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, 2012 |
OR
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 N. Orleans St., Suite 510, Chicago, IL | 60654 | |
(Address of principal executive offices) | (Zip Code) |
(312) 222-9550
(Registrant’s Telephone Number, including area code)code
Securities registered pursuant to Section 12(b) of the Act:
Title of | Name of | |
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. Yeso¨ Noþ
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. Yesþ Noo¨
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 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesoþ Noo¨ (not required)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 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” inRule 12b-2 of the Exchange Act. (Check one.)
Large accelerated filer | Accelerated filer | ||
Non-accelerated filer | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).
Yeso¨ Noþ
The aggregate market value of the common stock held by non-affiliates of the Company was $8,790,113,$478,710, based upon the closing price of shares of the Company’s common stock, $0.001 par value per share, of $0.28$0.01 as reported on theOver-the-Counter Bulletin Board on June 30, 2009.
The number of shares of common stock outstanding as of May 7, 2010March 28, 2013 was 45,317,610.74,692,204.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Annual Report onForm 10-K
December 31, 2009
2012
TABLE OF CONTENTS
PART I | ||||
Page | ||||
Item 1. | Business | 2 | ||
Item 1A. | Risk Factors | 15 | ||
Item 2. | Properties | 23 | ||
Item 3. | Legal Proceedings | 23 | ||
Item 4 | Mine Safety Disclosures | 23 | ||
PART II | ||||
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23 | |||||
Selected Financial Data | 25 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 25 | ||||
Quantitative and Qualitative Disclosures about Market Risk | 28 | ||||
Financial Statements and Supplementary Data | 28 | ||||
Changes in and Disagreements | 28 | ||||
Controls and Procedures | 28 | ||||
Other Information | 29 | ||||
Item | Directors, Executive Officers and Corporate Governance | 29 | |||
Executive Compensation | 32 | ||||
Security Ownership of Certain Beneficial Owners and Management | |||||
and Related Stockholder Matters | 34 | ||||
Certain Relationships and Related Transactions, and Director Independence | 36 | ||||
Principal Accountant Fees and Services | 38 | ||||
Exhibits and Financial Statement Schedules | 39 |
Signatures | 41 | |||
Index to Financial Statements | ||||||||
Firm.. | F-1 | |||||||
2011 | F-2 | |||||||
2011 | F-3 | |||||||
2011 | F-4 | |||||||
F-5 | ||||||||
Notes to Consolidated Financial Statements | F-6 | |||||||
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PART IItem 1. Business
Overview
CytoCore, Inc. (“CCI”(the “Company”, “Cytocore”“we”, or the “Company”“us”), formerly Molecular Diagnostics, Inc., develops, manufacturesis developing, and plans to sell, an integrated family of cost-effective products for the detection, diagnosis and treatment of cancer under the trade name ofCytoCore 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. CurrentCytoCore Solutionsproducts are focused upon cervical and breast cancer. CCI plansWe plan that this focus will later be expanded to include other gynecological cancers as well as bladder, lung, oral and breastanal cancers, among others. Within each of these markets, CCI anticipateswe anticipate that theCytoCore Solutionsproducts 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 CCI’sour only marketed product is theSoftPAP®cell collection device that is intended to replace the spatula and brush currently used to collect cervical cytology samples.SoftPAPconstitutes one of the cellsample collection components of the Company’sourCytoCore SolutionsSystem. The CompanyHalo® System, which we are selling for the assessment of breast cancer risk under an agreement with NeoMed, LLC is also licensed to sell the PadKitanother component ofCytoCore Solutions. Products under development include SoftKit®, another sample collection device directed at ensuring female reproductive tract health, and a cell preservative developed for cytological applications by Cell Solutions LLC. CCI intendsWe intend to market and sell theSoftPAP, Halo and PadKitSoftKit devices along with this preservative.preservative worldwide. The other components of theCytoCore SolutionsSystem include certain biochemical assays and slide-based tests, the Company’splus our next generation specialized system for computer-assisted cytology —– the Automated Image Proteomic Systems or AIPStm — and a drug delivery system.
We believe theCytoCore SolutionsSystem 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. CytoCoreWe also believesbelieve the system will expand the number of women who can be tested, thereby increasing detection and diagnosis rates.
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, without any business activity, 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 (“SEC”) filing purposes. Bell National merged into Ampersand Medical Corporation, its wholly-owned subsidiary, in May 1999 in order to change theits state of incorporation of the company to Delaware.
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In September 2001, we acquired 100% of the outstanding stock of AccuMed International, Inc., by means of a merger of AccuMed into aour wholly-owned subsidiary of the Company.subsidiary. Shortly after the AccuMed merger, we changed our corporate name to Molecular Diagnostics, Inc. TheSubsequently, in June 2006, we changed our 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 Company’s corporate 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”
Recent Developments
During 2012 and “our” refers to CytoCore, Inc. and our subsidiaries and predecessors.
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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, andamong other financial data, attributable to the Company’sour operations, see the consolidated financial statements included herewith.
Description of Business
We plan to sell an integrated family of cost-effective products for the detection diagnosis and treatmentdiagnosis of cancer under the trade name ofCytoCore 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. CurrentCytoCore Solutionsproducts are focused upon cervical and breast cancer. CCI plansWe expect that this focus will later be expanded to include other gynecological cancers as well as bladder, lung, oral and breastanal cancers, among others. Within each of these markets, CCI anticipateswe anticipate that theCytoCore Solutionsproducts 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, 20092012 and 20082011 were $198,000 and $24,000, respectively. Sales of the collection system for the detection of breast cancer totaled $179,000, or 90% of total revenues, in 2012. There was $44,000no revenue from this system in 2011. License fee revenue totaled $17,000 or 9% in 2012 and $125,000, respectively. Of this total revenue, license fees$24,000 in 2011. Sales of ourSoftPaP® product accounted for $40,000,revenue of $2,000, or 91%1%, of our revenue in 2009 and $66,000, or 53%, of our revenue in 2008. Sales of our current productSoftPap®accounted for revenue of $4,000, or 10%, of our revenue in 2009 and $59,000, or 47%, of our revenue in 2008.
Products
Cell Collection Devices
Clinical diagnostics laboratory analyzeslaboratories analyze or otherwise evaluatesevaluate 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 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 sensitivityand/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 aone of our major focus of CytoCore.
SoftPAP®
We currently manufactures and sellsplan to sell theSoftPAP®devicefor the collection of cervical cell samples that are used in the detection of cervical dysplasia, cancer and human papillomavirus (“HPV”) infections. CCI believesWe believe thatSoftPAP, 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,SoftPAPcollects 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
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PadKit®The Halo System
We entered into an agreement with NeoMatrix, LLC, to sell their® Halo System in several European countries and have an option to expand sales into the US and other countries in the future. TheHalo System, which is cleared by the FDA and CE marked, provides a convenient and non-invasive means for the collection of nipple aspirate fluid (NAF) that can be evaluated to provide an estimate of the risk that a woman has of developing breast cancer. As sample collection using Halo is fast, non-invasive, and can easily be performed in a physician’s office, we envision it becoming part of routine physical examinations in a manner analogous to a Pap smear.
Current methods for breast cancer screening primarily comprise manual palpitation of the breast and radiographic methods including classical radiography and mammography. Regular manual self examination is recommended for all women and periodic breast cancer screening using radiography or mammography is recommended for all women over the age of 40. These methods, however, are widely recognized as not providing the sensitivity needed in order to detect small early stage lesions and are adversely affected by the presence of high density breast tissue. The Halo method, on the other hand, can provide the sensitivity needed in order to detect early stage lesions and is largely insensitive to breast density. These characteristics make the Halo method suitable for routine use by women of all ages. In addition, unlike manual examination and radiography, Halo produces a sample that can be evaluated using standard cytological methods, thereby allowing patient stratification without the need for additional procedures.
SoftKit
SoftKitis 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. CCI has obtained an exclusive license to sell PadKitWe are in the final stages of developingSoftKit 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, CCI may obtain licenses to sell PadKit forHPV and additional indications such as the collection of samples for sexually transmitted disease (“STD”) testing. PadKitSoftKit addresses a number of market niches and segments that are not addressed effectively bySoftPAPor traditional gynecological sampling devices. CCI believesWe believe that PadKit thusSoftKit complementsSoftPAPin theCytoCore Solutionsfamily of products. PadKitSoftKit is designed to eliminate the need for assistance from a medical professional when collecting gynecological samples for many screening applications. CCI believesWe believe that this feature, in addition to the range of tests that can be performed on a PadKitSoftKit sample and PadKit’sSoftKit’s low cost, makes PadKitSoftKit particularly attractive for use in large scale public health screening programs. CCI isWe are also evaluating the use of PadKitSoftKit in an internet-based, fee-for-service testing program outside of the United States. AdditionalStates.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 are party to an agreement with Synermed Select Partners, Inc. (“Synermed”) under which CCIwe will packageprivate label and market theirGluCytetm cell preservative with CCI’sourSoftPAP, Haloand PadKitSoftKit cell collection devices. CCIWe selected this preservative for inclusion in convenience kits due to both its technical performance and because itslides can be performedprepared manually from cells in this preservative, thus avoiding the high equipment and supply costs incurred when using competing methods. CCI believesWe believe that this methodology provides a cost effective means for laboratories to transition from smears to high quality LBPs. CCI intendsWe intend to introduce the manual version of convenience kits containingcombining the preservative withSoftPAPand the preservativeHalo in the European Union to address the demand for LBPs in that part of the world. CCI expectsWe expect that distribution of such manual kits will then be expanded by region. In parallel, CCI planswe 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. CCIWe and Cell Solutions have agreed to collaborate on obtaining the necessary FDA approval. CCI isWe are also working with the manufacturer of PadKit to validate the preservative for this application,withSoftKit where CCI believeswe believe its superior ability to process bloody samples is of particular relevance. An independent clinical trial of PadKitrelevance and are evaluating other preservatives for use in combination with the preservative has recently been initiated by the UCLA School of Nursing.
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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. CCI isWe 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. CCI believesA study has been initiated in Germany 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 CCIour 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 patient’s 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 AcCelltm® 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.
AIPStm™ Workstation
The AIPStmAIPS™ Workstation is an updated and improved version of the AcCell device.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 theAIPS 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 theAIPS Workstation hardware also incorporates several major advances over the AcCell, competing “computerized microscope” systems, and conventional cytology microscopes.“Fly-by-wire” “Fly-by-wire” technology, for 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. TheAIPS 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 cytologist’s 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, theAIPS 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.
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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 offeredfollow-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 TracCelltmTracCell™ 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 behas been increasingly 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.
TheAIPStm Imager is an advanced version of the AccuMed TracCell location-guided cytology screening system that has been optimized for use with theour proprietary CCI stains described above.stains. 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, theAIPS Imager is expected to deliver superior performance when used in cytological screening applications. TheAIPS Imager is intended to work in conjunction with theAIPS Workstation.Workstation. When a specimen slide is evaluated by theAIPS Imager, the locations on the slide of any potentially abnormal cells are recorded to a data file. The slide is then movedtransmitted to anAIPS Workstation where the data file guides the workstation to present each of the potentially abnormal cells detected to the cytologist for classification.
We plan several additional software modules that will expand the capabilities of theAIPS Imager.Imager. These modules may include those for the analysis of specimens stained with our new CytoCore stains, bulk image capture and archiving, generation of time-optimized routing plans to maximize the efficiency of specimen review on anAIPS Workstation, and a “preview” module that assists the cytologist in evaluating difficult specimens. CCI hopesWe hope 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.
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Our core product development strategy is to develop theCytoCore 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, CytoCore anticipateswe anticipate expanding itsour 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. TheIf we obtain significant funding our CytoCore product pipeline for 20112013 calls for the introduction of an workstation for computer assisted cytology andSoftKit, an improved cytology preservative for use withSoftPAP.SoftPAP, HaloIn 2013 CytoCore expects andSoftKit, and possibly a novel cytological stain.If we obtain significant funding we expect to introduce an automated imaging systemthe AIPS Workstation and to introduce the AIPS Imager with assay reagents for the location-guided screening of cervical cancer specimens and the PadKit sample collection device.in 2014. 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 theSoftPAPcollection device, theHaloSystem and theCytoCore SolutionsSystem as a new screening and diagnostic tool for cervical and breast cancer screening, offering an alternativealternatives to the current Pap test methods. It is estimated thatAccording to Centers for Disease Control, there are approximately 6073 million annual Pap tests and 30 million mammograms given in the United States.States each year. Worldwide, approximately 180 million Pap and 60 million breast cancer screening tests are given andperformed annually. The potential market for each of these tests amounts to approximately 1.5 to 1.8 billion women require annual Pap testing.women. Many studies have shown that between 70 and 80% of a person’s 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. CytoCore isWe 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 world’s population. The female population of the world is approximately 3 billion, of which 2 billion fallfalls 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 effective 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. CytoCore believes itsWe 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. CytoCore isWe are developing itsour initial products to serve the needs of females in developed nations and economies, but anticipatesanticipate subsequent deployment of such products to less well-developed countries.
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Increasing life spans, |
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, thus 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 isWe are focused upon utilizing these advances to provide products that address the needs of these worldwide markets.
Sales and Distribution
TheSoftPAPhas 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. The Company expectsWe expect that theSoftPAPwill be primarily delivered to these customers through local and regional distributors who specialize in the value-added OB/GYN market. During the last quarterSoftPAP is presently registered for sale in a number of fiscal 2007, the Company entered into three distribution agreements with distributors in Italy, Spaincountries.
TheHalo System is being initially targeted toward general, ObGyn and Portugal. Each of these distributors agreed to act as the Company’s exclusive distributor in their respective territories. In 2008, the Company also entered into an international distribution agreementfamily medical practices for sales into Switzerland. However, the Company only realized minimal sales over the last few years. In 2009, the company shipped product to a distributor in Turkey.
In keeping with theCytoCore Solutions philosophy, bothSoftPAP and theHalo System are being offered as standalone products and, where allowed, in the form of convenience kits including our preservative.
If funding is obtained SoftKit is expected to be introduced into the European Unionmarket in 2013 with expansion into the Middle East and surrounding regionsAsia in 2014. The target market varies by country but is generally either selected clinical laboratories or national public health authorities. It is expected thatSoftKit will primarily incorporate our preservative, but other preservatives, which we are presently evaluating, will be also be made available to accommodate local and providing support to our distributors.
TheAIPS 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 theAIPS 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.
Many countries in combination withwhich 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. We are taking theSoftPap product only. The correspondingPadKitmarketing strategy is being developed, but it is currently anticipated steps necessary to be based upon convenience kits containing PadKit and the preservative.OmniDropwill be sold as an incidental component of the AIPS Workstation and may also be sold as an independent product.
Government Regulation, Clinical Studies and Regulatory Strategy
The development, manufacture, sale, and distribution of medical devices intended for commercial use are subject to extensive governmental regulation inworldwide. In the United States, byour products are regulated under the FDA and comparable authorities in certain
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The FDA has adopted regulations governingregulatory systems in other major markets such as China and South America have been undergoing substantial changes and now in many respects resemble the design and manufacture of medical devices thatsystem 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, we are for the most part, harmonizedalso required to register our products with the good manufacturing practices and ISO quality system standards for medical devices. The FDA’s adoption of the ISO’s approach to regulation and other changes to the mannerNational Health Authority in any country in which the FDA regulates medical devices will increase the costwe expect to do business; may have our quality and manufacturing systems inspected and/or audited by representatives of compliance with those regulations. Other countries impose similar but not identicalvarious National Health Authorities; and may have to conform to additional regulations that will further increase compliance costs.
Under these regulations, we are subject to certain registration, record-keeping and medical device reporting requirements of the FDA.requirements. Our manufacturing facilities, or those of our strategic partners, may be obligated to follow the FDA’s Quality
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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 Pre Market Approval (“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 theSoftPAP collector, was cleared for marketing by the FDA on May 31, 2002 and theSoftPAP 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 to date resulted in the announcement of a relatively small number of changes, most of which do not directly impact our products. Additional changes, some of which have the potential to substantially increase the time and cost involved in obtaining marketing clearance via the 510(k) process, are under consideration and may be announced in 2013.
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, which 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 companyus and itsour partners to scrutiny under such laws. Violations may be punishable by criminaland/or civil sanctions, including fines, as well as the exclusion from participation in government-funded healthcare programs.
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 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 subjectCE Marked, the manufacturer must demonstrate to regulation in the United States under the Clinical Laboratory Improvement Act (“CLIA”). CLIA establishes quality standards for laboratories conducting testing to ensure the accuracy, reliability and timeliness of patient test results, regardless of where the test is performed. The requirements for laboratories vary depending on the complexitysatisfaction of the tests performed. Thus,regulatory authorities that the more complicated the test, the more stringent the requirement. Tests are categorized as high complexity, moderate complexity (including the category of provider-performed microscopy)product is safe and waived tests. CLIA specifies quality standards for laboratory proficiency testing, patient test management, quality control, personnel qualifications and quality assurance, as applicable.
TheSoftPAP 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 possible classification for the system.level of quality system requirements. If however, these products are classifieda new Company product falls within or a current is reclassified into a higher risk category, it maywe 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 significant impact on our abilityquality system to marketISO 13485 and maintaining this registration will substantially increase the productscosts of regulatory compliance.
The EU is in the United States.
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 was completedregulatory agencies such as the FDA, is in 2008. The resultsthe 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 trialnew regulation as we have been publishedboth company and product specific GS-1/GTIN codes as well as product specific GMDA and EDMA for our current products and have 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 www.clinicaltrials.gov. Clinicaltrials.gov isPackaging 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 of our current 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 componentmore active role in the recycling of certain types of products including possibly “taking back” and recycling laboratory instruments. Implementing a compliant take-back program will increase our operating and regulatory compliance costs.
In the FDAEU 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 is responsible forthe 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 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 us.
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 reportingtime of product introduction and may then be extended if warranted and supported by “real-time” data. SinceSoftPAPwas introduced, we have been collecting product life data from the field and has been conducting internal “stability tests”. In 2011 we completed a study that demonstrated that the original expiration dating specification for SoftPAP can safely be doubled and suggested that a further extension may be possible. We intend to continue performing real-time stability studies and extending the expiration dating of our products if supported by data from these trials.studies.
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 bySoftPAP, but a new clinical study based upon this revision to clinical practice is needed for marketing purposes. The Company continuesnecessary 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 fourth quarter of 2012. This same study will also provide additional validation data for the use of our preservative withSoftPAP 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 SoftKit 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, refine the devicevalidation of certain stains and develop and optimize its assays andmarkers for use with the AIPS WorkstationImager, obtaining additional indications for use forSoftPAP and platform. Our overall strategy involvesSoftKit, and field validation of the continuing study of theCytoCore SolutionsSystem and its components. This research will determine whether theCytoCore SolutionsSystem is able to eliminate true negative samples from further review for cervical cancer. We believe the system could also become a primary screening device for cervical, endometrial and bladder cancer. We will also submit the data to foreign regulatory authorities that have jurisdiction over these products. Subsequently, we will continue to collect and submit data for theCytoCore SolutionsSystem point-of-care test. We plan to pursue regulatory approval of theCytoCore SolutionsSystem products through a series of submissions and, in some cases, using data from a single clinical study. This tiered approach is designed to accelerate revenue opportunities for theCytoCore SolutionsSystem in the short term and to drive adoption of our innovative products over the long term, while minimizing the expense and time involved in undertaking the appropriate study. If the submissions for the variousCytoCore SolutionsSystem products are cleared by the FDA for sale in the U.S. market or approved for sale by foreign regulatory agencies, we intend to sell the cleared products in their respective clinical markets.
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
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Our ability to successfully commercialize theCytoCore SolutionsSystem 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, 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 coverageand/or payment levels for current or future CytoCore products.
Competition
Competition
Historically, competition in the healthcare industry has been characterized by the search for technological innovations and efforts to market such innovations, and technologicalinnovations. 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. We believe that of CCI. These include manufacturers of liquid-based Pap tests and screening and diagnostic systems such as
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Operations
We do not intend to invest capital to develop our own distribution and sales organizations, or to 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 a contract manufacturermanufacturers 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 theCytoCore SolutionsSystem’s chemical components, plastic and silicone parts for theSoftPAP, and the instruments and other components of the AIPS workstation.
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 aone or more U.S. patent.or foreign patents. We convert each outstanding provisional patent application into some number of utility patent applications within this12-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 Officeexamining patent office may require us to divide the application into two or more separate applications or we may file acontinuation-in-part patent application that expands upon the technology disclosed in an earlier patent application and which has the potential of superseding or improving upon 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 utility patent application is filed under the Patent Cooperation Treaty (“PCT”) at the same time that
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As of December 2009,2012, we had filed 12 U.S.12U.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.abandoned as no longer being appropriate to our business. 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 theCytoCore SolutionsSystem 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 17 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 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 ispatents have 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 thisThis revised standard takes full effect,reduces the chances that such a “submarine” patent will impair our intellectual property portfolio are significantly reduced.portfolio. 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 trademarksSoftPAP, CytoCoretm®,CytoCore®, andCytoCore SolutionsandCocktail-CVXtm®. 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
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We believe research and development is critical to the success of our business strategy. During the 2009 and 2008 fiscal years, our research and development expenditures were approximately $372,000 and $1,852,000, 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 $457,000 for the fiscal year 2009 and were credited to expenses.
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 theCytoCore SolutionsSystem and bring it to market.
Components and Raw Materials
Low-cost products are a key component of our business strategy. We designed theSoftPAPcollection 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 manufacture through contract manufacturers theSoftPAPcollection device in Wisconsin and China, with quality assurance occurring in our Chicago facility. These contract manufacturers are using our machinery and tooling.
The instrument components of the laboratory version of theCytoCore SolutionsSystem 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. We currently have an adequate supply of workstations used in theCytoCore SolutionsSystem and have contracted for the design and manufacture of the next generation of the workstation platform.
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 debt and 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 theCytoCore SolutionsSystem 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 and/or other secured forms of payment, whenever possible, in sales of products in foreign markets.
Employees
Employees
As of March 31, 2010,28, 2013, we employed a total of sixfive full-time employees.and one part-time employee. None of our employees are members of a labor union. 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
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During the fiscal year ended December 31, 2009, the Company2012, we did not have any foreign operations, but did have distribution agreements to sell our products in Switzerland, Italy, Spain and Portugal. As of December 31, 2009, we had product shipments to Europe, which sales accounted for 9% of our revenues for the 2009 fiscal year.
operations. Item 1A.Risk Factors |
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Risks Related to Our Business
We have a history of operating losses and there are doubtsis 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, 20092012 was $95,351,000.$101,800,000. We have sold only a very limited amount of ourCytoCore SolutionsSystem products to date and cannot be certain as to when, if ever, that sales of the Company’sour products might occur in the future. We estimate that we have sufficient cashoccur. Our future depends on hand to fund our operations only until June 2010.
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Our ability to continue operations depends upon our raising additional funds during 2010, since we2013. We estimate that we have sufficient cash on hand to fund operations only until May 2010.April 2013. 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 of the Company.and loans from related parties. 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 CCI andour financial condition, our ability to conduct business.business, and possibly 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 ourCytoCore SolutionsSystem products to date and cannot be certain as to when, if ever, sales of the Company’sour products might occuroccur. We shipped $2,000 in the future. Only one shipment of product was made in 2009.2012. In the foreseeable future, we willexpect to derive most of our revenues from the sale of theSoftPAPcell collection device, and the other components of theCytoCore SolutionsSystem. 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 theCytoCore SolutionsSystem, 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 the Companyus 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.
In addition, the markets for CytoCore’sour 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.
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In 2008, CytoCorewe successfully completed a clinical trial for theSoftPAP collector and received both FDA clearance and a CE Mark to market this device in the United States and the CE Mark that is required to marketSoftPAPin the European Union. Future CytoCore 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 Statesand/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.
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Changes in third-party reimbursement may negatively affect us.
Widespread adoption and commercial acceptance of ourSoftPAPdevice and theCytoCore SolutionsSystem 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.
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We expect that international sales will account for a significant portion of our future revenues for the foreseeable future,in and we 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 |
trade barriers and |
regulations related to customs and export/import |
fluctuations in foreign economies and currency exchange |
longer payment cycles and difficulties in collecting accounts |
the complexity and necessity of using foreign representatives and |
tax uncertainties and unanticipated tax costs due to foreign taxing |
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 |
the uncertainty of protection for intellectual property rights and differing legal systems |
compliance with a variety of |
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 Company’s financial condition and results of operations. CytoCoreWe 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 the Company’sour financial condition and results of operations.
It is also possible that competing products will emerge that may be superior in quality, effectiveness and performanceand/or less expensive than those of the Company,our products, or that similar technologies may render CCI’sour products obsolete or uncompetitive and prevent the Companyus 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 theSoftPAP collection device and theCytoCoreSolutionsSystem. 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 successfully negotiate such agreements on terms acceptable to us, if at all, we may be
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The accuracy, performance and cost of our products are critical to our business and reputation, and we are subject to product liability.reputation.
As noted above, we are dependent on the sale of theSoftPAPcollection device and theCytoCore SolutionsSystem. 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, among other things, on our ability to keep product costs lowand/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.
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,us, 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 be subject to product liability actions.
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.
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 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.
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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 theSoftPAPand 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. NoneOnly two of our existing distributors purchased any product from us in 2009.2012. There were no sales in 2011. 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.
A significant portion of our revenues are attributable to the sale of products on behalf of a third-party.
For the year ended December 31, 2012, approximately 90% of our revenues were attributable to the sale by us on behalf of another company of a cell collection device used for detecting breast cancer. Any interruptions in our ability to sell these products, including manufacturing delays or regulatory hurdles, or the elimination of the product in the marketplace or the termination of our licensing arrangement, could adversely affect our business, financial condition and operating results.
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 |
timing and execution of distribution and sale |
competitive conditions in the medical device and diagnostic |
product development, sales and marketing |
third-party reimbursement |
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.us.
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. Currently, our limited resources make it difficult for us to competitively compensate our current employees and potential employee candidates. 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 and revenue. The Company’sOur success is particularly dependent on the retention of existing management and technical personnel, including Robert F. McCullough, Jr., the Company’sour Chief Executive Officer and Chief Financial Officer, and Richard A. Domanik, Ph.D., the Company’sour 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, 2009,2012, we employed sixfive full-time persons.persons and one part time person. 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
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Risks Related to Our Common Stock
There
Trading in our common stock has been limited, there is a limitedno significant trading market for “penny stocks” such as our common stock.
Our common stock is considered a “penny stock” because, among other things, itscurrently eligible for quotation on the OTC Bulletin Board (the “OTCBB”), however trading price is below $5.00 per share. This designation requires any broker or dealer selling these securities to disclose certain information concerningdate has been limited. If activity in the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the abilitymarket for shares of brokers or dealers to sell our common stock and may affect the abilitydoes not increase, purchasers of investors to sell their shares. In addition, since our common stock is currently traded on the Over-the-Counter Bulletin Board, investorsshares may find it difficult to sell their shares. We currently do not meet the initial listing criteria for any registered securities exchange. The OTCBB 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 our common stock and may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price. Being a penny stock also could limit the liquidityprice of, our common stocksecurities because smaller quantities of shares could be bought and limit thesold, transactions could be delayed and security analyst and news coverage of our stock by analysts.
The historically volatile market price of our common stock may affect the value of our stockholders’ investments.
The market price of our common stock like that of many other life science and biotechnology companies, has in the past been highly volatile. In fiscal year 2009,years 2012 and 2011, the price of our common stock traded in a range of $0.08$0.01 to $0.75.$0.05. 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.
OurWe have never been paid dividends on our common stock is unlikely to produce dividend income forand 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; ourfuture. Our ability to declare dividends on our common stock is further limited by the terms of certain of the Company’sour other securities, including several series of itsour 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.
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 stockholders or impose operational restrictions.
We are authorized to issue up to 10,000,000 shares of preferred stock. As of December 31, 2009,2012, we hadhad: 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 19,22219,022 shares of Series E convertible preferred stock outstanding, which convert into approximately 52,86152,311 shares of our common stock. There are cumulative dividends due on the Series B, Series C, Series D,
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In addition, we intend to trade or obtain quotations forraise additional capital in the future to fund 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). 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 bearprovide the economic riskcustomer 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-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s 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 purchaser’s written agreement to the transaction. Consequently, these 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 forstock.
Provisions of our certificate of incorporation, bylaws and Delaware law may make a contested takeover of us 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 indefinite periodattempt to obtain control of time. Evenus, even if an active market develops, Rule 144 promulgated under the Securities Actsuch a proposal is favored by a majority of 1933, as amended, which provides for an exemption from the registration requirements under such Act under certain conditions, requires, among other conditions, a holding period priorour stockholders. For example, we are subject to the resale (in limited amounts)provisions of securities acquiredthe DGCL that prohibit a public Delaware corporation from engaging in a non-public offering without having to satisfy the registration requirements under the Act. We may not be able to fulfill our reporting requirements in the future under,broad range of business combinations with a person who, together with affiliates and associates, owns 15% or disseminate to the public any current financial or other information concerning us, as is required by Rule 144 as partmore of the conditionscorporation’s 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 its availability.
Item 2. If we are late in our filings with the SEC again our stock may be de-listed from the OTCBB and would be traded on the Pink Sheets.Properties
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Item 3. |
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Item 4. Mine Safety Disclosures.
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases 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.
Market Information
Our common stock wasis quoted on the Over-the-Counter Bulletin BoardOTCBB under the symbol “CYOE.OB”; since April 16, 2010 it has been quoted under the symbol “CYOEE.OB”. The following table lists the high and low bid information for our common stock for the periods indicated, as reported on the Over-the-Counter Bulletin Board.OTCBB. These quotations reflect inter-dealer prices, may not include retailmark-ups, mark-downs, or commissions, and may not reflect actual transactions.
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Range of Common | ||||||||
Stock | ||||||||
High | Low | |||||||
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 | ||||
Year Ended December 31, 2008 | ||||||||
1st Quarter | $ | 4.08 | $ | 1.75 | ||||
2nd Quarter | $ | 3.10 | $ | 1.90 | ||||
3rd Quarter | $ | 2.15 | $ | 0.55 | ||||
4th Quarter | $ | 0.79 | $ | 0.15 |
High | Low | |||||||
Year Ended December 31, 2012 | ||||||||
1st Quarter | $ | .02 | $ | .01 | ||||
2nd Quarter | $ | .02 | $ | .01 | ||||
3rd Quarter | $ | .02 | $ | .01 | ||||
4th Quarter | $ | .06 | $ | .02 | ||||
Year Ended December 31, 2011 | ||||||||
1st Quarter | $ | 0.05 | $ | 0.01 | ||||
2nd Quarter | $ | 0.04 | $ | 0.01 | ||||
3rd Quarter | $ | 0.01 | $ | 0.007 | ||||
4th Quarter | $ | 0.04 | $ | 0.007 |
Holders
As of May 7, 2010,March 25, 2013, we had approximately 382419 record holders of shares of our common stock. This number does not include other persons who may hold only a beneficial interest, and not an interest of record, in our common stock.
Dividends
We have not paid a cash dividend on shares of our common stock, and theour Board of Directors is not contemplating paying dividends at any time in the foreseeable future. The terms of certain of the Company’sour securities, including itsour Series B, C, D and E preferred stock, provide that so long as such security is outstanding the Company shall not declareprohibit us from declaring any dividends on itsour 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.
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Stock Transfer Agent
Our stock transfer agent is BNY Mellon InvestorComputershare Shareowner Services, 480 Washington Boulevard, Jersey City, NJ 07310199 Water Street, 26th Floor, New York, New York, 10038 and its telephone number is(800) 522-6645.
Number of Securities | ||||||||||||
Number of Securities | Remaining Available for Future | |||||||||||
to be Issued upon | Weighted-Average | Issuance Under Equity | ||||||||||
Exercise of Outstanding | Exercise Price of | Compensation Plans | ||||||||||
Options, Warrants and | Outstanding Options, | (Excluding Securities Reflected | ||||||||||
Rights | Warrants 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 with debt and equity(1) | 2,173,930 | $ | 1.93 | — | ||||||||
Warrants issued for financial and IR services(2) | 283,266 | $ | 2.25 | — | ||||||||
Warrants issued for officer, director and employee compensation(3) | 802,000 | $ | 2.05 | — | ||||||||
Warrants issued in forgiveness of debt and other services(4) | 202,001 | $ | 1.63 | — | ||||||||
Total | 3,471,197 | $ | 1.96 | — | ||||||||
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During the yearquarter ended December 31, 2009,2012, we issued to Mauro Scimia (“Scimia”) and Xavier Carbonell (“Carbonell”), directors of 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 Directors1,052,359 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 yearquarter ended December 31, 2009, Board of Directors voted2012, we issued 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 $0.40 per share. The shares were not issued by the transfer agent.
We issued the three months ended December 31, 2009, the Company issued warrants to purchase 2,000 shares of common stock with 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.
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2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Dollars in thousands | ||||||||||||||||||||
Net Sales | $ | 44 | $ | 125 | $ | 83 | $ | 94 | $ | 117 | ||||||||||
Operating Expenses | ||||||||||||||||||||
Cost of revenues | (3 | ) | (81 | ) | (30 | ) | (19 | ) | (21 | ) | ||||||||||
Provision for inventory valuations | 400 | — | — | — | — | |||||||||||||||
Research and development | 85 | (1,852 | ) | (2,599 | ) | (854 | ) | 100 | ||||||||||||
Selling, general and administrative | (3,022 | ) | (4,301 | ) | (5,060 | ) | (3,967 | ) | (1,306 | ) | ||||||||||
Selling, general and administrative — related parties | — | (263 | ) | (239 | ) | — | — | |||||||||||||
Total cost and expenses | (3,340 | ) | (6,497 | ) | (7,928 | ) | (4,840 | ) | (1,267 | ) | ||||||||||
Operating Loss | $ | (3,296 | ) | $ | (6,372 | ) | $ | (7,845 | ) | $ | (4,746 | ) | $ | (1,150 | ) | |||||
Basic and fully diluted net loss per common share(1) | $ | (0.07 | ) | $ | (0.16 | ) | $ | (0.24 | ) | $ | (0.30 | ) | $ | (0.40 | ) |
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Item 6. Selected Financial Data
Not Applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We assume no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of these statements except as specifically required by law. Accordingly, past results and trends should not be used to anticipate future results or trends.
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 our current producttheSoftPAP® 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 theCytoCore SolutionsSystem, including the AIPStm Workstation, AIPS Imager,tm, 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.
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Outlook
We have incurred significant operating losses since its inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement itsour business plan and to develop, manufacture and market itsour products. Implementation of the Company’sour plans will be contingent upon it securing substantial additional financing. During the year ended December 31, 2009, CCI2012, we raised approximately $1.2$0.6 million through the exercise of stock warrants and advances from related parties. For CCIIn order to successfully implement itsour business plan, CCIwe will have to obtain additional capital. If the Company iswe are unable to obtain additional capital or generate profitable sales revenues, itwe may be required to curtail product development and other activities and may have toin the extreme case, cease operations. No assurances can be given about the Company’sour 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 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:
Results of Operations
Fiscal Year Ended December 31, 20092012 as compared to Fiscal Year Ended December 31, 20082011
Revenue
Revenues of $44,000$198,000 for the fiscal year ended December 31, 20092012 represented a decreasean increase of $81,000,$174,000, or 65%700%, from revenues of $125,000$24,000 for the fiscal year ended December 31, 2011. This increase was due to sales totaling $179,000 of the collection system relating to the detection of breast cancer, which we are selling on behalf of another company, and an increase in fiscal 2008. The decrease was a result of decreased sales of ourSoftPAPcervical cell collector totaling $56,000, a reduction in service revenue of $1,000, and$2,000, partially offset by a reduction in licensing fees of $24,000.
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Cost of Revenues
Cost of revenues represents the cost of the product sold, freight, and other costs of selling our products.
Research and Development
Research and development expenses include industrial design and engineering covering the disposable and instrument components ofCytoCore SolutionsSystem, 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 2012 fiscal year, research and development expenses were $336,000. Expenses for the 2011 fiscal year were $252,000 before a reduction of $15,000 from a settlement with a vendor, resulting in a net expense of $237,000. The $99,000, or 42%, increase is attributable to $54,000 in fees paid to medical consultants, an increase of $45,000 related to costs incurred for the ongoing improvement of theSoftPAP cervical collection device and other research and $1,000 increase in personnel costs, which were partially offset by a reduction of $1,000 in other costs.
Selling, General and Administrative
For the year ended December 31, 2009,2012, selling, general and administrative (“SG&A”) expenses were $3,022,000,$1,581,000 before an adjustment of trade debt totaling $554,000, resulting in a 34%net expense of $1,027,000. The SG&A expenses represent a $688,000, or 40%, decrease overfrom SG&A expenses of $4,564,000$1,715,000, after the reduction of $546,000 resulting from adjustment of trade debt, for the year ended December 31, 2008.2011. Of this $1,542,000$688,000 decrease, $748,000$215,000 related to a decrease in depreciation and amortization expense, $29,000 related to a reduction in employee compensation expense. Of the $748,000franchise and other taxes, $28,000 related to a decrease in consulting expense, $20,000 related to reduction in compensation expense, $529,000 relatesdirectors fees, $21,000 related to a decrease in financing costs, $7,000 related to a reduction in insurance costs and $554,000 related to the adjustment of sales and marketing personnel and $219,000 in reductionstrade debt. These decreases were partially offset by increases of administrative employees. The remaining $794,000 included reductions of $299,000$35,000 in professional fees for legal and accounting services, $239,000$73,000 in consultant expenses, $255,000 in investor and public relations expenses, $154,000 in temporary help, $160,000 relating to a reductionemployee compensation expense, $76,000 in marketing costs, $117,000expenses, $5,000 in travel expenses, $29,000 in insurance expense, $15,000 in office supplies, $23,000 in trade shows, $13,000 in employee recruitment and training costs, $12,000 in filing costs, $7,000 in bad debt expense, and $58,000$2,000 in other costs. These reductions were partially offset by increases including a $293,000 increase in directors’ fees, a $154,000 increase in depreciation expense of equipment and tooling, $54,000 in franchise taxes, $42,000 for amortization of a license, $38,000 in rent expense, and $6,000 in information technology costs.
Other Income (Expense)
Interest expense increased by $58,000 to $245,000 for the year ended December 31, 2009. Interest income was $53,0002012 from $187,000 in 2011. The increase is due to additional advances to us by a related party. We recorded a non-cash expense totaling $231,000 in 2012 and $173,000 in 2011 for interest on related party advances.
During the year ended December 31, 2011, we recorded a non-cash benefit of $30,000 resulting from the remeasurement of the derivative liability as described in Note 11 to the financial statements set forth elsewhere in this report.
We recorded an expense provision for valuation of certain fixed assets in the amount of $27,000 and a charge for impairment of inventory in the amount of $624,000 for the year ended December 31, 2008.
Net Loss
The net loss for the year ended December 31, 2009, before preferred dividends,2012, totaled $3,552,000,$1,514,000, as compared to $6,328,000$2,876,000 for 2008,2011, a decrease of $2,776,000$1,362,000 or 44%47%. Of this decrease, $1,937,000 related to reduced R&D costs, $1,542,000$688,000 related to decreases in SG&A expenses, and $3,000 represented a decrease$174,000 related to an increase in revenues, $141,000 resulted from the cost of
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The net loss applicable to common stockholders which reflects the unpaid and undeclared preferred stock dividends decreased to $3,552,000$1,718,000 for the year ended December 31, 20092012, from $6,386,000$3,142,000 for the year ended December 31, 2008,2011, a decrease of $2,834,000$1,362,000, or 44%43%. In addition to the changes reported above, cumulative dividends on the Company’s outstanding Series B and Series E convertible preferred stock converted into common stock totaled $58,000 for the year ended December 31, 2008 compared with $7.00 in 2009. The net loss per common share for each of the years ended December 31, 20092012 and December 31, 20082011 was $0.08$0.02 and $0.16,$0.05, respectively, on 41,874,89072,224,186 and 39,984,39458,223,600 weighted average common shares outstanding, respectively.
Liquidity and Capital Resources
Our capital resources and liquidity are generated primarilyneeds have been met from investments bysales of our debt and equity securities to individual and institutional investors.
Research and development, clinical trials and other studies of the components of ourCytoCore SolutionsSystem, 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 providedraised operating funds for theour business since itsour inception through loans from related parties and private offerings of debt and equity securities to limited numbers of U.S. and foreign investors. We will be required to make additional offerings in the future and obtain additional money from related parties to support theour operations of the business until we are able to generate sufficient income from the sale of our products. Weproducts.We used $1,637,000$683,000 and $7,118,000$719,000 during 20092012 and 2008,2011, respectively, to fund our operating activities. We also used $71,000 and $1,683,000 in 2009 and 2008, respectively, for the purchase of a license and of tooling and equipment.
At December 31, 2009,2012, we had checks issued in excess of cash on hand totaling $5,000of $39,000, as compared to $553,000 cash$15,000 on hand at the beginning of the period.December 31, 2011. We were able to raise $1,155,000$639,000 through the exercise of warrants and proceeds of advances from related parties and $70,000 from the sale of a machine during the fiscal year ended December 31, 2009.2012. This cash was used to fund operations, including research and development activities, and the purchase of a license.activities. We currently have enough cash on hand to fund operations into June, 2010.April 2013. We will need approximately $700,000 of additional financing to continue to conduct operations at current levels over the next twelve months. We continue to meet with qualified investors and believe we will be able to raise capital through the issuance of a new Series F Convertible Preferred Stock to fund operations in the immediate future until we can be self-sufficient through profitable operations, although no assurance can be given about the Company’sour ability to obtain such capital. We diddo not have any material commitments for capital expenditures as of December 31, 2009.
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.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 the Company iswe are unable to obtain adequate additional financing or generate profitable sales revenue, or negotiate a favorable settlement plan with creditors, itwe 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.
In order to meet our operational needs, we have any off-balance sheet arrangements.
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Off-Balance Sheet Arrangements
As of December 31, 2009,2012, we did not have any cash, cash equivalentsrelationships 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 7A. Quantitative and short-term investments. Due to our lack of material long-term debt Qualitative Disclosures About Market Risk
Not Applicable.
Item 8. Financial Statementsand anticipated capital expenditures, we do not believe that we currently face any material interest risk exposure.
Our consolidated financial statements for the years ended December 31, 20092012 and 2008,2011, together with the report of L J Soldinger Associates LLC dated May 14, 2010,April 1, 2013, and the notes thereto, are filed as part of this Annual Report onForm 10-K commencing onpage F-1 and are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable.
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, 2012, 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 SEC’s 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.
Management's 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, including our chief executive officer who serves as our principal executive officer and principal financial officer, we evaluatedconducted an assessment of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, our chief executive and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act”), is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.
Our internal control system was effective asdesigned to provide reasonable assurance regarding the reliability of financial reporting and the endpreparation of financial statements for external purposes in accordance with generally accepted accounting principles in the fiscal year ended December 31, 2009.
(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 our management and directors; and |
(iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements. |
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the temporary rules of the SecuritiesDodd-Frank Wall Street Reform and Exchange Commission that permitConsumer Protection Act, which permits us to provide only management’s report in this annual report.
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There were no changes in our internal control over financial reporting during the fourth fiscal quarter ended December 31, 20092012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not Applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Board of Directors and Executive Officers
Director | ||||||||||
Name | Age | Positions and Offices, if any, Held with the Company | Since | |||||||
Current Directors | ||||||||||
Robert F. McCullough, Jr. | 55 | Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors | 2005 | |||||||
John H. Abeles, M.D. | 65 | Director | 1999 | |||||||
Alexander M. Milley | 57 | Director | 1989 | |||||||
Clinton H. Severson | 62 | Director | 2006 | |||||||
Current Executive Officer | ||||||||||
Richard A. Domanik, Ph.D. | 63 | Chief Operating Officer | — |
Name | Age | Positions with the Company |
Robert F. McCullough, Jr. | 59 | Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors |
John H. Abeles, M.D. | 69 | Director |
Alexander M. Milley | 61 | Director |
Augusto Ocana Mauro Scimia Xavier Carbonell | 70 58 44 | Director Director Director |
Richard A. Domanik, Ph.D. | 68 | Chief Operating Officer |
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, 20092009. From October 2003 to fill the vacancy created by the resignation of Daniel J. Burns as such on that date. In addition,January 2011, Mr. McCullough currently servesalso served as President and as a Portfolio Manager of Summitcrest Capital, Inc., a money management firm and registered investment adviser, which was formerly a position he has held since October 2003.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 thereto,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 ana Masters of Business Administration in finance and is a Certified Public Accountant. Mr. McCullough’s financial and accounting educationMcCullough possesses particular knowledge and experience contributed to his nomination as a directorin accounting and appointment as CFO, and hisfinance, organizational leadership and finance experience supportedstrategic planning that strengthen the Board’s 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 appointment as CEObeneficial ownership of Company securities in our proxy statement, and aided and abetted us in violating Section 15(a) of the Company.Exchange Act. In February 2011, Mr. McCullogh’s qualifications asMcCullough consented to the entry of a directorfinal judgment pursuant to which he was permanently restrained and executive officerenjoined from violating Section 14(a) of the Company include his management experience, business acumenExchange Act, Section 16(a) of the Exchange Act, and investment expertise.
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 waspreviously 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. The Company believes that Dr. Abeles’Abeles possesses particular knowledge and experience in medical education, venture capital and finance, experience, and the pharmaceutical industry work experience with several leading medicalthat strengthen the Board’s collective qualifications, skills, and pharmaceutical companies make him qualified to serve as a director of the Company.
Alexander M. Milleyhas been a director of the Company (including its predecessors) since 1989. Mr. Milley is currently President, Chief Executive Officer and Chairman of the Board of ELXSI Corp., a publicly-held holding company withcompanywith subsidiaries operating in the restaurant and environmental inspection equipment industries.
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Clinton H. SeversonDr. Mauro Scimiawas elected to the Board of Directors in November 2006. Mr. Severson has served as President,a consultant to the Company since 2011. Prior to this, from 2009 to 2011, he served as a consultant to Greiner BioOne, a life sciences company, where he assisted with establishing distribution networks and developing a private laboratory network. During 2007 and 2008, he served as a consultant to Third Wave Technologies (Madison), a developer of cervical cancer screening tests, where he assisted with establishing distribution channels in Italy, France and Spain. From 2000 to 2006, Dr. Scimia served as the Country Manager for Cytyc Italy, a subsidiary of Cytyc Corporation. Prior to this, he served in several sales and management positions for several pharmaceutical and life sciences companies. As a result of these and other professional experiences, Dr. Scimia possesses particular knowledge and experience in sales strategies, product distribution and the life sciences industry which strengthens the Board’s collective qualifications, skills, and experience.
Dr. Xavier Carbonell has served as the Chief Executive Officer of Palex Medical, SA, a medical device distribution company located in Spain, since 2008. From 2004 to 2008, he served as the Oncology Business Unit Director for Amgen, a publicly-traded biotechnology company, and from 2002 to 2004, he was the Medical Director for the Oncology Business Unit at Novartis. Before Novartis, he held several positions in the medical oncology field, including serving as a directorMedical Oncologist at several public and private institutions. As a result of these and other professional experiences, Dr. Carbonell possesses particular knowledge and experience in management, international relations and product distribution which strengthens the Board’s collective qualifications, skills, and experience.
Augusto Ocana served as Chief Executive Officer of the BoardCompany from November 2006 to July 2007 and as President of DirectorsInternational Operations from 2007 through 2008. He has acted as a consultant to the Company since then. He also served as the President of Abaxis, Inc., a northern California-based providerWorldwide Business of portable technology, tools and services used for medical diagnostics sold to customers and distributors worldwide,the Company since 1996.2006. Prior to his assuming the CEO positionthis, from 1999 to 2006, he was a Senior Vice President, General Manager and Director of Abaxis,C.H. Werfen, S.A., where he was appointed Chairmanfocused on sales and market development. Prior to this, he served in sales and management roles for several corporations, including Abbott Laboratories. As a result of these and other professional experiences, Mr. Ocana possesses particular knowledge and experience in sales, marketing, and management which strengthens the Board in 1998, Mr. Severson served as PresidentBoard’s collective qualifications, skills, and CEO for over seven years at MAST Immunosystems, Inc., a privately-held medical diagnostic company. The Board believes that Mr. Severson’s industry and work experience, coupled with his global, leadership and finance experience as the chief executive of both publicly-traded and privately-held companies, make him qualified to serve as a director of the Company.
Executive Officer
Richard A. Domanik, Ph.D. was appointed President of the Company in May 2007 and served in that capacity until August 2008. He was appointedhas been our Chief Operating Officer insince October 2007. From May 2007 and continues to serve in that capacity.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 biotechnologystart-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 wasserved as our Chief Technology Officer and Vice President-Technology of the Company.President-Technology. He also served as CTOChief Technology Officer and Vice President of AccuMed International, which the Companywe acquired in 2001, from 1994 to 1999. Prior to his work with CytoCore and its subsidiaries,us, 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 CCIus as well as itsour industry. Dr. Domanik has a long history of working with the Companyus 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 the Company’sour executive officers and directors, and holders of more than 10% of the outstanding shares of the Company’sour common stock, to file initial reports of ownership and reports of changes in ownership with the Commission.
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Code of Ethics
We have adopted itsourCode of Ethics and Business Conduct for Officers, Directors and Employeesthat applies to all of our officers, directors and employees, of the Company, including the Company��sour principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The CompanyWe filed itsthe code as an exhibit to itsour Annual Report onForm 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 the Company’sour website atwww.cytocoreinc.com.
Board of Directors and Committee Information
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.
Audit Committee
The Audit Committee currently consists of Mr. Milley (Chairman), and Dr. Abeles, and Mr. Severson, eachboth of whom isare independent under applicable independence requirements. The Board of Directors has determined that Mr. Milley also satisfies the definition ofqualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K promulgated by Commission.
The Audit Committee acts pursuant to a written charter, which charter authorizes the committee’s 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 Company’s independent registered public accounting firm and members of financial management. A copy of the Audit Committee’s charter was filed as an appendix to the Company’s definitive proxy statement for its 2007 annual stockholders meeting, held on June 21, 2007, as filed with the SEC on May 15, 2007, and is available on the Company’sour website. The Audit Committee met four times in 2009.
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37
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Item 11. |
Summary Compensation Table
The following tables settable sets forth all plan and non-planthe compensation awarded to, earned by or paid to (i) the individual who served as the Company’s principal executive officer, and principal financial officer duringeach of the last completed fiscal year, and (ii)Company’s two most highly compensated executive officers other than the other individual who was serving as anprincipal executive officer of the Company at the end of the 2009 fiscal year ((i) and (ii) together,whose compensation exceeded $100,000 (collectively, the “Named Executive Officers”), for all services rendered in all capacities toduring the Company by such persons.
All | ||||||||||||||||||||||||||||
Name | Stock | Option | Other | |||||||||||||||||||||||||
and | Salary | Bonus | Awards | Awards | Compensation | Total | ||||||||||||||||||||||
Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
Robert F. McCullough, Jr. | 2009 | $ | 180,000 | (1) | — | — | — | $ | 15,000 | (2) | $ | 195,000 | ||||||||||||||||
CEO, CFO and | 2008 | $ | 180,000 | (3) | — | — | $ | 16,163 | (4) | $ | 71,094 | (5) | $ | 267,257 | ||||||||||||||
Chairman of the Board | ||||||||||||||||||||||||||||
Richard A. Domanik, Ph.D. | 2009 | $ | 150,000 | (6) | — | — | — | — | $ | 150,000 | ||||||||||||||||||
COO | 2008 | $ | 145,000 | (7) | — | — | — | $ | 83,094 | (8) | $ | 228,094 |
Name and Principal Position |
Year
|
Salary ($) |
Total ($) |
Robert F. McCullough, Jr.(1) CEO, CFO and Chairman of the Board | 2012 | $180,000(2) | $180,000 |
2011 | $90,000(2) | $90,000 | |
Richard A. Domanik, Ph.D.(3) COO | 2012 | $150,000(4) | $150,000 |
2011 | $150,000(4) | $150,000 |
(1) | Mr. McCullough |
(2) | Mr. McCullough voluntarily reduced his salary in 2011, and has deferred payment of 100% of his salary earned in |
(3) | ||
Dr. Domanik |
(4) | Dr. | |
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Narrative Disclosure to Summary Compensation
Mr. McCullough was appointed Chairmanearned an annual salary of the Board of Directors$180,000 and $90,000 in April 2009, Chief Executive Officer of the Company in October 2007,2012 and 2011, respectively, and has served as the Company’s Chief Financial Officer since September 2005. In November 2006, the Boardelected to defer payment of Directors approved and the Company100% of such salary. We do not have any employment agreement with Mr. McCullough.
We have not entered into an employment agreement with Mr. McCullough pursuant to which he agreed to continue to provide, on a non-exclusive basis, financial accounting, reporting and business services to the Company. The agreement provided for a term of 24 months from December 1, 2006, subject to earlier termination. Under the agreement, Mr. McCullough received a salary of $10,000 per month, which increased to $15,000 per month in April 2007 subsequent to the Company having raised $5 million in funding. It also provided that Mr. McCullough was entitled to reimbursement ofout-of-pocket expenses related to the performance of his duties for the Company and certain health insurance benefits. The agreement expired according to its terms on November 30, 2008 and was not renewed, although Mr. McCullough still serves as CEO and CFO of the Company.
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Equity Incentive Plan and Employee Stock Purchase Plan
In January 2008, the Board of Directors granted Dr. Domanik a stock bonus of 100,000 shares of restricted, unregistered common stock, valued at $177,735, for services rendered to the Company in 2007. Such bonus was made in recognition of Dr. Domanik’s performance during the 2007 fiscal year. During 2008, the Company reimbursed Dr. Domanik $83,094 for the taxes payable with respect to such stock bonus.
Equity | ||||||||||||||||||||
Incentive | ||||||||||||||||||||
Number of | Number of | Plan Awards: | ||||||||||||||||||
Securities | Securities | Number | ||||||||||||||||||
Underlying | Underlying | of Securities | ||||||||||||||||||
Unexercised | Unexercised | Underlying | Option | |||||||||||||||||
Options | Options | Unexercised | Exercise | |||||||||||||||||
(#) | (#) | Unearned Options | Price | Option | ||||||||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | Expiration Date | |||||||||||||||
Robert F. McCullough, Jr. | — | — | — | $ | — | — | ||||||||||||||
Richard A. Domanik, Ph.D. | 30,000 | (1) | — | — | $ | 2.67 | 6/29/10 | |||||||||||||
5,000 | (2) | — | — | $ | 1.89 | 12/18/10 |
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We do not offer or have in place any formal severance, change in control or similar compensation programs for itsour officers or employees. Rather, the Companywe individually negotiatesnegotiate with those employees for whom such compensation is deemed necessary. The Company doesWe do not currently have an agreement with any officer with respect to severance, change of control or a similar circumstance.
Compensation of Directors
The following table sets forth certain information regarding the compensation of directors for the Company’s 2009our 2012 fiscal year. Directors who are or
Name(1) |
Fees ($)
|
Total ($) |
John H. Abeles, M.D. | $20,000(2) | $20,000(3) |
Alexander M. Milley | $20,000(2) | $20,000(3) |
Xavier Carbonell | - (4) | - |
Mauro Scimia | - (4) | - |
Augusto Ocana | - (4) | - |
(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.
(2) Represents accrued but unpaid director fees with respect to fiscal year 2012. This amount does not include fees payable to each director in the amount of $20,000, which were also employees, including Robert F. McCullough, Jr., didaccrued but unpaid in 2011 and have not been paid to date.
(3) As of December 31, 2012, each of these directors is entitled to receive any100,000 shares of common stock in connection with a stock bonus provided to each of our directors in 2009.
(4) Does not include consulting fees and sales commissions earned in 2012. See “Certain Relationships and Related Transactions, and Director Independence” in Item 13 below.
Narrative Disclosure to Director Compensation Table
We currently pay our outside directors a quarterly fee of $5,000 as compensation for their service as a director while they were employees. Daniel J. Burns, the former Chairmanon our board of directors. Since 2009, our directors have deferred receipt of such fees. We also reimburse all directors for their reasonable expenses incurred in connection with attendance at meetings of the Board, also did not receive director fees. Rather, Future Wave Management, for which Mr. Burns is President and sole owner, received consulting fees from the Company pursuant to an agreement that expired November 30, 2008.
Nonqualified | ||||||||||||||||||||||||||||
Fees Earned | Non-Equity | Deferred | ||||||||||||||||||||||||||
or Paid | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||
in Cash | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||
Name | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
John H. Abeles, M.D. | $ | 20,000 | (1) | $ | 40,000 | (2) | — | — | — | — | $ | 60,000 | ||||||||||||||||
Daniel J. Burns | 10,000 | (1)(3) | $ | 40,000 | (2) | — | — | — | — | $ | 50,000 | |||||||||||||||||
Erik Danielsen | $ | 20,000 | (1) | $ | 40,000 | (2) | — | — | — | — | $ | 60,000 | ||||||||||||||||
Phillip Bradley Hall, M.D. | $ | 10,000 | (1)(3) | $ | 40,000 | (2) | — | — | — | — | $ | 50,000 | ||||||||||||||||
Alexander M. Milley | $ | 20,000 | (1) | $ | 40,000 | (2) | — | — | — | — | $ | 60,000 | ||||||||||||||||
Clinton H. Severson | $ | 20,000 | (1) | $ | 40,000 | (2) | — | — | — | — | $ | 60,000 | ||||||||||||||||
David J. Weissberg, M.D. | $ | 10,000 | (1)(3) | $ | 40,000 | (2) | — | — | — | — | $ | 50,000 |
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Upon our acquisition, all outside directors will also receive, upon the acquisition of the Company, as follows:receive: (1) warrants to purchase 62,500 shares of common stock at $2.50 per share if the Company iswe 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 the Company iswe 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 the Company iswe are acquired for more than $30.00 per share.
For information on other consideration received by directors or their affiliates from the Company, see “Transactions with“Certain Relationships and Related Persons, PromotersTransactions, and Certain Control Persons”Director Independence” in Item 1213 below.
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Security Ownership of Certain Beneficial Owners and Management and |
Common Stock — Five Percent Holders
The following table sets forth certain information, as of April 22, 2010, certain informationMarch 28, 2013 with respect to anyholdings of our common stock by (i) each person including any group, who is known to the Companyby us to be the beneficial owner of more than 5% of the common stocktotal number of the Company. There were 44,832,610 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 closeaddress of business on April 22, 2010.
Amount and Nature of | Percent | |||||||
Name and Address of Beneficial Owner | Beneficial Ownership(1) | of Class | ||||||
Daniel J. Burns(2) | 3,525,500 | 7.9 | % | |||||
946 Sea Wind Court Del Mar, CA 92014 | ||||||||
NeoMed Innovations III L.P.(3) | 2,875,800 | 6.4 | % | |||||
Parkvein 55 N-0256 Oslo, Norway | ||||||||
Standard General Holdings, LLC | 2,534,315 | 5.7 | % | |||||
5190 Neil Road, #430 Reno, NV 89502 | ||||||||
Robert F. McCullough(4) | 3,725,853 | 8.3 | % | |||||
c/o CytoCore, Inc. 414 N. Orleans Street, Suite 510 Chicago, IL 60610 | ||||||||
David J. Weissberg, M.D(5) | 2,279,199 | 5.0 | % | |||||
175 E. Main Street Huntington, NY 11723 |
Amount and Nature of | Percent | |||||||
Name and Address of Beneficial Owner | Beneficial Ownership(1) | of Class | ||||||
Robert F. McCullough | 5,190,706 | (2) | 7.1 | % | ||||
Augusto Ocana | 7,285,307 | 9.9 | % | |||||
Mauro Scimia | 5,056,986 | 6.9 | % | |||||
Xavier Carbonell | 4,764,294 | 6.0 | % | |||||
John H. Abeles, M.D. | 313,098 | (3)* | ||||||
Richard A. Domanik, Ph.D. | 127,272 | (4)* | ||||||
Alexander M. Milley | 902,950 | (5) | 1.2 | % | ||||
All current directors and executive | ||||||||
officers as a group (7 persons) | 23,640,613 | 30.2 | % |
· | 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 person’s 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 |
(2) | Includes 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: (i) 213,098 shares owned by Northlea Partners, Ltd., of which Dr. Abeles is General Partner; and (ii) 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. |
(4) | Includes 100,000 shares of common stock awarded in 2009 that have not yet been issued. |
Includes: (i) 149,551 shares | |||
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Amount and Nature of | Percent | |||||||
Name of Beneficial Owner | Beneficial Ownership(1) | Of Class | ||||||
John H. Abeles, M.D.(2) | 377,681 | * | ||||||
Daniel J. Burns(3) | 3,525,500 | 7.9 | % | |||||
Erik Danielsen(4) | 661,845 | 1.5 | % | |||||
Richard A. Domanik, Ph.D.(5) | 162,272 | * | ||||||
Phillip Bradley Hall, M.D.(6) | 896,070 | 2.0 | % | |||||
Robert F. McCullough, Jr.(7) | 3,725,853 | 8.3 | % | |||||
Alexander M. Milley(8) | 965,450 | 2.2 | % | |||||
Clinton H. Severson(9) | 110,000 | * | ||||||
David J. Weissberg, M.D.(10) | 2,279,199 | 5.0 | % | |||||
All current directors and executive officers as a group (6 persons)(11) | 5,341,256 | 11.9 | % |
35 |
Amount and Nature of | Percent | |||||||
Name and Address of Beneficial Owner(1) | Beneficial Ownership(2) | of Class | ||||||
Kevin F. Flynn June 1992 Non-Exempt Trust | 6,667 | (3) | 35.0 | % | ||||
120 South LaSalle Street | ||||||||
Chicago, IL 60602 | ||||||||
Rolf Lagerquist | 2,000 | (4) | 10.5 | % | ||||
4522 CO Road 21 NE | ||||||||
Elgin, MN 55932 |
(1) | ||
(2) | 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 person’s 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 | |
(3) | ||
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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 | ||||||||
All current directors and executive officers as a group (9 persons) | 0 | 0.0 | % |
Converts into | ||
(4) | Converts into |
Equity Compensation Plan Information
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
Equity Compensation Plans Approved by Security Holders | (a) | (b) | (c) | |||||||||
None | -- | -- | -- | |||||||||
Equity Compensation Plans Not Approved by Security Holders | ||||||||||||
Warrants issued for purchase of common stock | 666,667 | $ | 0.07 | -- | ||||||||
Warrants issued for settlement of a lawsuit | 217,000 | $ | 0.50 | -- | ||||||||
Warrants issued for officer, director and employee compensation (1) | 39,000 | $ | 0.03 | -- | ||||||||
Total | 922,667 | $ | 0.17 | -- |
1) | We have issued warrants in lieu of cash payment for employment services, for achieving certain goals or for other corporate reasons. During fiscal year 2012, we issued to a non-executive employee warrants to acquire 13,000 shares of common stock. |
Changes in Control
We are not aware of any arrangements (including any pledge by any person of securities of CCI)our securities), the operation of which did or may at a subsequent date result in a change of control of the Company.
Item 13. | Certain Relationships and Related |
The following section sets forth information regarding transactions since January 1, 2008,2011, or any currently proposed transactions, between the Companyus and certain related persons. For more information on the compensation received by current and formerour directors and officers, of the Company during the 2009 fiscal year, and the beneficial ownership of equity securities of the Company ofby such individuals, see the “Compensation”Item 11 “Executive Compensation” and “SecurityItem 12 “Security Ownership of Certain Beneficial Owners and Management” sections in Items 10Management and 11, respectively,Related Stockholder Matters” above.
46
36 |
Board of Directors
Mr. McCullough is the President of its general partner, purchasedloaned to us an aggregate 944,550 shares of common stock of the Company in the open market at prices ranging from $0.10 to $0.72 per share. Mr. McCullough individually purchased an aggregate 208,772 shares of common stock of the Company in the open market at prices ranging from $0.08 to $0.75 per share$639,000 and $771,000 during the 20092012 and 2011 fiscal year. In 2008, Summitcrest purchased 551,400 shares of common stock of the Company in the open market at prices ranging from $0.17 to $2.30 per share and Mr. McCullough individually purchased 197,000 shares in the open market at prices ranging from $0.18 to $0.67 per share.
Payment of Consulting Fees and Commissions to Directors
During the first quarter of 2008, Mr. McCullough and various trusts of which Mr. McCullough serves as trustee participatedyear ended December 31, 2012, we engaged in a private placement of units of the Company, each unit consisting of two shares of common stock and a warrant to purchase one common share. Mr. McCullough invested $90,000 and received 45,000 shares, the trusts invested $110,000 and received 55,000 shares, and the Company issued warrants to purchase an aggregate 50,000 shares.
47
· | we issued 3,817,736 shares of common stock to Xavier Carbonell in payment of consulting services; |
· | we issued 2,252,415 shares of common stock and paid $27,500 to Mauro Scimia in payment of consulting services and paid $16,500 to Mr. Scimia in payment of commissions on sales of our products; and |
· | we issued 3,731,198 shares of common stock to Augusto Ocana in payment of consulting services and paid $4,500 to Mr. Ocana in payment of commissions on sales of our products. |
We recognize that related person transactions can present potential or actual conflicts of interest and create the appearance that Companyour decisions are based on considerations other than the best interests of the Companyus and itsour 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 NominatingAudit 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 Companywe 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 NominatingAudit Committee meeting, management must propose those transactions to be entered into by the Companyus 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 NominatingAudit Committee must approve or disapprove such transactions and at each subsequently scheduled meeting, management must update the
48
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 |
the extent of the related person’s interest in the |
the impact on a director’s independence in the event the related person involved in the transaction is a director, an immediate family member or an affiliated |
if applicable, the availability of other sources of comparable products 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 NominatingAudit 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 itsour stockholders, as the NominatingAudit 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 NominatingAudit Committee or the Board of Directors.
Director Independence
Upon consideration of the Boardcriteria 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, are independent. With regard to our audit committee, the board of directors has determined that each of current directors Dr. Abeles and Mr. Milley, and Mr. Severson is “independent” aswho constitute all members of the audit committee, are independent with respect to the independence criteria for audit committee members set forth in Rule 5605(c)(2) of the rules and regulations of The Nasdaqthe NASDAQ Stock Market includingand Rule 5605, andRule 10A-310A-3(b)(1) of the Exchange Act. The Company does not utilize any other definition or criteria for determining the independence of a director or nominee,
Item 14. Principal Accountant Fees and no other transactions, relationships, or other arrangements exist to the Board’s knowledge or were considered by the Board, other than as may be discussed herein, in determining an individual’s independence. For more information on the independence of the members of the Board of Directors of the Company, including committee members, please see “Board of Directors and Committee Information” in Item 9 — Directors, Executive Officers, and Corporate Governance above.
L J Soldinger Associates LLC (“LJSA”) served as the Company’sour independent registered publicpubic accounting firm each of the fiscal years ending December 31, 20092012 and 2008.
Fees
The following table presents fees for the professional services rendered by LJSA for fiscal years 20092012 and 2008,2011, respectively:
Services Performed | 2009 | 2008 | ||||||
Audit Fees(1) | $ | 128,000 | $ | 281,000 | ||||
Audit-Related Fees(2) | — | — | ||||||
Tax Fees(3) | — | — | ||||||
All Other Fees(4) | — | — | ||||||
Total Fees | $ | 128,000 | $ | 281,000 | ||||
Services Performed |
2012 |
2011 | ||||||
Audit Fees(1) | $ | 85,000 | $ | 95,000 | ||||
Audit-Related Fees(2) | 1,560 | -- | ||||||
Tax Fees(3) | 2,772 | 4,680 | ||||||
All Other Fees(4) | -- | -- | ||||||
Total Fees | $ | 89,332 | $ | 99,680 |
(1) | Audit fees represent fees billed for professional services rendered for the audit of |
49
(2) | Audit-related fees represent fees billed for assurance and related services reasonably related to the performance of the audit or review of |
(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 the Company’sour independent registered public accounting firm. In connection with such responsibilities, the Audit Committee is required, and it is the Audit Committee’s policy, to pre-approve the audit and permissible non-audit services (both the type and amount) performed by the Company’s independent registered public accountingour independentregistered publicaccounting firm in order to ensure that the provision of such services does not impair the firm’s independence, in appearance or fact.
The Audit Committee pre-approved all audit services provided to the Companyus during fiscal 2009. No non-audit2012. Non-audit services were provided to the Companyus during fiscal year 2009.
2012 were for tax compliance. PART IV Item 15. Exhibits and Financial Statement Schedules (*) Denotes an exhibit filed herewith.
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.
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.
CYTOCORE INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Stockholders of CytoCore, Inc. We have audited the accompanying consolidated balance sheets of CytoCore, Inc. audits. We conducted our In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the 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 Company’s 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. Management’s 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.
CYTOCORE, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
CYTOCORE, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
CYTOCORE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CYTOCORE, INC. AND SUBSIDIARIES
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements
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 Except where the context otherwise requires, “CCI,” “CytoCore”, the “Company,” “we” and “our” refers to CytoCore, Inc. and our dormant subsidiaries and predecessors. Currently, CCI Going Concern The Company has incurred significant operating losses since its CCI has only enough cash to operate into
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 dormant subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. Use of 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.
Revenue Recognition CCI recognizes revenue from product sales in accordance with FASB Accounting Standards Codification Section (“FASB ASC”) 605, “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.
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:
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 asset’s 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 Foreign Currency Translation The functional currency of the Company’s 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. During 2012 and 2011 all foreign operations were dormant. 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.
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. CCI’s calculation of diluted net loss per share excludes potential common shares as of December 31, 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 Income taxes are provided for the
bases of assets and liabilities, and are measured using tax rates and laws that are expected to be in effect when the differences are 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 Risks from Concentrations Revenues were derived 2011. For the past two years all the Company’s financing has been provided by one related party and the Company is currently dependent on this related party for its financing. Recent Accounting Pronouncements In 2011. In
Note 3. Property and
Fixed assets consist of the following at December 31:
For the years ended December 31, During 2011, the Company adjustment of $27,000. During the
Note 4. Accrued Expenses Accrued expenses include the following at December 31:
Note 5. Notes Payable Notes payable at December 31 consist of:
The Company has failed to make principal and interest payments when due and is in breach of certain warranties and representations under
During year ended December 31, 2012, the Company was advanced $639,000 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 $231,000 and $173,000 on the outstanding balances as of December 31, 2012 and 2011, respectively. Note 6. 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:
Warrants to purchase Preferred Stock A summary of the Company’s preferred stock as of December 31 is as follows:
Summary of Preferred Stock Terms Series A Convertible Preferred Stock
Series B Convertible Preferred Stock
Cumulative dividends in arrears at December 31,
Series C Convertible Preferred Stock
Cumulative dividends in arrears at December 31, $128,000 Series D Convertible Preferred Stock
Cumulative dividends in arrears at December 31, $1,955,000 Series E Convertible Preferred Stock
Cumulative dividends in arrears at December 31, $470,000 Issuance of Securities Common Stock Issuance of Common Stock as Payment for Services During the quarter ended December 31, 2012, the Company Also, during the year ended December 31, 2012, the Company issued 849,838 shares of restricted, unregistered common stock to During the year ended December 31, Issuance of Common Stock as Payment for Employee Compensation During the quarter ended December 31, 2012, the Company issued to Augusto Ocana (“Ocana”), a director and vice president of the For the year ended December 31, As of December 31, 2012, we have a total of 4,418,271 shares of common stock As of December 31, 2011, we were contractually obligated to issue 700,000 shares of restricted, unregistered common stock to a
Also during the quarter ended December 31, 2011, we were contractually obligated to issue 384,615 shares of common stock In addition, during the quarter ended December 31, 2011, we were contractually obligated to issue 615,384 shares of
During the year ended December 31, Issuance of Common Stock for Conversion of Debt Forthe Conversions of Preferred Stock During the Warrants For the year ended December 31, 2012, the Company issued warrants to a During the year ended December 31, 2011, the Company
are immediately exercisable. Warrants At December 31,
As of December 31,
2012. A summary of the Company’s stock option activity and related information follows: 1999 Stock Option Plan
Warrants and options issued outside of the Plan for employee compensation
The current facilities Future minimum annual lease payments under these leases as of December 31,
Note 8. Income Taxes The provision for income taxes consists of the following for the years ended December 31,
:
For the years ended December 31,
The significant components of the Company’s deferred tax assets and liabilities are as follows:
At December 31, 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 Tax Uncertainties The Company 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 Company’s tax returns are for the years
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in millions):
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. The Company’s 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 9. Derivative Liability In March 2010, the Company issued a note with a variable conversion feature. This resulted in the Company recording a derivative liability in the amount of $55,000 for the variable conversion feature in accordance with ASC 480-10. During the six months ended June 30, 2011, the remaining debt was converted and the $55,000 derivative liability was reclassified to additional paid-in-capital. In addition, this also resulted in the Company having to account for 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 Company’s total authorized common shares. Initially, the Company was required to record a liability for the potential excess of shares over the authorized amount and revalue this liability no less than every quarter. The Company determined that the excess shares were related to warrants and preferred stock issued and outstanding as of June 21, 2011 and March 31, 2010. Based upon the FASB guidance, the Company determined the fair value of these excess shares using the Black-Scholes valuation model. In March 2010, the Company measured and recorded an inception liability, and has remeasured this liability quarterly. At December 31, 2010, this liability totaled $44,000. The remaining balance of the note was converted to common stock as of June 22, 2011. As of June 21, 2011, in accordance with the FASB guidance, the Company remeasured this liability. The Company recorded an unrealized benefit of $30,000 and reclassified $14,000 to additional paid-in-capital upon conversion of the entire debt. As a result, there was no derivative liability as of December 31, 2011. Note 10.Commitments and contingencies Legal Proceedings Settled in 2012 None Pending as of December 31,
None 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, 2012, the Company recorded a During the year ended December 31, 2011, the Company entered into a expense. Commitments As a result of cash constraints experienced by the Company, the Illinois Franchise Taxes due for the year 2012, 2011, 2010 and 2009 have not been paid. CCI believes that it has made adequate provision for the liability including penalties and interest. Note 11.Related Party Transactions During the year ended December 31, During the year ended December 31, In 2012 and 2011 the Company recorded interest expense of $231,000 and $173,000, respectively, with a corresponding entry to
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