| 3 |
CYTOCORE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2013 | 2012 | |||||||
| Operating Activities: | ||||||||
| Net loss | $ | (104 | ) | $ | (581 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 29 | 57 | ||||||
| Common stock issued for compensation | — | 15 | ||||||
| Reduction in accrual for franchise taxes | (173 | ) | — | |||||
| Interest expense imputed on related party advances | 61 | 54 | ||||||
| Common stock issued for services | 20 | 50 | ||||||
| Gain on settlements of trade indebtedness | (193 | ) | — | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 109 | (19 | ) | |||||
| Prepaid expenses and other current assets | — | — | ||||||
| Accounts payable | (30 | ) | (36 | ) | ||||
| Accrued expenses | 195 | 217 | ||||||
| Net cash used in operating activities | (86 | ) | (243 | ) | ||||
| Investing activities: | — | — | ||||||
| Net cash used in investing activities | ||||||||
| Financing activities: | ||||||||
| Proceeds from related parties | 55 | 231 | ||||||
| Net cash provided by financing activities | 55 | 231 | ||||||
| Net increase (decrease) in cash and cash equivalents | (31 | ) | (12 | ) | ||||
| Cash and cash equivalents at the beginning of period | 38 | 15 | ||||||
| Cash and cash equivalents at end of period | $ | 7 | $ | 3 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Common stock issued for services | $ | 20 | $ | 50 | ||||
| Imputed interest recorded | 61 | 54 | ||||||
| Cash paid for interest | — | — | ||||||
| Cash paid for taxes | — | — | ||||||
See accompanying notes to these condensed consolidated financial statements.
| 4 |
CYTOCORE, INC.
Notes to Consolidated Financial Statements
(Tabular data in thousands, except per share amounts)
(Unaudited)
| Note 1. | Organization |
CytoCore, Inc. was incorporated in Delaware in December 1998. Except where the context otherwise requires, the “Company” refers to CytoCore, Inc. and our subsidiaries and predecessors.
Currently, the Company has one product of its own for sale – its SoftPap collector. The Company 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. The Company 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 the Company 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.
The Company has also begun marketing and selling a companion product that is designed to detect breast cancer, which is manufactured by a third party.
The Company has incurred significant operating losses since its inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement the Company’s business plan and develop, manufacture and market its products. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. Implementation of the Company’s plans and its ability to continue as a going concern will depend upon the Company’s ability to increase sales of its products, develop new products, and raise additional capital. At March 31, 2013, the Company had $7,000 to fund its operations.
If the Company is unable to obtain adequate additional financing or generate sufficient sales revenues, it will be unable to continue its product development efforts and other activities and will be forced to curtail or cease operations. The consolidated financial statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.
| Note 2. | Basis of Presentation |
The consolidated financial statements for the periods ended March 31, 2013 and 2012 included herein are unaudited. Such consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2013 or for any other period. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the interim information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission (“SEC”).
The Company does not have any comprehensive income or loss.
| 5 |
| Note 3. | Fixed Assets |
Fixed assets consist of the following:
| March 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| (unaudited) | ||||||||
| Furniture and fixtures | $ | 47 | $ | 47 | ||||
| Laboratory equipment | 508 | 508 | ||||||
| Computer and communications equipment | 261 | 261 | ||||||
| Design and tooling | 1,204 | 1,204 | ||||||
| 2,020 | 2,020 | |||||||
| Less accumulated depreciation and amortization | (1,969 | ) | (1,941 | ) | ||||
| Total | $ | 51 | $ | 79 | ||||
For the quarters ended March 31, 2013 and 2012, depreciation expense was $29,000 and $57,000, respectively. The Company did not allocate any of the depreciation expense of the machinery and equipment or the design and tooling into inventory since the Company has suspended manufacturing. This depreciation was included as a selling, general and administrative expense as excess idle time.
| Note 4. | Accrued Expenses |
Accrued expenses include the following:
| March 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| (unaudited) | ||||||||
| Accrued interest | $ | 67 | $ | 65 | ||||
| Accrued franchise and other taxes | 338 | 484 | ||||||
| Accrued compensation | 200 | 190 | ||||||
| Other accrued expenses | 139 | 164 | ||||||
| Total | $ | 744 | $ | 903 | ||||
| Note 5. | Notes Payable and Advances-related parties |
Notes payable to unrelated parties consist of:
| March 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| (Unaudited) | ||||||||
| Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate 9% per annum, due December 20, 2001. | 15 | 15 | ||||||
| Ventana Medical Systems, Inc. $62,946 Promissory Note issued November 30, 2003; due December 31, 2003; interest rate 8% per annum payable after December 31, 2003 | 21 | 21 | ||||||
| Xillix Technologies Corporation $361,000 Promissory Note issued June 26, 1998; Interest rate Canadian Prime plus 6% per annum, due December 27, 1999; represents a debt of AccuMed | 34 | 34 | ||||||
| $ | 70 | $ | 70 | |||||
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. Such notes require the holder to notify the Company in writing of a declaration of default at which time a cure period, as specified in each individual note, would commence. The Company has not received any written declarations of default from holders of its remaining outstanding notes payable.
| 6 |
During the three months ended March 31, 2013, the Company was advanced $55,000 from a related party. 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 approximately $61,000 and $52,905 on the outstanding balance for the quarter ended March 31, 2013 or 2012, respectively.
| Note 6. | Stockholders’ Equity (Deficit) |
Loss per share
A reconciliation of the numerator and the denominator used in the calculation of loss per share is as follows:
| March 31, | March 31, | |||||||
| 2013 | 2012 | |||||||
| (unaudited) | ||||||||
| Basic and Diluted: | ||||||||
| Net loss applicable to common stockholder (in thousands) | $ | (170 | ) | $ | (647 | ) | ||
| Weighted average common shares outstanding | 78,610,477 | 67,163,767 | ||||||
| Net loss per common share | $ | (0.00 | ) | $ | (0.01 | ) | ||
Warrants to purchase 705,667 and 922,667 common shares and preferred stock convertible into 613,191 and 584,891 common shares 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 periods ended March 31, 2013 and March 31, 2012, respectively.
Preferred Stock
A summary of the Company’s preferred stock is as follows:
| March 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Shares Issued & | Shares Issued & | |||||||
| Offering | Outstanding | Outstanding | ||||||
| (unaudited) | ||||||||
| Series A convertible | 47,250 | 47,250 | ||||||
| Series B convertible, 10% cumulative dividend | 93,750 | 93,750 | ||||||
| Series C convertible, 10% cumulative dividend | 38,333 | 38,333 | ||||||
| Series D convertible, 10% cumulative dividend | 175,000 | 175,000 | ||||||
| Series E convertible, 10% cumulative dividend | 19,022 | 19,022 | ||||||
| Total Preferred Stock | 373,355 | 373,355 | ||||||
As of March 31, 2013 and 2012, the Company had cumulative preferred undeclared and unpaid dividends. In accordance with the Financial Accounting Standard Board’s Accounting Standards Codification 260-10-45-11, “Earnings per Share”, these dividends were added to the net loss in the net loss per share calculation.
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: | 0.04367—Liquidation 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: | 0.40—Liquidation Value divided by Conversion Price ($4.00/$10.00) |
| Voting Rights: | None |
| Dividends: | 10%—Quarterly—Commencing March 31, 2001 |
| Conversion Period: | Any time |
Cumulative and undeclared dividends in arrears at March 31, 2013 were $454,000
| 7 |
Series C Convertible Preferred Stock
| Liquidation Value: | $3.00 per share, $115,000 |
| Conversion Price: | $6.00 per share |
| Conversion Rate: | 0.50—Liquidation Value divided by Conversion Price ($3.00/$6.00) |
| Voting Rights: | None |
| Dividends: | 10%—Quarterly—Commencing March 31, 2002 |
| Conversion Period: | Any time |
Cumulative and undeclared dividends in arrears at March 31, 2013 were $131,000
Series D Convertible Preferred Stock
| Liquidation Value: | $10.00 per share, $1,750,000 |
| Conversion Price: | $10.00 per share |
| Conversion Rate: | 1.00—Liquidation Value divided by Conversion Price ($10.00/$10.00) |
| Voting Rights: | None |
| Dividends: | 10%—Quarterly—Commencing April 30, 2002 |
| Conversion Period: | Any time |
Cumulative and undeclared dividends in arrears at March 31, 2013 were $1,998,000
Series E Convertible Preferred Stock
| Liquidation Value: | $22.00 per share, $418,488 |
| Conversion Price: | $8.00 per share |
| Conversion Rate: | 2.75—Liquidation Value divided by Conversion Price ($22.00/$8.00) |
| Voting Rights: | Equal in all respects to holders of common shares |
| Dividends: | 10%—Quarterly—Commencing May 31, 2002 |
| ConversionPeriod: | Any time |
Cumulative and undeclared dividends in arrears at March 31, 2013 were $480,000
Issuance of Common Stock as Payment for Services
During the quarter ended March 31, 2013, the Company issued 886,294 shares of restricted, unregistered common stock to a consultant for services rendered, and recorded $20,000 as a selling, general and administrative expense.
| Note 7. | Commitments and contingencies |
Legal Proceedings
There are no pending legal proceedings against the Company. To the Company’s knowledge, there have been no cases initiated by or against the Company, nor any cases resolved, since the date of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 was filed with the SEC.
The Company has been 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. The Company is attempting to settle these demands and unfilled claims. The Company does not consider any of these claims to be material.
During the quarter ended March 31, 2012, the Company recorded a write off totaling $193,000 of trade debt deemed uncollectible by the holder due to the expiration of the statute of limitations. The settlement was recorded as a reduction of selling, general and administration expense.
Contingencies
The Company has not filed its franchise returns for 2012, 2011, 2010 and 2009 or paid its franchise tax for those years. During the quarter, the Company remeasured its liability for unpaid franchise taxes and, as a result, reduced its liability by $235,000. The Company believes that it has made adequate provision for the liability including penalties and interest.
| 8 |
| Note 8. | Change of Estimate |
During the quarter the Company reviewed its estimate for unpaid franchise taxes for the years 2008 through 2012 and changed the method of its accrual for certain states. The change in estimate resulted in a reduction of the liability owed for prior years’ franchise taxes for certain states. The effect is as follows:
| Reduction of net loss | $ | 173 | ||
| Basic and diluted net loss to Common shareholders | $ | (0.00 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Caution Regarding Forward-Looking Statements
This report contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: 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, our ability to develop new products and respond to technological changes in the markets in which we compete, our ability to obtain government approvals of our products, our ability to market our products, changes in third-party reimbursement procedures, and such other factors that may be identified from time to time in our Securities and Exchange Commission ("SEC") filings and other public announcements including those set forth under the caption “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012. 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. Readers are cautioned not to place undue reliance on our forward-looking statements, as they speak only as of the date made. Except as required by law, we assume no duty to update or revise our forward-looking statements.
Overview of CytoCore, Inc.
Cytocore, Inc. (the “Company,” “we” or “us”) is developing an integrated family of cost-effective products for the detection, diagnosis and treatment of cancer under the trade name of CytoCore Solutions®. Currently, we have one of our own products for sale – our SoftPap collector. We are developing, 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®. Our products are intended to address sample collection, specimen preparation, specimen evaluation (including detection/screening and diagnosis), and patient treatment and monitoring within vertical markets related to specific cancers. Current CytoCore Solutions products are focused upon cervical cancer. We plan to expand our focus 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.
| 9 |
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 the SoftPAP®, a sample collection device approved by the U.S. Food and Drug Administration, and are licensed to sell the PadKitÔ collection device and GluCyteÔ cell preservative. We are focusing on the development and testing of cocktail assay markers and stains for use with the Company’s Automated Image Proteomic System (AIPSÔ) to screen for various cancers.
The Company has also began marketing and selling a companion product which is designed to detect breast cancer. This product is manufactured by a third party.
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 our products.
Outlook
We have incurred significant losses since inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement our business plan and develop, manufacture and market our products. Implementation of our plans and our ability to continue as a going concern will depend upon our ability to increase sales of our products, develop new products, and raise substantial additional capital. During the year ended December 31, 2012, we raised approximately $639,000 through advances from related parties. During the three months ended March 31, 2013, we raised approximately $55,000 through advances from related parties.
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.
Critical Accounting Policies and Changes to Accounting Policies
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, and (2) estimates as to the valuation allowance for the amounts recorded and held as property and equipment.
There have been no material changes in our critical accounting policies or critical accounting estimates since December 31, 2012, nor have we adopted any accounting policy that has or will have a material impact on our consolidated financial statements. In the quarter ended March 31, 2013 we changed the way we estimate franchise taxes due from certain states. This change in estimate resulted in a significant reduction in the liability we estimate to owe to certain states for past franchise tax years. Reference Note 8 of the Financial Statements. For further discussion of our critical accounting policies, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, including the notes to our consolidated financial statements included therewith, as filed with the SEC.
Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements presented in Part I, Item 1 of this Quarterly Report and the notes thereto, and our audited consolidated financial statements and notes thereto, as well as our Management’s Discussion and Analysis, contained in our Annual Report on Form 10-K for the year ended December 31, 2012.
| 10 |
Three Months Ended March 31, 2013 as compared to Three Months Ended March 31, 2012
Revenue
Revenues for the three months ended March 31, 2013 decreased $13,000, or 46%, to $11,000 from $24,000 for the three months ended March 31, 2012. This decrease was the result of lower sales of a collection system relating to the detection of breast cancer, which we are selling on behalf of another company. Licensing revenue decrease approximately $2,000 to $4,000 for the quarter ended March 31, 2013.
Costs and Expenses
Cost of Revenues
Cost of revenues for the quarter ended March 31, 2013 was $6,000, a decrease of $10,000 or 63% from $16,000 for the quarter ended March 31, 2012. This decrease was a result of lower sales of the collection system relating to the detection of breast cancer, which we are selling on behalf of another company.
Research and Development
For the three months ended March 31, 2013, our research and development (“R&D”) expenses were $81,000, an $8,000, or 11%, increase from $73,000 for the corresponding period in 2012. Of this $8,000 increase, $9,000 related to an increase in payments to consultants, which was partially offset by a decrease of $1,000 in other costs.
R&D expenses consist primarily of costs related to specific development programs with scientists and researchers and expenses incurred by engineers and researchers at our Chicago facility.
Selling, General and Administrative
For the three months ended March 31, 2013, selling, general and administrative expenses (“SG&A”) were $331,000 before an adjustment of trade debt totaling $193,000 and an adjustment for an accrual for franchise taxes totaling $173,000, resulting in a net gain of $35,000. The SG&A expenses represent a $494,000, or 108%, decrease from SG&A expenses of $459,000 for the corresponding period in 2012. Of this $494,000 decrease, depreciation expense decreased $27,000, marketing costs decreased $52,000, professional fees decreased $45,000, travel expenses decreased $7,000, administrative payroll cost decreased $5,000, transfer agent fees decrease $1,000, $193,000 related to the adjustment of trade debt and a $173,000 reduction in the franchise tax expense. These decreases were partially offset by an increase of $9,000 in other costs.
Other Income (Expense)
Interest expense increased $6,000 to $63,000 for the three month period ended March 31, 2013 from $57,000 for the three month period quarter ended March 31, 2012. Of this increase, $7,000 relates to the non-cash charge for related party advances, offset by a reduction of other interest expense.
Net Loss
The net loss from operations for the three-month period ended March 31, 2013 was $104,000, as compared to $581,000 for the corresponding period in 2012, a decrease of $477,000, or 93%. Of this decrease, $494,000 resulted from the decrease in SG&A expenses partially offset by increases in R&D, interest expense and a decrease in revenues.
The net loss applicable to common stockholders, which reflects the unpaid and undeclared preferred stock dividends from the period, decreased to $170,000 for the quarter ended March 31, 2013 from $647,000 for the quarter ended March 31, 2012, a decrease of $477,000, or 74%. The net loss per common share for each of the three month periods ended March 31, 2013 and March 31, 2012 was $0.00 and $0.01 per share, respectively, on 78,610,477 and 67,163,767 weighted average common shares outstanding, respectively.
| 11 |
Liquidity and Capital Resources
To date, our capital resources and liquidity needs have been met from advances from related parties, and 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 products and 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 obtained operating funds for the business since inception through private offerings of debt and equity securities to U.S. accredited and foreign investors. We will be required to make additional offerings in the future to support our operations until we are able to generate sufficient income from the sale of our products. We used $86,000 for operating activities during the three months ended March 31, 2013 compared to $243,000 during the three months ended March 31, 2012. During the quarter ending March 31, 2013, approximately $81,000 was incurred for R&D and approximately $138,000 was incurred for SG&A functions.
We did not engage any investing activity during the quarter ended March 31, 2013. At this time, we have no other material commitments for capital expenditures during the remainder of the 2013 fiscal year.
We were able to raise proceeds of $55,000 through advances from related parties during the three months ended March 31, 2013. The proceeds were used to develop our products and satisfy certain present and past obligations. At March 31, 2013, we had $7,000 of cash on hand. We believe that our current cash resources will not be sufficient to fund operations for 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.
Our operations have been, and will continue to be, dependent upon management’s ability to raise operating capital through the issuance and sale of debt and equity securities and advances from related parties. 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 our 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 March 31, 2013, 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 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our chief executive officer, who also serves as our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our chief executive and chief financial officer has concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
| 12 |
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended March 31, 2013, we issued 886,294 shares of restricted, unregistered common stock to a consultant for services rendered, and recorded $20,000 as a selling, general and administrative expense.
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 3. Defaults upon Senior Securities
As of March 31, 2013, we failed to make the required principal and interest payments, constituting events of default, on the $21,000 Ventana Medical Systems, Inc. promissory note. The note requires the holder to notify us in writing of a declaration of default at which time a cure period, as specified in the note, would commence. There is no guarantee that we will be able to cure any event of default if, or when, the holder provides the required written notice.
Item 6. Exhibits
| Exhibit | ||
| Number | Description | |
| 31.1 | Section 302 certification by principal executive and chief financial officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | |
| 32.1 | Section 906 certification by principal executive and chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. | |
| 101.INS** | XBRL Instance | |
| 101.SCH** | XBRL Taxonomy Extension Schema | |
| 101.CAL** | XBRL Taxonomy Extension Calculation | |
| 101.DEF** | XBRL Taxonomy Extension Definition | |
| 101.LAB** | XBRL Taxonomy Extension Labels | |
| 101.PRE** | XBRL Taxonomy Extension Presentation |
| 13 |
Signatures
Pursuant to the requirements 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. | |
| /s/ Robert F. McCullough, Jr. | |
| Robert F. McCullough, Jr. | |
| Chief Executive Officer and | |
| Chief Financial Officer | |
| Date: May 15, 2013 |
| 14 |
EXHIBIT INDEX
| Exhibit | ||
| Number | Description | |
| 31.1 | Section 302 certification by principal executive and chief financial officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | |
| 32.1 | Section 906 certification by principal executive and chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. | |
| 101.INS** | XBRL Instance | |
| 101.SCH** | XBRL Taxonomy Extension Schema | |
| 101.CAL** | XBRL Taxonomy Extension Calculation | |
| 101.DEF** | XBRL Taxonomy Extension Definition | |
| 101.LAB** | XBRL Taxonomy Extension Labels | |
| 101.PRE** | XBRL Taxonomy Extension Presentation |
| 15 |
Exhibit 31.1
CERTIFICATION
I, Robert F. McCullough Jr., certify that:
| (1) | I have reviewed this quarterly report on Form 10-Q of CytoCore, Inc.; |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| (4) | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under my supervision, 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; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Robert F. McCullough Jr. | |
| Robert F. McCullough Jr. | |
| Chief Executive Officer and | |
| Chief Financial Officer | |
| Dated: May 15, 2013 |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cytocore, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2013, filed with the Securities and Exchange Commission (the “Report”), I, Robert McCullough, Jr., Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition as of the dates presented and the results of operations of the Company for the periods presented.
| /s/ Robert F. McCullough, Jr. | |
| Robert F. McCullough, Jr. | |
| Chief Executive Officer and | |
| Chief Financial Officer | |
| Dated: May 15, 2013 |
|
Commitments and contingencies - Additional Information (Detail) (USD $)
|
3 Months Ended | |
|---|---|---|
|
Mar. 31, 2013
|
Mar. 31, 2012
Selling General and Administrative Expenses [Member]
|
|
| Commitments and Contingencies Disclosure [Line Items] | ||
| Settlement of trade debt | $ 193,000 | |
| Liability for Unpaid Claims and Claims Adjustment Expense, Net | $ 235,000 |
|
Notes Payable and Advances-related parties (Parenthetical) (Detail) (USD $)
|
3 Months Ended | 12 Months Ended |
|---|---|---|
|
Mar. 31, 2013
|
Dec. 31, 2012
|
|
| Debt Instrument [Line Items] | ||
| Promissory note, interest rate | 8.00% | |
|
Robert Shaw [Member]
|
||
| Debt Instrument [Line Items] | ||
| Promissory note | $ 25,000 | $ 25,000 |
| Promissory note, date of issue | Sep. 20, 2001 | Sep. 20, 2001 |
| Promissory note, interest rate | 9.00% | 9.00% |
| Promissory note, due date | Dec. 20, 2001 | Dec. 20, 2001 |
|
Ventana Medical Systems, Inc [Member]
|
||
| Debt Instrument [Line Items] | ||
| Promissory note | 62,946 | 62,946 |
| Promissory note, date of issue | Nov. 30, 2003 | Nov. 30, 2003 |
| Promissory note, interest rate | 8.00% | 8.00% |
| Promissory note, due date | Dec. 31, 2003 | Dec. 31, 2003 |
|
Xillix Technologies Corporation [Member]
|
||
| Debt Instrument [Line Items] | ||
| Promissory note | $ 361,000 | $ 361,000 |
| Promissory note, date of issue | Jun. 26, 1998 | Jun. 26, 1998 |
| Promissory note, interest rate | 6.00% | 6.00% |
| Promissory note, due date | Dec. 27, 1999 | Dec. 27, 1999 |
|
Fixed Assets
|
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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|
Mar. 31, 2013
|
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| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed Assets | Note 3. Fixed Assets
Fixed assets consist of the following:
For the quarters ended March 31, 2013 and 2012, depreciation expense was $29,000 and $57,000, respectively. The Company did not allocate any of the depreciation expense of the machinery and equipment or the design and tooling into inventory since the Company has suspended manufacturing. This depreciation was included as a selling, general and administrative expense as excess idle time. |
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