UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-935
CYTOCORE, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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36-4296006
(I.R.S. Employer
Identification No.)
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414 N. Orleans St., Suite 510, Chicago, IL
(Address of principal
executive offices)
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60654
(Zip
Code)
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(312) 222-9550
(Registrants Telephone
Number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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None
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Not Applicable
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Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. o
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
(not required)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one.)
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the Company was $8,790,113, based upon the
closing price of shares of the Companys common stock,
$0.001 par value per share, of $0.28 as reported on the
Over-the-Counter
Bulletin Board on June 30, 2009.
The number of shares of common stock outstanding as of
May 7, 2010 was 45,317,610.
CYTOCORE,
INC.
Annual Report on
Form 10-K
December 31, 2009
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1
PART I
Overview
CytoCore, Inc. (CCI, Cytocore or the
Company), formerly Molecular Diagnostics, Inc.,
develops, manufactures and plans to sell an integrated family of
cost-effective products for the detection, diagnosis and
treatment of cancer under the trade name of CytoCore
Solutions®.
CytoCore Solutions products are intended to address
sample collection, specimen preparation, specimen evaluation
(including detection/screening and diagnosis), treatment and
patient monitoring within vertical markets related to specific
cancers. Current CytoCore Solutions products are focused
upon cervical cancer. CCI plans that this focus will later be
expanded to include other gynecological cancers as well as
bladder, lung, and breast cancers, among others. Within each of
these markets, CCI anticipates that the CytoCore Solutions
products will be sold as individual value-added drop-in
replacements for existing products and as integrated systems
that improve the efficiency and effectiveness of clinical and
laboratory operations.
Currently, CCIs only product is the
SoftPAP®
cell collection device that is intended to replace the
spatula and brush currently used to collect cervical cytology
samples. SoftPAP constitutes one of the cell collection
components of the Companys CytoCore Solutions
System. The Company is also licensed to sell the
PadKit®,
another sample collection device directed at ensuring female
reproductive tract health, and a cell preservative developed for
cytological applications by Cell Solutions LLC. CCI intends to
market and sell the SoftPAP and PadKit devices along with
this preservative. The other components of the CytoCore
Solutions System include certain biochemical assays and
slide-based tests, the Companys next generation
specialized system for computer-assisted cytology
the Automated Image Proteomic Systems or
AIPStm
and a drug delivery system.
The Company believes the CytoCore Solutions System will
provide better detection and diagnosis of cancer and
cancer-related diseases through improved specimen quality and
accuracy of test results, both in terms of a lower incidence of
false negatives and fewer inadequate collections of samples.
CytoCore also believes the system will expand the number of
women who can be tested, thereby increasing detection and
diagnosis rates.
CCI was 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 filing
purposes. Bell National merged into Ampersand Medical
Corporation, its wholly-owned subsidiary, in May 1999 in order
to change the state of incorporation of the company to Delaware.
In September 2001, we acquired 100% of the outstanding stock of
AccuMed International, Inc. by means of a merger of AccuMed into
a wholly-owned subsidiary of the Company. Shortly after the
AccuMed merger we changed our corporate name to Molecular
Diagnostics, Inc. The name change was effected by the merger of
our wholly-owned subsidiary, Molecular Diagnostics, Inc., with
and into Ampersand. In 2006, our shareholders approved a
proposal to change the Companys 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 and our refers
to CytoCore, Inc. and our subsidiaries and predecessors.
Recent
Developments
During 2009 and 2010 to date, our operations were severely
restricted by our lack of working capital. We have maintained
minimal operations. Due to this restriction, we have not been
able to hire marketing and sales personnel or accelerate our
research and development activities. If we are unable to raise
additional capital, we may be forced to cease operations.
3
CCI is currently conducting an offering, begun in the first
quarter of 2009, of its Series F Convertible Preferred
Stock. Proceeds of that offering will be used for working
capital and general corporate purposes. To date we have not
raised any capital from this offering.
Information
About Industry Segments
We operate in one industry segment involving medical screening
devices, diagnostics, and supplies. All of our operations during
the reporting period were conducted and managed within this
segment, with a single management team that reports directly to
our Chief Executive Officer. For information on revenues, profit
or loss, total assets and other financial data attributable to
the Companys operations, see the consolidated financial
statements included herewith.
Description
of Business
CCI develops, manufactures and plans to sell an integrated
family of cost-effective products for the detection, diagnosis
and treatment of cancer under the trade name of CytoCore
Solutions®.
CytoCore Solutions products are intended to address sample
collection, specimen preparation, specimen evaluation (including
detection/screening and diagnosis), treatment and patient
monitoring within vertical markets related to specific cancers.
Current CytoCore Solutions products are focused upon
cervical cancer. CCI plans that this focus will later be
expanded to include other gynecological cancers as well as
bladder, lung, and breast cancers, among others. Within each of
these markets, CCI anticipates that the CytoCore Solutions
products will be sold as individual value-added drop-in
replacements for existing products and as integrated systems
that improve the efficiency and effectiveness of clinical and
laboratory operations.
Total revenue for the years ended December 31, 2009 and
2008 was $44,000 and $125,000, respectively. Of this total
revenue, license fees accounted for $40,000, or 91%, of our
revenue in 2009 and $66,000, or 53%, of our revenue in 2008.
Sales of our current product
SoftPap®
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
The clinical diagnostics laboratory analyzes or otherwise
evaluates samples obtained from the human body for the purpose
of detecting the presence of disease, characterizing it as to
type and extent,
and/or
monitoring the efficacy of treatment. The starting point in any
clinical diagnostic test is the collection of a sample that
contains the analyte of interest. To a very large extent, the
characteristics of the sample collected determine the quality of
the results of any tests performed on the sample. The
sensitivity
and/or
accuracy of a test is, for example, likely to be reduced if the
sample collection device or method does not capture a sufficient
amount of the target analyte, alters the analyte of interest, or
collects significant quantities of substances that interfere
with the analysis. For this reason, sample collection is a major
focus of CytoCore.
SoftPAP®
CCI currently manufactures and sells the
SoftPAP®
device for the collection of cervical cell samples that are
used in the detection of cervical dysplasia, cancer and human
papillomavirus (HPV) infections. CCI believes that
SoftPAP, which has been cleared by the Food and Drug
Administration (FDA) for sale in the United States
and which is CE Marked for international distribution, is
positioned as a premium value-added alternative to the spatula,
broom and brush-style devices that have traditionally been used
for these purposes. Unlike these traditional devices, SoftPAP
collects only exfoliated cells and does not scrape, cut or
abrade the cervix. This unique sample collection method has been
shown in clinical trials to reduce the frequency of false
negative and false positive results when the sample is evaluated
by cytological methods to detect the presence of dysplasia and
cancer. A reduction in the false negative rate means that a
greater percentage of patients who have cervical dysplasia,
cancer or similar abnormalities are detected during cervical
cancer screening (Pap testing) and can, therefore, be treated. A
reduced false positive rate means that fewer patients are
falsely identified as having cervical dysplasia or cancer, thus
sparing these patients the unnecessary stress, discomfort and
expense of the additional testing needed to verify that
4
dysplasia or cancer is actually present. In addition, women have
reported that having a cervical sample taken using SoftPAP
is more comfortable than when a traditional device is used.
Variants of SoftPAP are also being designed for the
collection of exfoliated cell samples from tissues other than
the cervix.
PadKit®
PadKit®
is a low cost device that captures a sample that can be
evaluated to provide an assessment of the health of the entire
female genital tract. CCI has obtained an exclusive license to
sell PadKit for the collection of cellular samples that can be
screened for a variety of gynecological cancers (including
cervical, endometrial, and ovarian), and for the collection of
gynecological samples to be tested for the presence of HPV. In
the future, CCI may obtain licenses to sell PadKit for
additional indications such as the collection of samples for
sexually transmitted disease (STD) testing. PadKit
addresses a number of market niches and segments that are not
addressed effectively by SoftPAP or traditional
gynecological sampling devices. CCI believes that PadKit thus
complements SoftPAP in the CytoCore Solutions
family of products. PadKit is designed to eliminate the need
for assistance from a medical professional when collecting
gynecological samples for many screening applications. CCI
believes that this feature, in addition to the range of tests
that can be performed on a PadKit sample and PadKits low
cost, makes PadKit particularly attractive for use in large
scale public health screening programs. CCI is also evaluating
the use of PadKit in an internet-based fee-for-service testing
program outside of the United States. Additional uses, such as
providing a simple and rapid means of monitoring patients who
have had an abnormal Pap test or who are undergoing treatment
for a gynecological cancer, are also being explored.
Specimen
Preparation
Cervical cytology specimens are traditionally prepared as
smears where the cells on the collecting device are
literally wiped or smeared onto a microscope slide. In the
mid-1990s an alternative method, variously called a
monolayer or liquid-based preparation
(LBP), was introduced. In this method, cells are
washed off of the collection device into a preservative solution
to form a cell suspension. A portion of this cell suspension is
then transferred to a microscope slide. LBPs presently account
for about 80% of the cervical cytology slides prepared in the
United States, but despite the technical benefits of LBPs, only
about 20% of the cervical cytology slides in the European Union
and much lower percentages in the rest of the world are prepared
in this manner. The primary limitations to greater adoption of
LBPs outside of the United States are the high equipment and
ancillary supply costs associated with the two predominant LBP
methods.
Cell
Preservative
CCI has reached an agreement with Synermed Select Partners, Inc.
(Synermed) under which CCI will package and market
their
GluCytetm
cell preservative with CCIs SoftPAP and PadKit cell
collection devices. CCI selected this preservative for inclusion
in convenience kits due to both its technical performance and
because it can be performed manually, thus avoiding the high
equipment and supply costs incurred when using competing
methods. CCI believes that this methodology provides a cost
effective means for laboratories to transition from smears to
high quality LBPs. CCI intends to introduce the manual version
of convenience kits containing the SoftPAP and the
preservative in the European Union to address the demand for
LBPs in that part of the world. CCI expects that distribution of
such manual kits will then be expanded by region. In parallel,
CCI plans to collaborate with Cell Solutions, an affiliate of
Synermed, on selling the Cell Solutions automated slide
preparation system to high volume laboratories in these
countries. Unlike the rest of the world, where this preservative
is already approved for use, it is approved only as a general
cytology preservative in the United States and requires
additional FDA approval before it can be sold for use in
specific applications such as cervical cytology. CCI and Cell
Solutions have agreed to collaborate on obtaining the necessary
FDA approval. CCI is also working with the manufacturer of
PadKit to validate the preservative for this application, where
CCI believes its superior ability to process bloody samples is
of particular relevance. An independent clinical trial of PadKit
in combination with the preservative has recently been initiated
by the UCLA School of Nursing.
5
Stains
and Reagents
Once a cytology specimen has been deposited onto a microscope
slide, it is stained in order to assist the cytologist in
detecting and identifying the various features of the deposited
cells that are relevant to determining whether the cells are
normal, dysplastic or cancerous. CCI is 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 believes
that an added benefit of the CCI proprietary stains is that
after the specimen has been evaluated using these stains, it can
be counterstained with Pap stain for conventional confirmation
and archiving.
Specimen
Evaluation
When reading a cytology specimen, a cytologist
traditionally examines the specimen by eye through a
conventional optical microscope to detect, classify, record,
mark, and report abnormal cells. While performing this
examination, the cytologist is also referring to the
patients medical history, assessing specimen adequacy, and
capturing a variety of metrics and other information needed for
regulatory compliance and operational purposes. Despite the
widespread deployment of computers in the laboratory, many of
these operations are still largely paper-based. Even in
laboratories where medical histories are available to the
cytologists in electronic form and reports are prepared on a
computer, it is not uncommon for the data, and sometimes even
draft reports, to be initially captured on paper and then
transcribed.
In 1994 AccuMed, a corporate predecessor to CytoCore, introduced
the
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
AIPStm
Workstation is an updated and improved version of the AcCell
device. Like the AcCell, the AIPS Workstation is intended to
reduce operating costs and improve operating efficiency in the
cytology laboratory. Among the improvements and new features
incorporated in the AIPS Workstation are a more efficient user
interface, improved data management, workflow management and
communications capabilities, and new features such as image
capture, audio dictation, a consult mode, and
support for continuing education and proficiency testing. In
keeping with the AcCell tradition, patented context-sensitive
software allows these capabilities to be provided in an
unobtrusive manner that permits the cytologist to concentrate on
evaluating specimens rather than on operating the instrument.
CCI believes that the AIPS Workstation hardware also
incorporates several major advances over the AcCell, competing
computerized microscope systems, and conventional
cytology microscopes.
Fly-by-wire
technology, for example, allows the user to switch seamlessly
between manual and computer-controlled specimen positioning and
focusing and makes possible many of the improvements in system
ergonomics. This is important as it has been documented that the
poor ergonomics of conventional cytology microscopes are
responsible for causing many cytologists to leave the field due
to carpal tunnel syndrome and related medical problems. The AIPS
Workstation is expressly designed to address the root causes of
many of these ergonomic problems and is therefore expected to
improve the retention of trained cytologists, who are in
increasingly short supply, by the laboratory. Unlike the AcCell
and other computerized microscopes, the AIPS Workstation does
not require an external PC for operation. Instead, all necessary
computing power is embedded within the workstation frame. This
provides multiple benefits ranging from eliminating a
considerable quantity of equipment from a cytologists
typically cramped work area to facilitating the periodic
equipment validations that laboratories are required to perform.
In addition to use as part of a cytology screening system, the
AIPS Workstation can also be used in conjunction with the AIPS
Imager for automated cytological analysis, and in many other
applications in which a conventional microscope is used such as
pathology and hematology in a clinical laboratory, and
applications outside of the clinical laboratory that range from
drug discovery and quality control to metallurgy.
6
AIPStm
Imager
The intent of a medical screening program is to differentiate
between patients who show no evidence of the target disease
state (normals) and those who do
(abnormals). Patients who have abnormal screening
results are offered
follow-up
testing to confirm the presence of the disease, diagnosis to
classify the disease state and determine its extent and, where
appropriate, treatment for the disease. Patients who have a
normal screening result are not offered these services. In order
to allow scarce medical resources to be focused upon those
patients having the greatest need, screening programs are
structured to differentiate between normal and abnormal patients
as accurately, rapidly, reliably and cost effectively as
possible.
Although the evaluation of cervical cytology specimens by
automated image analysis can be traced back to the 1940s and a
number of capable systems have been developed, the FDA has not
to date approved any automated image analysis system to
diagnose, or classify as normal or abnormal,
cervical cytology specimens without human intervention. The FDA
has, however, approved several systems including the AccuMed
TracCelltm
for use in mapping or location-guided
screening. In these systems, image analysis is used to
identify potentially abnormal cells which are then presented to
a cytologist for classification. This approach, which has been
shown to reduce the time required to differentiate between
normal and abnormal specimens, is starting to be adopted by high
volume laboratories, but is presently too expensive for most
laboratories. We believe that our imager will be marketable at a
price that will be affordable for most laboratories.
The
AIPStm
Imager is an advanced version of the AccuMed TracCell
location-guided cytology screening system that has been
optimized for use with the proprietary CCI stains described
above. As these stains are designed to be more effective in
highlighting the cellular abnormalities associated with cancer
and precancerous conditions than the traditional Pap stain used
in conjunction with other automated cytology screening
instruments, the AIPS Imager is expected to deliver superior
performance when used in cytological screening applications. The
AIPS Imager is intended to work in conjunction with the AIPS
Workstation. When a specimen slide is evaluated by the AIPS
Imager, the locations on the slide of any potentially abnormal
cells are recorded to a data file. The slide is then moved to an
AIPS Workstation where the data file guides the workstation to
present each of the potentially abnormal cells detected to the
cytologist for classification.
CCI plans several additional software modules that will expand
the capabilities of the AIPS Imager. These modules may include
those for the analysis of specimens stained with new CytoCore
stains, bulk image capture and archiving, generation of
time-optimized routing plans to maximize the efficiency of
specimen review on an AIPS Workstation, and a
preview module that assists the cytologist in
evaluating difficult specimens. CCI hopes that this product
family will also be expanded by the addition of application kits
consisting of the stains and associated software that are needed
for the automated screening of other types of cytology specimens.
OmniDROPtm
The screening of cytology specimens is a
communications-intensive activity. Physicians, for example, send
test requisitions and medical histories to the lab, receive test
results in return, and communicate these results to their
patients. Requisitions, data, reports and other information are
all communicated back and forth between multiple operational
centers within the laboratory and in some cases to other
laboratories. As private patient information may be included in
many of these communications, most countries impose privacy and
security requirements on the communication systems used to
transport this traffic. CCI has entered into an agreement with
Zycom Touch, LLC under which CCI will sell
OmniDROPtm
Communicator software as a component of its AIPS systems and as
a standalone product for laboratories, hospitals and health
maintenance organizations. OmniDROP is a flexible and secure
communications package that complies with privacy and other
regulations contained in the Health Insurance Portability and
Accountability Act (HIPAA) in the United States and
corresponding privacy regulations worldwide. OmniDROP also
includes features such as message receipts and tracking that
ensure that messages are received by the intended recipient in a
timely manner. OmniDROP is provided as a
software-as-a-service product where physicians pay
only a nominal annual subscription fee while labs pay a small
service fee per test.
7
Therapeutics
CCI is developing a derivative of the SoftPAP cell
collection device that can be used to apply a patch containing a
therapeutic agent to the cervix. CCI is planning to develop and
market this applicator, as well as patches containing
established therapeutic agents, at some future date in
collaboration with a pharmaceutical or transdermal patch
manufacturer.
Product
Development
Our core product development strategy is to develop the
CytoCore Solutions System and its component products,
enhance such products, and develop new and innovative diagnostic
and screening devices for the early detection of various types
of cancer. To implement this strategy, we have and will continue
to utilize internal resources, sponsored and collaborative
agreements with medical institutions, strategic partnerships
with commercial entities, and licenses and acquisitions of
intellectual property.
In the future, CytoCore anticipates expanding its portfolio to
include other cytological assays and tests, tests for STDs,
including HPV, and other markers of vaginal health, and
medicinal products related to the treatment of diseases of the
female reproductive system. The CytoCore product pipeline for
2011 calls for the introduction of an workstation for computer
assisted cytology and an improved cytology preservative for use
with SoftPAP. In 2013 CytoCore expects to introduce an
automated imaging system with assay reagents for the
location-guided screening of cervical cancer specimens and the
PadKit sample collection device. Reagents for use in the
automated screening for additional conditions such as
endometrial and bladder cancer are expected to be introduced in
late 2014.
Markets
and Marketing Objectives
Diagnostic
Focus
Our immediate chief objective is to achieve broad market
acceptance of the SoftPAP collection device and the
CytoCore Solutions System as a new screening and
diagnostic tool for cervical cancer screening, offering an
alternative to the current Pap test methods. It is estimated
that there are approximately 60 million annual Pap tests
given in the United States. Worldwide, approximately
180 million tests are given and approximately 1.5 to
1.8 billion women require annual Pap testing. Many studies
have shown that between 70 and 80% of a persons entire
healthcare expenditures over their whole life occur in the last
four to six months of life. As a result, more and more attention
is being given to the early detection of a disease or condition.
Bio-molecular screening, diagnostic, and treatment products
consequently are being developed to detect disease states early
so they can be dealt with before they become life threatening
and expensive to treat. CytoCore is designing and developing its
products to satisfy this paradigm shift and focus more on
diagnostic methods and tools for early detection.
Point of
Care for All Populations
We also believe we are well positioned to capitalize on trends
affecting the worlds population. The female population of
the world is approximately 3 billion, of which
2 billion fall in the range where reproductive healthcare
monitoring is necessary and effective. This group falls into two
sub-groups: (1) females in the United States and other
countries where healthcare is available to most, and where
healthcare is more or less effective (estimated at between 300
and 400 million women), and (2) the remainder of the
female world population, where healthcare is limited or
non-existent. CytoCore believes its 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 is
developing its initial products to serve the needs of females in
developed nations and economies, but anticipates subsequent
deployment of such products to less well-developed countries.
8
Within both developed and developing economies, there are macro
trend drivers that are not specific to female healthcare needs,
including:
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Increasing life spans, driving the demand for healthcare
services up and increasing the emphasis on developing screening
tests for the early detection of diseases;
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Limited infrastructure and the fact that a significant portion
of the world population lives in locations where the
infrastructure does not support the classical laboratory-based
model of healthcare delivery, putting a premium on point-of-care
diagnostic testing;
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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;
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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
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Constrained funds available for healthcare, driving the need to
reduce healthcare costs.
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These trends are set against the major advances that are
occurring in many areas related to healthcare. These advances
range from a better and more nuanced understanding of disease
states to the movement of genomics, proteomics and
bioinformatics out of the research laboratory and into routine
medical practice. These are supported by rapid advances in
information, optical and software technology. This combination
is making it possible to perform increasing numbers of screening
and diagnostic tests at or near the point of care. CytoCore is
focused upon utilizing these advances to provide products that
address the needs of these worldwide markets.
Sales
and Distribution
The SoftPAP has initially been targeted to the premium
segment of the cervical cytology sampling market. This premium
segment comprises almost the entire cervical sampling market
except for public health programs and research hospitals. The
Company expects that the SoftPAP will be primarily
delivered to these customers through local and regional
distributors who specialize in the value-added OB/GYN market.
During the last quarter of fiscal 2007, the Company entered into
three distribution agreements with distributors in Italy, Spain
and Portugal. Each of these distributors agreed to act as the
Companys exclusive distributor in their respective
territories. In 2008, the Company also entered into an
international distribution agreement 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 2010 the Company engaged the services of Dr. Mauro
Scimia as a sales representative. Dr. Scimia will be
focusing upon developing markets for Company products in the
European Union and surrounding regions and providing support to
our distributors.
The AIPS Workstation will be marketed to small and medium-sized
hospitals and reference laboratories. The compact, low cost
design of the workstation is intended to facilitate its
deployment at or in proximity to the point of care. Once the
AIPS Workstation has been successfully established in the
laboratory market, our strategy is to form alliances with these
laboratories and other medical products distribution companies
and utilize their sales forces to broaden sales of the system to
other markets, including hospitals, clinics, managed care
organizations and office-based physician groups. Our marketing
strategy to these organizations will vary depending upon the
applicable cancer screening test.
CCI will be selling cell preservatives in combination with the
SoftPap product only. The corresponding PadKit
marketing strategy is being developed, but it is currently
anticipated to be based upon convenience kits containing PadKit
and the preservative. OmniDrop will 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 in the United States by the FDA and
comparable authorities in certain
9
states and foreign countries. In the United States, the Food,
Drug and Cosmetic Act (the FD&C Act) and
related regulations apply to some of our products. These
products cannot be shipped in interstate commerce without prior
authorization from the FDA.
Medical devices may be authorized by the FDA for marketing in
the United States either pursuant to a pre-market notification
under Section 510(k) of the FD&C Act, commonly
referred to as a 510(k) notification, or a
pre-market approval application or PMA. The process
of obtaining FDA marketing clearance and approval from other
applicable regulatory authorities is both lengthy and costly and
there can be no guarantee that the process will be successful.
The 510(k) notifications and PMAs typically require preliminary
internal studies, field studies,
and/or
clinical trials, in addition to the submission of other design
and manufacturing documentation. In addition, a PMA supplement
or clearance of a new 510(k) may be required for certain changes
to a product if they affect the safety, efficacy or substantial
equivalence of the product. We manage the regulatory process
through the use of consultants and clinical research
organizations.
A 510(k) notification, among other things, requires an applicant
to show that its products are substantially
equivalent in terms of safety and effectiveness to an
existing FDA-cleared predicate product. An applicant may only
market a product submitted through a 510(k) notification after
the FDA has issued a written notification determining the
product has been found to be substantially equivalent. The
predecessor to the SoftPAP collector, the e2 Collector,
was cleared for marketing by the FDA on May 31, 2002 under
the 510(k) notification process. The SoftPAP collection
device received FDA clearance under the 501(k) notification
process in February 2008.
To obtain PMA approval for a device, an applicant must
demonstrate, independent of other similar devices, that the
device in question is safe and effective for its intended uses.
A PMA must be supported by extensive data, including
pre-clinical and clinical trial data, as well as extensive
literature and design and manufacturing documentation to prove
the safety and effectiveness of the device. The PMA process is
substantially longer than the 510(k) notification process.
During the review period, the FDA may conduct in-depth reviews
of clinical trial center documentation and manufacturing
facilities and processes or those of strategic partners. In
addition, the FDA may request additional information and
clarifications and convene a medical advisory panel to assist in
its determination.
To date all CCI products have been cleared via the 510(k)
process, but it is expected that some future products will
require approval via the PMA process.
The FD&C Act generally bars advertising, promoting, or
other marketing of medical devices that the FDA has not approved
or cleared. Moreover, FDA enforcement policy strictly prohibits
the promotion of known or approved medical devices for
non-approved or off-label uses. In addition, the FDA
may withdraw product clearances or approvals for failure to
comply with regulatory standards.
Our prospective foreign operations are also subject to
government regulation, which varies from country to country.
Many countries, directly or indirectly through reimbursement
limitations, control the price of most healthcare products.
Developing countries put restrictions on the importation of
finished products, which may delay such importation. European
Directives establish the requirements for medical devices in the
European Union. The specific directives applicable to our
current products are the Medical Device Directive and the
In-Vitro Diagnostics Device Directive. Some future products may
also be required to comply with additional directives. The
International Organization for Standardization (ISO)
establishes standards for compliance with these directives,
particularly for quality system requirements. The Company
announced in August 2007 that it had completed the process of
demonstrating the conformity of the cell collection device to
the requirements of the Medical Device Directive for sales into
the European Union.
The FDA has adopted regulations governing the design and
manufacture of medical devices that are, for the most part,
harmonized with the good manufacturing practices and ISO quality
system standards for medical devices. The FDAs adoption of
the ISOs approach to regulation and other changes to the
manner in which the FDA regulates medical devices will increase
the cost of compliance with those regulations. Other countries
impose similar but not identical regulations that will further
increase compliance costs.
We may be subject to certain registration, record-keeping and
medical device reporting requirements of the FDA. Our
manufacturing facilities, or those of our strategic partners,
may be obligated to follow the FDAs Quality
10
System Regulation and be subject to periodic FDA inspections.
Any failure to comply with the FDAs Quality System
Regulation or any other FDA or other government regulations
could have a material adverse effect on our future operations.
In addition, separate state and local laws relating to such
matters as safe working conditions, manufacturing practices and
environmental protection may apply, which may impose additional
costs and risks.
Various federal and state laws pertaining to healthcare fraud
and abuse, including federal and state anti-kickback laws and
the federal Foreign Corrupt Practices Act, make it illegal for
an entity to solicit, offer, receive or pay remuneration or
anything of value in exchange for, or to induce, the referral of
business or the purchasing, leasing or ordering of any item or
service paid for by Medicare, Medicaid or certain other federal
healthcare programs. These statutes have been broadly defined to
prohibit a wide array of practices, and our activities may
subject the company and its partners to scrutiny under such
laws. Violations may be punishable by criminal
and/or civil
sanctions, including fines, as well as the exclusion from
participation in government-funded healthcare programs.
The CytoCore Solutions System also may be subject 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 complexity of the tests
performed. Thus, 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) and waived tests. CLIA specifies
quality standards for laboratory proficiency testing, patient
test management, quality control, personnel qualifications and
quality assurance, as applicable.
The FDA is responsible for the categorization of
commercially-marketed laboratory tests and manufacturers are
notified of the assigned complexity through routine FDA
correspondence. Categorization is effective as of the date of
the written notification to the manufacturer.
We are developing the CytoCore Solutions System, and in
particular the AIPS Workstation, to be user-friendly, require
minimum operator training, and have safety and operating checks
built into the functionality of the instruments. We believe that
our efforts may result in receiving the lowest possible
classification for the system. If, however, these products are
classified into a higher category, it may have a significant
impact on our ability to market the products in the United
States.
We received FDA clearance to market the SoftPAP collector
in February 2008 and a
follow-up
clinical trial for the device was completed in 2008. The results
of this trial have been published on www.clinicaltrials.gov.
Clinicaltrials.gov is a component of the FDA that is responsible
for the registration of clinical trials and the reporting of
data from these trials. The Company continues to refine the
device and develop and optimize its assays and the AIPS
Workstation and platform. Our overall strategy involves the
continuing study of the CytoCore Solutions System and its
components. This research will determine whether the CytoCore
Solutions System 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 the CytoCore Solutions System point-of-care
test. We plan to pursue regulatory approval of the CytoCore
Solutions System 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 the CytoCore Solutions System 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
various CytoCore Solutions System 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
11
the Medicare rates and may reimburse for only a portion of the
testing or not at all. Outside of the United States, healthcare
providers
and/or
facilities are generally reimbursed through numerous payment
systems designed by governmental agencies, such as the National
Health Service in the United Kingdom, the Servicio Sanitaris
Nazionale in Italy and the Spanish National Health System, as
well as private insurance companies and managed care programs.
The manner and level of reimbursement will depend on the
procedures performed, the final diagnosis, the devices
and/or drugs
utilized, or any combination of these factors, with coverage and
payment levels determined in the payers discretion.
Our ability to successfully commercialize the CytoCore
Solutions System and future products will depend, in part,
on the extent to which coverage and reimbursement for such
products will be available from third-party payers in the United
States such as Medicare, Medicaid, health maintenance
organizations and health insurers, and other public and private
payers in foreign jurisdictions. The coverage policies and
reimbursement levels of these third-party payers may impact the
decisions of healthcare providers and facilities regarding which
medical products they purchase and the prices they are willing
to pay for those products. 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 coverage
and/or
payment levels for current or future CytoCore products.
Competition
Historically, competition in the healthcare industry has been
characterized by the search for technological innovations and
efforts to market such innovations, and technological advances
have accelerated the pace of change in recent years. The cost of
healthcare delivery has always been a significant factor in
markets outside of the United States. In recent years, the
U.S. market has also become much more cost conscious. We
believe technological innovations incorporated into certain of
our products offer cost-effective benefits that address this
particular market opportunity.
Competitors may introduce new products that compete with ours,
or those that we are developing. We believe the portion of our
research and development efforts devoted to continued refinement
and cost reduction of our products will permit us to remain or
become competitive in the markets in which we presently
distribute or intend to distribute our products.
The market for our cancer screening and diagnostic product line
is significant, but highly competitive. We are currently not
aware of any other company that is duplicating our efforts to
develop a fully-automated, objective analysis and diagnostic
system for female reproductive-tract cancer screening that can
be used at the point of care. Nonetheless, we compete with
several large and well-established medical device companies,
including companies with financial, marketing, and research and
development resources substantially greater than ours. There can
be no assurance that our technological innovations will provide
us with a competitive advantage.
There are several companies that produce automated and
quantitative microscopy instruments. In the past, the market for
these instruments has been primarily limited to research
applications. However, as a result of recent advances in the
area of molecular diagnostics, we believe the market for such
instruments and applications will increase over the next several
years. We believe our instruments are the most versatile and
cost-effective platforms available in the current market whether
as an outright purchase or a fee-for-use application.
In general, we believe that our products must compete primarily
on the basis of clinical performance, accuracy, functionality,
quality, product features and effectiveness of the product in
standard medical applications. We also believe that cost control
and cost effectiveness are additional key factors in achieving
or maintaining a competitive advantage. We focus a significant
amount of product development effort on producing systems and
tests that will not add to overall healthcare cost.
Specifically, there are several companies whose technologies are
similar, adjunctive to, or may overlap with that of CCI. These
include manufacturers of liquid-based Pap tests and screening
and diagnostic systems such as
12
Cytyc (a Hologic, Inc. company) and Becton, Dickinson and
Company (which acquired Tripath Imaging Inc. in 2006).; Qiagen,
which manufactures the leading HPV test; Ventana Medical
Systems, Inc., an instrument and reagent manufacturer; and Dako
Group, Clarient, Inc. and Genetix LTD., which provide cancer and
genetic diagnostic and screening products and services,
respectively. However, as noted above, we do not believe any of
these companies have developed the fully-integrated solution
necessary to deliver a fully-automated, proteomic-based
solution. Certain of the competitors listed have chosen to focus
on the histology market that, although closely related to
cytology, is separate and distinct. To develop fully-automated
solutions, companies must have technologies that fully integrate
microscopy instruments, imaging software and cancer-detecting
biochemistry. It is difficult to assess our competitive position
in the market since we are not sufficiently aware of the
development stages of any of competitors products.
Operations
We conduct research and development work for the CytoCore
Solutions System using a combination of our full-time and
part-time employees and independent consultants in our Chicago,
Illinois location and contracted researchers.
We do not intend to invest capital to develop our own
distribution and sales organizations, or construct and maintain
a medical-products manufacturing facility and all its related
quality systems requirements. Our strategy is to utilize the
operations, quality systems and facilities of a contract
manufacturer specializing in medical products manufacturing to
meet our current and future needs in the United States and
abroad. This strategy covers manufacturing requirements related
to the CytoCore Solutions Systems chemical
components, plastic and silicone parts for the SoftPAP,
and the instruments and other components of the AIPS workstation.
To this end, we have agreements, including for design and
development work, with contract manufacturers of medical devices
to supply commercial quantities of the SoftPAP sample
collection device. These manufacturers began delivering
commercial product to CCI in 2007 and have the capacity to
handle high volume production through facilities in both the
United States and several foreign countries. All of our
machinery and tooling is located at our suppliers.
Intellectual
Property
We rely on a combination of patents, licenses, trade names,
trademarks, know-how, proprietary technology, trade secrets and
policies and procedures to protect our intellectual property. We
consider such security and protection a very important aspect of
the successful development and marketing of our products in the
U.S. and foreign markets.
In the United States, we follow the practice of filing a
provisional patent application for an invention as soon as it
has been determined that the invention meets the minimum
standards for patentability. While a provisional patent
application does not provide any formal rights or protections,
it does establish an official priority date for the invention
that carries over to any utility patent applications that are
derived from the provisional application within the next
12 months. A utility patent application begins the process
that can culminate in the issuance of a U.S. patent. We
convert each outstanding provisional patent application into
some number of utility patent applications within this
12-month
period. In most cases each provisional application results in
one utility filing. However, in some cases a single provisional
application has generated two independent utility filings or
multiple (up to five) provisional applications have been
consolidated into a single utility application. During the
examination of a utility application, the U.S. Patent and
Trademark Office may require us to divide the application into
two or more separate applications or we may file a
continuation-in-part
patent application that expands upon the technology disclosed in
an earlier patent application and which has the potential of
superseding the disclosure of the earlier application. For these
reasons, estimating the number of patents that are likely to be
issued based upon the number of provisional and utility
applications filed is difficult.
Prior to filing a utility application in the United States, we
review the application to determine whether obtaining patent
coverage for the invention outside of the United States is
necessary or desirable to support our business model. If so, a
patent application is filed under the Patent Cooperation Treaty
(PCT) at the same time that
13
the U.S. filing is made. Depending upon the nature of the
invention and business considerations, we typically nationalize
PCT applications in three to six countries.
As of December 2009, we had filed 12 U.S. utility patent
applications. Three of the U.S. utility applications have
been issued as U.S. patents, two are pending and seven have
been abandoned. One Chinese patent had been issued and one
European case has been abandoned. One U.S. and five foreign
patent applications are filed and pending; in order to reduce
the expenses related to patent prosecution, we are currently
taking only those actions needed to keep them in effect. This
group of patents and patent applications covers all aspects of
the CytoCore Solutions System including, but not limited
to, the point of service instrument, the personal and
physicians collectors, and the slide-based test. As a
result of the acquisition of AccuMed, we acquired 33 issued
U.S. patents, one U.S. patent application, and nine
foreign patents, of which a combined total of 17 were
transferred to a third party under a license agreement.
Twenty-four additional foreign patent applications primarily
covering the AcCell and AcCell Savant technology and related
software were also acquired. We have recovered the
AcCell-related patents and patent applications from the third
party.
We intend to prepare additional patent applications for
processes and inventions arising from our research and
development process. The protections provided by a patent are
determined by the claims that are allowed by the patent office
that is processing the application. During the patent
prosecution process it is not unusual for the claims made in the
initial application to be modified or deleted or for new claims
to be added to the application. For this reason, it is not
possible to know the exact extent of protection provided by a
patent until it issues.
Patent applications filed prior to November 29, 2000 in the
United States are maintained in secrecy until any resulting
patent is issued. As there have been examples of
U.S. patent applications that have remained in
prosecution and, therefore, secret for decades, it is not
possible to know with certainty that any U.S. patent that
we may own, file for or have issued to us will not be pre-empted
or impaired by patents filed before ours and that subsequently
are issued to others. Utility patent applications filed in the
United States after November 29, 2000 are published
18 months after the earliest applicable filing date. As
this revised standard takes full effect, the chances that such a
submarine patent will impair our intellectual
property portfolio are significantly reduced. Foreign patent
applications are automatically published 18 months after
filing. As the time required to prosecute a foreign utility
patent application generally exceeds 18 months and the
foreign patents use a first to file rather than a
first to invent standard, we do not consider
submarine patents to be a significant consideration in our
patent protection outside of the United States.
Our products are or may be sold worldwide under trademarks that
we consider to be important to our business. We own the
trademarks SoftPAP,
CytoCoretm,
CytoCore Solutions and
Cocktail-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
14
collaboration with universities, medical centers and other
entities. All of our research and development activities are
conducted in the United States.
We believe research and development is critical to the success
of our business strategy. During the 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.
Our research work in the area of chemical and biological
components will continue for the foreseeable future as we seek
to refine the current process and add additional capabilities to
our analysis procedure, including the detection of other forms
of cancer and precursors to cancer.
We anticipate the need to invest a substantial amount of capital
in the research and development process, including the cost of
clinical trials, required to complete the development and use of
the CytoCore Solutions System and bring it to market.
Components
and Raw Materials
Low-cost products are a key component of our business strategy.
We designed the SoftPAP collection device using widely
available and inexpensive silicone and plastic materials. These
materials are available from numerous sources and can be
fabricated into finished devices by a variety of worldwide
manufacturers based on our proprietary designs. Currently, we
manufacture through contract manufacturers the SoftPAP
collection 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 the
CytoCore Solutions System are also available from a
number of sources. Computers, cameras, automated slide-staining
instruments and automated slide-preparation instruments are
currently available from several large manufacturers. We
currently have an adequate supply of workstations used in the
CytoCore Solutions System 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 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 the CytoCore Solutions
System or other products into foreign markets may result in
collection periods that may be longer than those expected for
domestic sales of these products. Our strategy will be to use
down payments, letters of credit and/or other secured forms of
payment, whenever possible, in sales of products in foreign
markets.
Employees
As of March 31, 2010, we employed a total of six full-time
employees. We also utilize independent consultants in the United
States on an as-needed basis.
Financial
Information About Foreign and Domestic Operations and Export
Sales
Markets outside of North America are an important factor in our
business strategy. Any business that operates on a worldwide
basis and conducts its business in one or more local currencies
is subject to the risk of fluctuations in
15
the value of those currencies against the dollar, as well as
foreign economic conditions. Such businesses are also subject to
changing political climates, differences in culture and the
local practices of doing business, as well as North American and
foreign government actions such as export and import rules,
tariffs, duties, embargoes and trade sanctions. We do not regard
these risks, however, as a significant deterrent to our strategy
to introduce our CytoCore Solutions System to foreign
markets in the future. As we begin to market and sell our
CytoCore Solutions System, we will closely review our
foreign operational practices. We will attempt to adopt
strategies to minimize the risks of changing economic and
political conditions within foreign countries.
During the fiscal year ended December 31, 2009, the Company
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.
Available
Information
The Companys website can be found at
www.cytocoreinc.com. CCI makes available, free of charge,
its annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to such periodic and current reports. The
contents on our website are not incorporated in our
Form 10-K.
Copies can be requested in writing to CytoCore, Inc.,
414 N. Orleans St., Suite 510, Chicago, Illinois
60654, Attn: Chief Financial Officer.
You should carefully consider the following risk factors that
affect our business. Such risk factors could cause our actual
results to differ materially from those that are expressed or
implied by forward-looking statements contained herein. Some of
the risks described relate principally to our business and the
industry in which we operate. Others relate principally to the
securities market and ownership of our capital stock. The risks
and uncertainties described below are not the only ones we face.
Additional risks are described elsewhere in this report under
the Item 1 Business and Item 3
Legal Proceedings sections, among others. Other
risks and uncertainties that we are unaware of, or that we
currently deem immaterial, also may become important factors
that affect us. Our business, financial condition or results of
operations could be materially and adversely affected by any of
these risks, and the trading price of our common stock could
decline. The discussion of our risk factors should be read in
conjunction with the financial statements and notes thereto
included herein.
Risks
Related to Our Business
We
have a history of operating losses and there are doubts 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, 2009 was
$95,351,000. We have sold only a very limited amount of our
CytoCore Solutions System products to date and cannot be
certain as to when sales of the Companys products might
occur in the future. We estimate that we have sufficient cash on
hand to fund our operations only until June 2010.
Our losses have resulted from research and development costs,
sales and marketing expenses and other general operating
expenses. We expect to continue to devote resources to
marketing, product development and other research and
development activities, including expenses associated with
additional and larger clinical trials for our product
candidates. Although we expect to generate revenue in the future
from the sale of the SoftPAP collection device and other
components of the CytoCore Solutions System, we cannot
predict when revenues will be sufficient to fund our operations.
We therefore expect to continue to incur significant losses in
the near future.
Due to the substantial losses we have incurred and our current
limited financial resources, our independent registered public
accounting firm has noted in its report on our financial
statements that these conditions raise substantial doubt as to
our ability to continue as a going concern. Our financial
statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that may result
from the outcome of this uncertainty. Moreover, the going
concern explanatory paragraph may make obtaining additional
financing more difficult or costly.
16
We
have limited financial resources and we are not certain we will
be able to obtain additional financing to maintain operations
and fund the development of future products.
Our ability to continue operations depends upon our raising
additional funds during 2010, since we estimate that we have
sufficient cash on hand to fund operations only until May 2010.
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 securities of the
Company. 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 and our ability to conduct
business. 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.
CCI has sold only a very limited amount of our CytoCore
Solutions System products to date and cannot be certain as
to when sales of the Companys products might occur in the
future. Only one shipment of product was made in 2009. In the
foreseeable future we will derive most of our revenues from the
sale of the SoftPAP cell collection device, and the other
components of the CytoCore Solutions System. Our net
sales and earnings will therefore be heavily dependent on the
sale of these products. If we are unable to successfully develop
and commercialize such products as well as other new or improved
products, our business, sales and profits will be materially
impaired.
Our
future success will depend on our ability to develop new
products and respond to technological changes in the markets in
which we compete.
Our long-term ability to generate product-related revenue will
depend in part on our ability to identify products and product
candidates that may utilize the different components of the
CytoCore Solutions System, including our drug delivery
system and slide-based tests. If internal efforts do not
generate sufficient product candidates, we will need to identify
third parties that wish to collaborate with the Company 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 CytoCores 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.
17
Delays in receiving governmental approvals can be costly in
terms of lost sales opportunities and increased clinical trial
costs. The speed with which we complete such trials and receive
approval will depend on several factors, many of which are
beyond our control, including but not limited to the rate of
patient enrollment and retention, negative tests results,
analysis of data obtained from testing activities and changes in
regulatory policies. At the time of this writing the FDA is in
the early stages of a system level review that is widely
expected to result in significant changes in the way that
medical devices are regulated in the United States. Similarly,
the European Union is in the later stages of revising the
directives that apply to the regulation of medical devices in
the EU, and other countries, particularly in Asia, are
undertaking similar efforts.
In 2008 CytoCore successfully completed a clinical trial for the
SoftPAP collector and received both FDA clearance to
market this device in the United States and the CE Mark that is
required to market SoftPAP in the European Union. Future
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
States
and/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.
Changes
in third-party reimbursement may negatively affect
us.
Widespread adoption and commercial acceptance of our SoftPAP
device and the CytoCore Solutions System in the
United States and other countries is in part dependent upon the
ability of healthcare providers and laboratories to secure
adequate reimbursement from third-party payers such as private
insurance plans, managed care organizations, Medicare and
Medicaid, and foreign governmental healthcare agencies. We
cannot guarantee that third parties will add our products to the
coverage and that reimbursement will in fact be provided, that
it will continue to be available, or that reimbursement levels
will be adequate to enable healthcare providers and laboratories
in the United States and other countries to use our products
instead of conventional methods or existing therapies.
Reimbursement and healthcare payment systems in international
markets vary significantly by country and include both
government-sponsored healthcare and private insurance. There can
be no assurance that foreign third-party payers will provide or
continue to provide coverage, which third-party reimbursement
will be made available at adequate levels, if at all, for our
products under any such foreign reimbursement system or that
healthcare providers or clinical laboratories will use our
products in lieu of other methods. We also will be required to
secure adequate reimbursement for any new products we develop or
acquire, and we may not be able to do so successfully.
18
Our
international operations expose us to additional
risks.
The Company expects that international sales will account for a
significant portion of our revenues for the foreseeable future,
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:
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imposition of tariffs or embargoes,
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trade barriers and disputes,
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regulations related to customs and export/import matters,
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fluctuations in foreign economies and currency exchange rates,
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longer payment cycles and difficulties in collecting accounts
receivable,
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the complexity and necessity of using foreign representatives
and consultants,
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tax uncertainties and unanticipated tax costs due to foreign
taxing regimes,
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the difficulty of managing and operating an enterprise spanning
several countries, including difficulties in maintaining
effective communications with employees and customers due to
distance, language and cultural barriers,
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the uncertainty of protection for intellectual property rights
and differing legal systems generally,
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compliance with a variety of laws, and
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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.
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We may
not be able to compete with companies that are larger and have
more resources.
We compete in the highly competitive medical device and
diagnostics marketplace and have several U.S. and foreign
competitors, both publicly-traded and privately-held. Most of
these companies have substantially greater financial, technical
and research and development resources, established sales and
marketing organizations and distribution networks, greater name
recognition and longer-standing relationships with customers.
Competitors with greater financial resources can be more
aggressive in marketing campaigns, can survive sustained price
reductions in order to gain market share, and can devote greater
resources to support existing products and develop new products.
Any period of sustained price reductions for our products would
have a material adverse effect on the Companys financial
condition and results of operations. CytoCore 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 Companys financial
condition and results of operations.
It is also possible that competing products will emerge that may
be superior in quality, effectiveness and performance
and/or less
expensive than those of the Company, or that similar
technologies may render CCIs products obsolete or
uncompetitive and prevent the Company from achieving or
sustaining profitable operations. In addition, many of our
competitors have significantly greater experience in conducting
preclinical testing and clinical trials of products and
obtaining regulatory approvals to market such products.
Accordingly, our competitors may succeed in obtaining FDA
approval for products more rapidly, which may give them an
advantage in achieving market acceptance of their products.
We may
not be able to market our products.
Our success and growth depend on the market acceptance of the
SoftPAP collection device and the CytoCore Solutions
System. We do not intend to maintain a direct sales force to
market and sell our products. Therefore, in order to
successfully market and sell our products, we must be able to
negotiate profitable distribution, marketing and sales
agreements with organizations that have direct sales forces
calling on domestic and foreign market participants that may use
our products. If we are not able to successfully negotiate such
agreements, we may be
19
forced to market our products through our own sales force. We
cannot be certain that we will be successful in developing and
training such a sales force, should one be required, or that we
will have the financial resources to carry out such development
and training.
The
accuracy, performance and cost of our products are critical to
our business and reputation, and we are subject to product
liability.
As noted above, we are dependent on the sale of the SoftPAP
collection device and the CytoCore Solutions System.
Due in part to increased competitive pressures in the healthcare
industry to reduce costs, our ability to gain market acceptance
of our products will depend on our ability to keep product costs
low and/or
demonstrate that any increased cost of using our products is
offset by the increased accuracy and performance achieved by
using them. In particular, we need to convince healthcare
providers, insurance companies and other third-party payers, as
well as clinical laboratories, of the clinical benefits and
cost-effectiveness of our products.
In addition, the sale and use of our products entail a risk of
product failure, product liability or other claims. Coverage is
becoming increasingly expensive, however, and we may not be able
to obtain adequate coverage at an acceptable cost in the future.
Any product liability claims and related litigation would likely
be time-consuming and expensive, may not be adequately covered
by our insurance coverage, and may delay or terminate research
and development efforts, regulatory approvals and
commercialization activities.
Occasionally, some of our products may have quality issues
resulting from the design or manufacture of the product or, in
the case of the AIPS platform, the hardware and software used in
the product. Often these issues can be discovered prior to
shipment and may result in shipping delays or even cancellation
of orders by customers. Other times problems could be discovered
after the products have shipped, which would require us to
resolve issues in a manner that is timely and least disruptive
to our customers. Such pre-shipment and post-shipment problems
would have ramifications for CytoCore, including cancellation of
orders, product returns, increased costs associated with product
repair or replacement, and a negative impact on our goodwill and
reputation.
We may
not be able to adequately protect our intellectual
property.
Our success in large part depends on our ability to maintain the
proprietary nature of our technologies, trade secrets and other
proprietary information. To protect our intellectual property
and proprietary information, we rely primarily on patent,
copyright, trademark and trade secret laws, as well as internal
procedures and contractual provisions.
We hold a variety of patents and trademarks and have applied for
a number of additional patents and trademarks with the
U.S. Patent and Trademark Office and foreign patent
authorities. We intend to file additional patent and trademark
applications as dictated by our research and development
projects and business interests. We cannot be certain that any
of the currently pending patent or trademark applications, or
any of those which may be filed in the future, will be granted
or that they will provide any meaningful protection for our
products or technologies or any competitive advantage. In order
to provide protection, patents and trademarks must be enforced,
which is costly and time-consuming, and trade secret and
copyright laws afford only limited protection.
In addition, the laws and enforcement mechanisms of some foreign
countries may not offer the same level of protection as do the
laws of the United States. Legal protections of our rights may
be ineffective in such countries, and technologies developed in
such countries may not be protected in jurisdictions where
protection is ordinarily available. Our inability to protect our
intellectual property both in the United States and abroad would
have a material adverse effect on our financial condition and
results of operations.
We protect much of our core technology as trade secrets because
our management believes that patent protection would not be
possible or would be less effective than maintaining secrecy,
and we have in place certain internal procedures and contractual
provisions designed to maintain such secrecy. Despite our
efforts to safeguard and maintain our proprietary rights, we may
not be successful in doing so. The steps taken by us may be
inadequate to deter unauthorized parties from misappropriating
our technologies or prevent them from obtaining and using our
proprietary information, products and technologies. Moreover,
our competitors may independently develop similar technologies
or design around patents issued to us.
20
If we fail to protect, defend and maintain the intellectual
property rights associated with our products or if we are
subject to a third-party claim of infringement, the competitive
position of our products could be impaired. We may be required
to obtain licenses from third parties to avoid infringing
third-party patents or other proprietary rights, yet there can
be no assurance that such licenses would be available to us on
acceptable terms, if at all. If we are unable to obtain required
third-party licenses, we may be delayed in or prohibited from
developing, manufacturing or selling products that require such
licenses. In addition, infringement, interference and other
intellectual property claims and proceedings, with or without
merit, are expensive and time-consuming to litigate, divert
resources, and could adversely affect our business, financial
condition and operating results.
We may
not be able to maintain effective product distribution
channels.
We currently rely primarily on third-party distributors for the
sale and distribution of our products. Our relationships with
these distributors, therefore, must remain positive. We have a
limited a history of working with these companies and have only
limited control over their performance. We cannot predict the
success of these relationships or the efforts of these companies
in marketing the SoftPAP and our other products. Our
sales and marketing efforts, including those of our
distributors, may not be sufficient to successfully compete
against more extensive and well-funded operations of certain of
our competitors. None of our existing distributors purchased any
product from us in 2009. In addition, we must manage sales and
marketing personnel in numerous countries around the world with
the concomitant difficulties in maintaining effective
communications due to distance, language and cultural barriers.
Our
quarterly operating results may fluctuate and our future
revenues and profitability are uncertain.
We anticipate substantial fluctuations in our future operating
results. A number of factors contribute to such fluctuations,
including but not limited to:
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introduction and market acceptance of new products and product
enhancements by both CytoCore and our competitors,
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timing and execution of distribution and sale contracts,
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competitive conditions in the medical device and diagnostic
markets,
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product development, sales and marketing expenses,
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third-party reimbursement levels, and
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changes in general economic conditions.
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The
loss of existing key management and technical personnel or the
inability to attract new hires could have a detrimental effect
on the Company.
Our success depends on identifying, hiring, training, and
retaining qualified professionals. Competition for qualified
employees in our industry is intense and we expect this to
remain so for the foreseeable future. If we were unable to
attract and hire a sufficient number of employees, or if a
significant number of our current employees or any of our senior
managers resign, we may be unable to complete or maintain
existing projects or develop and implement new projects of
similar scope and revenue. The Companys success is
particularly dependent on the retention of existing management
and technical personnel, including Robert F.
McCullough, Jr., the Companys Chief Executive Officer
and Chief Financial Officer, and Richard A. Domanik, Ph.D.,
the Companys Chief Operating Officer. 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, we employed six full-time persons.
In the event our products and services obtain greater market
acceptance, we may be required to expand our management team and
hire and train additional technical and skilled personnel. We
may need to scale up our operations in order to service our
customers, which may strain our resources, and we may be unable
to manage our growth effectively. If our systems, procedures,
and
21
controls are inadequate to support our operations, growth could
be delayed or halted, and we could lose our opportunity to gain
significant market share. In order to achieve and manage growth
effectively, we must continue to improve and expand our
operational and financial management capabilities. Any inability
to manage growth effectively could have a material adverse
effect on our business, results of operations, and financial
condition.
Risks
Related to Our Common Stock
There
is a limited market for penny stocks such as our
common stock.
Our common stock is considered a penny stock
because, among other things, its trading price is below $5.00
per share. This designation requires any broker or dealer
selling these securities to disclose certain information
concerning 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 ability of brokers or dealers to sell our common stock and
may affect the ability of investors to sell their shares. In
addition, since our common stock is currently traded on the
Over-the-Counter Bulletin Board, investors may find it
difficult 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 liquidity of our common stock and limit the
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, the price of our common
stock traded in a range of $0.08 to $0.75. This volatility is
likely to continue for the foreseeable future. Factors affecting
potential volatility include:
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announcements of new products or technology by us or our
competitors;
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announcements of the FDA relating to products and product
approvals;
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announcements of private or public sales of securities;
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ability to finance our operations;
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announcements of mergers, acquisitions, licenses and strategic
agreements;
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fluctuations in operating results; and
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general economic and other external market factors.
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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.
Our
common stock is unlikely to produce dividend income for the
foreseeable future.
We have never declared or paid a cash dividend or distribution
on our common stock and we do not anticipate doing so for the
foreseeable future; our ability to declare dividends on our
common stock is further limited by the terms of certain of the
Companys other securities, including several series of its
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.
We are authorized to issue up to 10,000,000 shares of
preferred stock. As of December 31, 2009, we had
47,250 shares of Series A convertible preferred stock
outstanding, which convert into approximately 2,064 shares
of our common stock; 93,750 shares of Series B
convertible preferred stock outstanding, which convert into
approximately 37,500 shares of our common stock;
38,333 shares of Series C convertible preferred stock
outstanding, which convert into approximately 19,167 shares
of our common stock; 175,000 shares of Series D
convertible preferred stock outstanding, which convert into
approximately 175,000 shares of our common stock; and
19,222 shares of Series E convertible preferred stock
outstanding, which convert into approximately 52,861 shares
of our common stock. There are cumulative dividends due on the
Series B, Series C, Series D,
22
and Series E convertible preferred stock, which may be paid
in kind in shares of our common stock. Our Certificate of
Incorporation (as amended to date) gives our Board of Directors
authority to issue the remaining 5,143,137 undesignated shares
of preferred stock with such voting rights, if any,
designations, rights, preferences and limitations as the Board
may determine. Any such sale of Company securities would have a
dilutive effect on the holdings of our stockholders and the
value of our common stock. We cannot be certain what level of
dilution, if any, may occur or if we will be able to complete
any such sales of common stock or other securities in the future.
At December 31, 2009, we had outstanding warrants to
purchase an aggregate 3,461,197 shares of our common stock
and outstanding options to purchase 10,000 shares of our
common stock.
The issuance of shares of our common stock upon the conversion
of our preferred stock, or upon exercise of outstanding options
and warrants, would cause dilution of existing
stockholders percentage ownership of the Company. Holders
of our common stock do not have preemptive rights, meaning that
current stockholders do not have the right to purchase any new
shares in order to maintain their proportionate ownership in the
Company. Such stock issuances and the resulting dilution could
also adversely affect the price of our common stock.
Investors
may find it difficult to trade or obtain quotations for our
common stock.
Although our common stock is quoted on the OTCBB, trading of our
common stock is limited. There can be no assurance a more active
market for our common stock will develop. Accordingly, investors
must bear the economic risk of an investment in our common stock
for an indefinite period of time. Even if an active market
develops, Rule 144 promulgated under the Securities Act 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
prior to the resale (in limited amounts) of securities acquired
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, or
disseminate to the public any current financial or other
information concerning us, as is required by Rule 144 as
part of the conditions of its availability.
Our
authorized share capital may be used as an anti-takeover
device.
The Company currently has authorized for issuance
500 million shares of its common stock. The Board of
Directors has the authority to issue a significant number of
shares of our common stock without further stockholder approval.
This may have an anti-takeover effect of delaying or preventing
a change of control without further action by our stockholders.
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.
If our shares become quoted on the Pink Sheets an investment in
our common stock may be illiquid and investors may not be able
to liquidate their investment readily or at all when they desire
to sell. Many institutional investors have investment policies
which prohibit them from trading in stocks on the Pink Sheets.
As a result, shares quoted on the Pink Sheets generally have
limited trading volume and exhibit a wide spread between the
bid/ask quotations than stock traded on national exchanges.
Quotation of our securities on the Pink Sheets may limit the
liquidity and price of our securities more than if our
securities were quoted or listed on the OTC Bulletin Board, the
Nasdaq Stock Market or a national exchange. These factors may
have an adverse impact on the trading and price of our Common
Stock.
The
accounting for stock-based compensation has reduced and may
continue to reduce our reported earnings, which could result in
a decline in our stock price.
As part of our compensation to employees, directors and
consultants, we issue equity awards, primarily in the form of
stock options and warrants. Many of the companies within our
industry and with whom we compete for skilled employees use
stock-based compensation as a means to attract personnel,
although not all do and many do not issue the same level of
awards. In particular, during the periods when the Company faces
severe cash constraints, it uses equity awards in lieu of salary
to compensate employees and others. In addition, if we
unexpectedly hire additional employees the impact of the
accounting standards on stock based compensation may be more
significant for us. To the extent investors believe the costs
incurred for stock-based compensation by CCI are higher than
those incurred by other companies, our stock price could be
negatively impacted.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
We occupy approximately 5,627 square feet of leased space
at 414 N. Orleans St., Suites 503 and 510, Chicago,
Illinois 60654, under a five-year lease that expires in October
2013. This space houses our executive offices, research
laboratory, and engineering development facilities. We consider
our facilities to be well utilized, well maintained, and in good
operating condition. Further, we consider the facilities to be
suitable for their intended purposes and to have capacities
adequate to meet current and projected needs for our operations.
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Item 3.
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Legal
Proceedings
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Legal
Proceedings
Settled
in 2009
NeoMed Innovation III L.P. In October
2007, NeoMed Innovation III L.P. (NeoMed) filed
suit against the Company in the United State District Court,
Eastern District of Illinois (Case No. 07C 5721). NeoMed
alleged that the Company breached a contract with NeoMed. The
alleged contract provided among other things that the Company
would exchange two existing notes for a new note in the
principal amount of $1,110,000 with an interest rate of 12%,
payable on July 31, 2003 at the option of the holder in the
form of common stock valued at $1.50 (adjusted for stock splits
and equity raised at lower valuations). In 2006, the Company
paid to NeoMed $1,060,000 and accrued interest calculated at 7%
totaling $318,913. Despite accepting this payment, NeoMed
demanded that the Company honor the alleged contract.
In April 2009, the Company entered into a tentative settlement
agreement with NeoMed. The terms of the agreement provided that
the Company would issue to NeoMed 2,658,800 shares of
restricted, unregistered common stock and a warrant to purchase
217,000 shares of restricted unregistered common stock at
an exercise price of $0.50 per share. As a result of the
tentative settlement, the Company made an additional provision
totaling $948,000, which was charged to other expense in the
first quarter of 2009. In February 2010, the settlement
agreement was approved by the court and CCI issued
2,658,800 shares of restricted unregistered common stock
and a warrant to purchase 217,000 shares of restricted
unregistered common stock to NeoMed. The warrant has a term of
three years and is exercisable immediately. As a result of the
settlement becoming final, CCI reduced the $948,000 provision to
$222,000 in the fourth quarter of fiscal 2009. The $726,000
credit was applied to other expense.
Pending
as of December 31, 2009
MedPlast Elkhorn, Inc. In May 2009, MedPlast
Elkhorn, Inc. (MedPlast) filed suit against the
Company in the Circuit Court, Walworth County, Wisconsin (Case
No. 09 CV00721). MedPlast alleges that the Company has
failed to pay for certain tools and materials used in the
manufacturing of the Companys products. MedPlast is asking
for payment of $377,000. The Company believes that it has made
adequate provision for any obligation to MedPlast.
Wildman, Harrold, Allen & Dixon
LLP. In November 2009, Wildman, Harrold,
Allen & Dixon (Wildman) filed suit against
the Company in the Circuit Court of Cook County Illinois (Case
No. 2009-L-013902).
Wildman alleged that the Company failed to pay for legal
services in the amount of $41,407.03. In January 2010, the
Company entered into a Confession of Judgment and a payment plan
with Wildman. The payment plan provides for an initial payment
of $5,000 in January 2010, two payments of $1,500 each in
February and March 2010, two payments of $2,500 each in April
and May 2010, two payments of $4,000 each in June and July 2010,
one payment of $10,203 in August 2010 and a final payment of
$10,203 in September 2010. The Company has made all of the
required payments to date.
Securities
and Exchange Commission Subpoenas
SEC action. The Company received subpoenas
dated June 29, 2009, July 24, 2009 and March 2,
2010 (the Subpoenas) from the Securities and
Exchange Commission (the Commission). The Subpoenas
request documents pertinent to the Companys procedures to
raise equity in 2008 and 2009, as well as personal information
including trading records of insiders and certain other
documents relating to the Companys operations. CCI has
24
submitted to the Commission the requested documents. The Company
does not know what, if any, action the Commission intends to
take at this time.
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.
In 2009, a vendor entered into a non-cash settlement releasing
the Company from an obligation totaling $457,000. The settlement
was recorded as a reduction in research and development expense
in the fourth quarter.
PART II
|
|
Item 4.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock was quoted on the Over-the-Counter
Bulletin Board 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. These
quotations reflect inter-dealer prices, may not include retail
mark-ups,
mark-downs, or commissions, and may not reflect actual
transactions.
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Holders
As of May 7, 2010, we had approximately 382 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 the Board of Directors is not contemplating paying dividends
at any time in the foreseeable future. The terms of certain of
the Companys securities, including its Series B, C, D
and E preferred stock, provide that so long as such security is
outstanding the Company shall not declare any dividends on its
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.
25
We paid non-cash dividends, in the form of newly issued shares
of our common stock, amounting to $7.00 and $58,000 during 2009
and 2008, respectively, to holders of shares of our preferred
stock who elected to convert their preferred stock and
cumulative dividends thereon into shares of our common stock. We
have a contingent obligation to pay cumulative dividends on
various series of our convertible preferred stock in the
aggregate amount of approximately $2,205,000 at
December 31, 2009, which we intend to pay through the
issuance of shares of our common stock, if and when the holders
of the preferred shares elect to convert their shares into
common stock.
Stock
Transfer Agent
Our stock transfer agent is BNY Mellon Investor Services, 480
Washington Boulevard, Jersey City, NJ 07310 and its telephone
number is
(800) 522-6645.
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table presents information about the equity
compensation plans of the Company as of the fiscal-year ended
December 31, 2009. See also Note 7
Stockholders Equity and Note 8 Equity
Incentive Plan and Employee Stock Purchase Plan in the Notes to
our Consolidated Financial Statements for further information.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) |
|
CCI has issued warrants in conjunction with the issuance of debt
and equity. The issuance of warrants significantly reduces the
cash costs that would otherwise be associated with raising
capital. |
|
2) |
|
CCI has included warrants in agreements for providers of
investor relations and/or public relations services. Warrants
were also issued to financial advisors as remuneration for the
procurement of equity, debt and preferred stock convertible into
equity. This practice significantly reduces the cash costs to
CCI to obtain these services. |
|
3) |
|
CCI has issued warrants in lieu of cash payment for employment
services, for achieving certain goals or for other corporate
reasons. During fiscal year 2009, a non-executive employee was
issued 13,000 warrants. |
26
|
|
|
4) |
|
CCI has issued warrants to settle debt and pay for services
rendered. The issuance of warrants significantly reduces the
cash costs that would otherwise be associated with the
settlement of such debt or payment for such services. |
Recent
Sales of Unregistered Securities; Use of Proceeds from
Registered Securities
Issuance
of Securities
Common
Stock
During fiscal 2009, CCI offered capital stock to foreign and
accredited investors for cash and to directors, employees and
consultants as payment for services rendered in lieu of cash
payments.
On March 23, 2009, the Company offered to all holders of
warrants to purchase shares of the Companys common stock
the option to exercise their warrants at a reduced exercise
price of $0.25 per share. The original offer expired on
April 23, 2009 and was subsequently extended until
May 23, 2009. During the year ended December 31, 2009,
the Company received gross proceeds of $214,000 from the
exercise of warrants for an aggregate 854,371 shares of
unregistered, restricted common stock in connection with its
offer. In addition, our former Chairman of the Board of
Directors and our Chief Executive Officer exercised warrants to
purchase an aggregate 670,000 share of unregistered
restricted common stock through the reduction of $168,000 of
debt. CCI recorded a charge of $21,000 related to this warrant
modification and recorded the amount as interest expense. In
addition, holders of warrants to purchase 28,292 exercised their
warrants at the original exercise price. CCI received
approximately $56,000 from these exercises.
For the year ended December 31, 2009, CCI received proceeds
totaling $270,000 and reduced its debt by $168,000 from the
exercise of warrants to purchase an aggregate
1,552,663 shares of unregistered, restricted common stock.
As of December 31, 2009, 683,049 shares were not yet
issued by the transfer agent.
In the first quarter of the 2009 fiscal year, as described in
Note 8 in the Notes to the Consolidated Financial
Statements included herewith, the Company issued to two of its
executive officers an aggregate 61,144 shares of
restricted, unregistered common stock valued at $0.50 per share
as compensation for services rendered in 2008. The shares were
valued at $31,000, and such amount was recorded as compensation
in 2008.
During the year ended December 31, 2009, Board of Directors
voted to accept, in lieu of payment for $311,000 due to them,
778,194 shares of restricted, unregistered common stock.
The common stock was valued at $0.40 per share. The shares were
not issued by the transfer agent.
CCI issued 16,129 shares of restricted, unregistered common
stock valued at $0.31 per share to a consultant as payment for
services rendered. The Company recorded the value of the common
stock at $5,000 and recorded the amount as a selling, general
and administrative expense.
Also during 2009, the Board of Directors granted each director a
bonus of 100,000 shares of restricted, unregistered common
stock for services rendered. The shares granted totaled 700,000
and were valued at $0.40 per share. The Company recorded a
charge of $280,000 as a selling, general and administrative
expense. These shares have not been issued.
Warrants
During 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.
27
Conversions
of Preferred Stock
During the year ended December 31, 2009, a holder of four
shares of Series E Convertible Preferred Stock of CCI
elected to convert such preferred shares and accrued and unpaid
dividends thereon into 20 unregistered shares of the
Companys common stock. Dividends on these preferred shares
were $7.00.
Please refer to Note 7 Stockholders
Equity in the Notes to our Consolidated Financial Statements for
more information on the Companys preferred stock.
Exemptions
CCI issued such securities in reliance on the safe harbor and
exemptions from registration provided under Rule 506 of
Regulation D
and/or
Section 4(2) of the Securities Act of 1933, as amended, and
Regulation S for sales to foreign investors. No advertising
or general solicitation was employed in offering the securities.
The offerings and sales or issuances were made to a limited
number of persons, all of whom were accredited
and/or
foreign investors, and transfer was restricted by the Company in
accordance with the requirements of applicable law. In addition
to representations by the above-referenced persons, the Company
made independent determinations such that it reasonably believed
that all of the investors were accredited or sophisticated
investors, and that they were capable of analyzing the merits
and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, these
investors were provided with access to CCIs filings with
the Securities and Exchange Commission.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
Not applicable.
|
|
Item 5.
|
Selected
Financial Data
|
The information below was derived from the audited consolidated
financial statements included in this report and in previous
annual reports filed with the Commission. This information
should be read together with the consolidated financial
statements and the notes thereto included in such reports.
Historical results are not necessarily indicative of the results
to be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
(1) |
|
Reflects the one-for-ten reverse stock split effected on
November 27, 2007. Prior periods have been restated to
reflect the reverse stock split. |
|
|
Item 6.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
Certain statements contained in this discussion and analysis
that are not related to historical results are
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
28
Statements that are predictive, that depend upon or refer to
future events or conditions, or that include words such as
expects, anticipates,
intends, plans, believes,
estimates, hopes, or similar expressions
constitute forward-looking statements. In addition, any
statements concerning future financial performance (including
future revenues, earnings or growth rates), ongoing business
strategies or prospects, or possible future actions by us are
also forward-looking statements.
These forward-looking statements are based on beliefs of our
management as well as current expectations, projections and
information currently available to the Company and are subject
to certain risks and uncertainties that could cause actual
results to differ materially from historical results or those
anticipated or implied by such forward-looking statements. These
risks are described more fully under the caption Risk
Factors herein and include our ability to raise capital;
our ability to settle litigation; our ability to retain key
employees; economic conditions; technological advances in the
medical field; demand and market acceptance risks for new and
existing products, technologies, and healthcare services; the
impact of competitive products and pricing; U.S. and
international regulatory, trade, and tax policies; product
development risks, including technological difficulties; ability
to enforce patents; and foreseeable and unforeseeable foreign
regulatory and commercialization factors.
Should one or more of such risks or uncertainties materialize or
should underlying expectations, projections or assumptions prove
incorrect, actual results may vary materially from those
described. Those events and uncertainties are difficult to
predict accurately and many are beyond our control. We believe
that our expectations with regard to forward-looking statements
are based upon reasonable assumptions within the bounds of our
current business and operational knowledge, but we cannot be
sure that our actual results or performance will conform to any
future results or performance expressed or implied by any
forward-looking statements. 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.
Overview
CCI is developing an integrated family of cost-effective
products for the detection, diagnosis and treatment of cancer
under the trade name of CytoCore
Solutions®.
CytoCore Solutions products are intended to address
sample collection, specimen preparation, specimen evaluation
(including detection/screening and diagnosis), treatment and
patient monitoring within vertical markets related to specific
cancers. Current CytoCore Solutions products are focused
upon cervical cancer. CCI plans that this focus will later be
expanded to include other gynecological cancers as well as
bladder, lung, and breast cancers, among others. Within each of
these markets, CCI anticipates that the CytoCore Solutions
products will be sold as individual value-added drop-in
replacements for existing products and as integrated systems
that improve the efficiency and effectiveness of clinical and
laboratory operations.
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 product
SoftPAP®
cervical cell collector in the fourth quarter of fiscal 2007. We
believe the revenues from this device along with additional
capital will allow us to complete the development of the other
components of the CytoCore Solutions System, including
the
AIPStm
Workstation, AIPS
Imagertm,
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.
29
The Company has incurred significant operating losses since its
inception. Management expects that significant on-going
operating expenditures will be necessary to successfully
implement its business plan and to develop, manufacture and
market its products. Implementation of the Companys plans
will be contingent upon it securing substantial additional
financing. During the year ended December 31, 2009, CCI
raised approximately $1.2 million through the exercise of
stock warrants and advances from related parties. For CCI to
successfully implement its business plan, CCI will have to
obtain additional capital. If the Company is unable to obtain
additional capital or generate profitable sales revenues, it may
be required to curtail product development and other activities
and may have to cease operations. No assurances can be given
about the Companys 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:
Revenue Recognition. CCI recognizes revenue
from product sales 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.
Share-Based Payment. Financial Accounting
Standards Board Codification 718-10, establishes accounting
standards for transactions in which a company exchanges its
equity instruments for goods or services. In particular, this
statement requires that all share-based payments, such as
employee stock options or warrants, be reflected as an expense
based upon grant-date fair value of those awards. The expense is
recognized over the remaining vesting period of the awards. The
Company estimates the fair value of these awards using the
Black-Scholes model. This model requires management to make
certain estimates in the assumptions used in this model,
including the expected term the award will be held, volatility
of the underlying common stock, discount rate and forfeiture
rate. We develop our assumptions based on our past historical
trends and consider changes for future expectations.
Management believes that it is reasonably possible that the
following material estimates affecting the financial statements
could significantly change in the coming year:
(1) estimates concerning the method of depreciation or the
useful life of the equipment used in the production of
SoftPAP collection kits, (2) estimates as to the
valuation allowance for the amounts recorded and held as
inventory of goods and property and equipment and,(3) estimates
of possible litigation losses.
Results
of Operations
Fiscal
Year Ended December 31, 2009 as compared to Fiscal Year
Ended December 31, 2008
Revenue
Revenues of $44,000 for the fiscal year ended December 31,
2009 represented a decrease of $81,000, or 65%, from revenues of
$125,000 in fiscal 2008. The decrease was a result of decreased
sales of our SoftPAP cervical cell collector totaling
$56,000, a reduction in service revenue of $1,000, and a
reduction in licensing fees of $24,000.
30
Costs
and Expenses
Cost of
Revenues
For the year ended December 31, 2009, cost of revenues
totaled $3,000, a decrease of $78,000 or 96% over cost of
revenues of $81,000 for the year ended December 31, 2008.
Cost of revenues represents the cost of the product sold,
freight, and other costs of selling our products.
Also, CCI recorded a provision for inventory adjustment to
market of its finished goods inventory totaling $400,000 for the
year ended December 31, 2009.
Research
and Development
For the 2009 fiscal year, research and development expenses were
$372,000 before a reduction of $457,000 from a non-cash
settlement with a vendor, resulting in a net credit balance of
$85,000. Expenses for 2008 were $1,852,000. Of the $1,937,000
decrease in R&D expenses, $791,000 resulted from the
completion of clinical trials, $457,000 resulted from the
non-cash settlement with a vendor, $168,000 related to reduced
fees paid to medical consultants, $110,000 related to reduced
personnel costs, $107,000 related to costs incurred for the
ongoing improvement of the SoftPAP cervical collection
device, $255,000 related to the development of the AIPS
Workstation, $25,000 related to a reduction in licensing fees
and $24,000 related to decreases in other costs.
Research and development expenses include industrial design and
engineering covering the disposable and instrument components of
CytoCore Solutions System, payments to medical and
engineering consultants for advice related to the design and
development of our products and their potential uses in the
medical technology marketplace, and payroll-related costs for
in-house engineering, scientific, laboratory, software
development, and research management staff.
Selling,
General and Administrative
For the year ended December 31, 2009, selling, general and
administrative expenses were $3,022,000, a 34% decrease over
SG&A expenses of $4,564,000 for the year ended
December 31, 2008. Of this $1,542,000 decrease, $748,000
related to a reduction in employee compensation expense. Of the
$748,000 reduction in compensation expense, $529,000 relates to
a reduction of sales and marketing personnel and $219,000 in
reductions of administrative employees. The remaining $794,000
included reductions of $299,000 in professional fees for legal
and accounting services, $239,000 in consultant expenses,
$255,000 in investor and public relations expenses, $154,000 in
temporary help, $160,000 relating to a reduction in marketing
costs, $117,000 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 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)
There was no interest income for the year ended
December 31, 2009. Interest income was $53,000 for the year
ended December 31, 2008.
Interest expense increased by $24,000 to $34,000 for the year
ended December 31, 2009. This increase resulted from a
non-cash charge related to the Companys warrant price
modification.
The Company recorded a non-cash charge of $222,000 for the year
ended December 31, 2009 resulting from a preliminary legal
settlement as described in Item 3 herein.
Net
Loss
The net loss for the year ended December 31, 2009, before
preferred dividends, totaled $3,552,000, as compared to
$6,328,000 for 2008, a decrease of $2,776,000 or 44%. Of this
decrease, $1,937,000 related to reduced R&D costs,
$1,542,000 related to decreases in SG&A expenses and $3,000
represented a decrease from cost of
31
revenues exceeding revenues. These decreases were partially
offset by an increase of $222,000 resulting from the cost of a
legal settlement, a provision for inventory valuation totaling
$400,000, interest expense and a reduction of interest income.
The net loss applicable to common stockholders decreased to
$3,552,000 for the year ended December 31, 2009 from
$6,386,000 for the year ended December 31, 2008, a decrease
of $2,834,000 or 44%. In addition to the changes reported above,
cumulative dividends on the Companys 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,
2009 and December 31, 2008 was $0.08 and $0.16,
respectively, on 41,874,890 and 39,984,394 weighted average
common shares outstanding, respectively.
Liquidity
and Capital Resources
The Companys capital resources and liquidity are generated
primarily from investments by individual and institutional
investors.
Research and development, clinical trials and other studies of
the components of our CytoCore Solutions System,
conversions from designs and prototypes into product
manufacturing, sales and marketing efforts, medical consultants
and advisors, and research, administrative, and executive
personnel are and will continue to be the principal basis for
our cash requirements. We have provided operating funds for the
business since its inception through 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 to support the operations of the
business until we are able to generate sufficient income from
the sale of our products. We used $1,637,000 and $7,118,000
during 2009 and 2008, 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, we had checks issued in excess of
cash on hand totaling $5,000 as compared to $553,000 cash on
hand at the beginning of the period. We were able to raise
$1,155,000 through the exercise of warrants and proceeds of
advances from related parties during the fiscal year ended
December 31, 2009. This cash was used to fund operations,
including research and development activities, and the purchase
of a license. We currently have enough cash on hand to fund
operations into June, 2010. 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 Companys ability to
obtain such capital. We did not have any material commitments
for capital expenditures as of December 31, 2009.
Our operations have been, and will continue to be, dependent
upon managements ability to raise operating capital
through the issuance and sale of debt and equity securities. 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 is unable to obtain adequate additional financing
or generate profitable sales revenue, or negotiate a favorable
settlement plan with creditors, it may be unable to continue its
product development and other activities and may be forced to
cease operations. The consolidated financial statements
presented do not include any adjustments that might result from
the outcome of this uncertainty.
Off-Balance
Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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Item 6A.
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Quantitative
and Qualitative Disclosures about Market Risk
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The Company is exposed to market risk in the normal course of
its business operations, including the risk of loss arising from
adverse changes in interest rates and foreign exchange rates.
The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes, or engage in
any hedging activities.
32
We are headquartered in the United States where we conduct the
majority of our business activities, although we do have
distribution agreements with several distributors in Europe. We
have not to date had any material exposure to foreign currency
rate fluctuations. Nevertheless, because a portion of the
Companys revenues may be generated outside of the United
States in currencies other than the United States dollar, the
Companys operations may be subject to changes in foreign
exchange rates and changes in the value of the United States
dollar against other currencies, which changes could affect the
Companys net earnings.
As of December 31, 2009, we had total debt of $70,000, of
which $36,000 bears interest at fixed interest rates and $34,000
bears interest at a variable rate. As of December 31, 2009,
we did not have any cash, cash equivalents and short-term
investments. Due to our lack of material long-term debt and
anticipated capital expenditures, we do not believe that we
currently face any material interest risk exposure.
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Item 7.
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Financial
Statements and Supplementary Data
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Our consolidated financial statements for the years ended
December 31, 2009 and 2008, together with the report of L J
Soldinger Associates LLC dated May 14, 2010, and the notes
thereto, are filed as part of this Annual Report on
Form 10-K
commencing on
page F-1
and are incorporated herein by reference.
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Item 8.
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Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
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None.
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Item 8A.
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Controls
and Procedures
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Evaluation
of Disclosure Controls and Procedures
Under the supervision and with the participation of our
management, including our chief executive and financial officer,
we evaluated 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.
Managements
Annual Report on Internal Control Over Financial
Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting and disclosure controls and procedures. Internal
controls over financial reporting are designed to provide
reasonable assurance that the Companys books and records
reflect the transactions of the Company and that established
policies and procedures are carefully followed. Disclosure
controls and procedures are designed to ensure that information
required to be disclosed in reports filed under the Exchange Act
is appropriately recorded, processed, summarized and reported
within the specified time periods. An important feature of the
Companys system of internal control over financial
reporting and disclosure controls is that both are continually
reviewed for effectiveness and are augmented by written policies
and guidelines.
Management has conducted an evaluation of the Companys
internal control over financial reporting using the Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission as a basis
to evaluate effectiveness and determined that internal control
over financial reporting was effective as of the end of the
fiscal year ended December 31, 2009.
This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting. Managements report was
not subject to attestation by our independent registered public
accounting firm pursuant to the temporary rules of the
Securities and Exchange Commission that permit us to provide
only managements report in this annual report.
33
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting during the fourth fiscal quarter ended
December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
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Item 8B.
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Other
Information
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None.
PART III
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Item 9.
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Directors,
Executive Officers, and Corporate Governance
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The Board
of Directors and Executive Officers
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Director
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Name
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Age
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Positions and Offices, if any, Held with the Company
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Since
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Current Directors
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Robert F. McCullough, Jr.
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55
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Chief Executive Officer, Chief Financial Officer and Chairman of
the Board of Directors
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2005
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John H. Abeles, M.D.
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65
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Director
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1999
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Alexander M. Milley
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57
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Director
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1989
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Clinton H. Severson
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62
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Director
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2006
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Current Executive Officer
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Richard A. Domanik, Ph.D.
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63
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Chief Operating Officer
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Directors
Robert F. McCullough, Jr. was elected Chief
Financial Officer and director of the Company in September 2005
and Chief Executive Officer of the Company in October 2007.
Mr. McCullough was appointed to serve as Chairman of the
Board of Directors on April 21, 2009 to fill the vacancy
created by the resignation of Daniel J. Burns as such on that
date. In addition, Mr. McCullough currently serves as
President and as a Portfolio Manager of Summitcrest Capital,
Inc., a money management firm and registered investment adviser,
a position he has held since October 2003. From April 1999 to
July 2003, Mr. McCullough served as a Portfolio Manager at
Presidio Management, a money management firm. Prior thereto,
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 an Masters of Business Administration in
finance and is a Certified Public Accountant.
Mr. McCulloughs financial and accounting education
and experience contributed to his nomination as a director and
appointment as CFO, and his leadership and finance experience
supported his appointment as CEO of the Company.
Mr. McCulloghs qualifications as a director and
executive officer of the Company include his management
experience, business acumen 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 was 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 medical
education, venture capital and finance experience, and industry
work experience with several leading medical and pharmaceutical
companies make him qualified to serve as a director of the
Company.
Alexander M. Milley has 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 with
subsidiaries operating in the restaurant and environmental
inspection equipment industries.
34
Mr. Milley has served as Chairman and CEO of ELXSI since
September 1989, and was elected President of that company in
August 1990. He is also President and Chairman of the Board of
Azimuth Corporation, a holding company with subsidiaries
operating in the trade show exhibit, retail environment design,
and electrical components and fastener distribution industries.
Mr. Milley was Chairman of the Board and Chief Executive
Officer of Bell National Corporation, a predecessor of the
Company, until December 1998 and was President of Bell National
from August 1990 until December 1998. Mr. Milley is the
founder, President, sole director and majority stockholder of
Milley Management, Inc., a private investment and
management-consulting firm. Mr. Milley is also the
President and a director of Cadmus Corporation, a private
investment and management consulting firm, and a director and
executive officer of Winchester National, Inc. Mr. Milley
has had over 20 years experience with the Company and its
predecessors and has extensive finance, management, marketing,
and leadership experience with multiple companies across a broad
variety of industries, including a publicly-traded company
serving several different markets, all of which make him
qualified to serve as a director of the Company.
Clinton H. Severson was elected to the Board of Directors
in November 2006. Mr. Severson has served as President,
Chief Executive Officer and a director of the Board of Directors
of Abaxis, Inc., a northern California-based provider of
portable technology, tools and services used for medical
diagnostics sold to customers and distributors worldwide, since
1996. Prior to his assuming the CEO position of Abaxis, where he
was appointed Chairman of the Board in 1998, Mr. Severson
served as President and CEO for over seven years at MAST
Immunosystems, Inc., a privately-held medical diagnostic
company. The Board believes that Mr. Seversons
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 appointed Chief Operating Officer in October 2007
and continues to serve in that capacity. Since 2001,
Dr. Domanik has been the principal at R. Domanik
Consulting, Inc., a consulting firm specializing in the
development and manufacture of medical and clinical diagnostic
devices and instruments and intellectual property management.
Between 2002 and 2006, Dr. Domanik served as Director of
Technology Development of ZelleRX Corporation, a biotechnology
start-up in
the field of cellular therapeutics for the treatment of cancer.
Dr. Domanik also served as Director of Technology of Xomix,
Ltd., a biotechnology consulting company, between 2001 and 2007.
From 1999 to 2001, Dr. Domanik was Chief Technology Officer
and Vice President-Technology of the Company. He also served as
CTO and Vice President of AccuMed International, which the
Company acquired in 2001, from 1994 to 1999. Prior to his work
with CytoCore and its subsidiaries, Dr. Domanik worked for
over 15 years at Abbott Laboratories where he held several
positions, including Laboratory Manager and Senior Systems
Engineer. Dr. Domanik is intimately familiar with both the
products offered by CCI as well as its industry.
Dr. Domanik has a long history of working with the Company
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.
Family
Relationships; Involvement in Certain Legal
Proceedings
There are no family relationships among any of the directors or
executive officers of CytoCore, and no arrangements or
understandings exist between any director, executive officer and
any other person pursuant to which such director or officer was
or is to be selected as a director or officer of the Company.
Contempo Design, Inc., of which Mr. Milley was both a
director and a Vice President, filed a petition under
Chapter 11 of the federal Bankruptcy Code in 2004.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the
Companys executive officers and directors, and holders of
more than 10% of the outstanding shares of the Companys
common stock, to file initial reports of ownership and reports
of changes in ownership with the Commission.
35
Based solely on the Companys review of copies of such
reports (and any amendments thereto) it has been furnished
and/or any
written representations that no other reports were required with
respect to 2009, the Company believes that all reports with
respect to transactions occurring during fiscal year 2009 were
timely filed, except that Messrs Burns, Severson, Milley and
Danielsen and Drs. Abeles, Hall and Weissberg have not yet
filed a Form 4 to report the stock awards of
100,000 shares of common stock which was awarded in 2009,
but which shares have not yet been issued. Mr. McCullough
filed his Form 4 late with respect to purchases of an
aggregate 270,300 shares of common stock on the open market
by Mr. McCullough and an affiliate, the exercise of
warrants to purchase 485,000 shares of common stock and the
receipt of 39,459 shares in lieu of cash compensation.
Code of
Ethics
The Company has adopted its Code of Ethics and Business
Conduct for Officers, Directors and Employees that applies
to all officers, directors and employees of the Company,
including the Companys principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The Company
filed its code as an exhibit to its Annual Report on
Form 10-KSB
for the fiscal year ended December 31, 2003 as filed with
the Commission on April 14, 2004. The Code of Ethics is
also available on the Companys website at
www.cytocoreinc.com.
Board of
Directors and Committee Information
The Board has determined that each of current directors
Dr. Abeles, Mr. Milley and Mr. Severson is
independent as set forth in the rules and
regulations of The Nasdaq Stock Market, including
Rule 5605, and
Rule 10A-3
of the Exchange Act. The Company does not utilize any other
definition or criteria for determining the independence of a
director or nominee, and no other transactions, relationships,
or other arrangements exist to the Boards knowledge or
were considered by the Board, other than as may be discussed
herein, in determining an individuals independence.
The Board of Directors currently has three standing
committees the Audit Committee, the Compensation
Committee and the Nominating and Corporate Governance Committee.
The Compensation Committee and Nominating and Corporate
Governance Committees were established by the Board in 2008.
Audit
Committee
The Audit Committee currently consists of Mr. Milley
(Chairman), Dr. Abeles and Mr. Severson, each of whom
is independent under applicable independence requirements. The
Board of Directors has determined that Mr. Milley also
satisfies the definition of audit committee financial
expert as promulgated by Commission.
The Audit Committee acts pursuant to a written charter, which
charter authorizes the committees overview of the
financial operations and management of the Company, including a
required review process for all quarterly, annual, and special
filings with the Commission, review of the adequacy and efficacy
of the accounting and financial controls of the Company as well
as the quality of accounting principles and financial disclosure
practices, and communications with the Companys
independent registered public accounting firm and members of
financial management. A copy of the Audit Committees
charter was filed as an appendix to the Companys
definitive proxy statement for its annual stockholders meeting
held on June 21, 2007, as filed on May 15, 2007, and
is available on the Companys website. The Audit Committee
met four times in 2009.
Compensation
Committee
The Board established the Compensation Committee in May 2008,
which consists of Mr. Severson (Chairman) and
Mr. Milley, both of whom are independent under applicable
independence requirements. Previously, the Board did not have
such a committee due to the limited number of persons employed
by the Company in prior years and the Companys inability
at various times to provide competitive compensation. The
Compensation Committee did not meet in 2009.
Pursuant to its charter, the Compensation Committees role
is to assist the Board with its responsibilities relating to the
compensation of the Companys officers and directors and
the development and administration of the Companys
compensation plans. The Compensation Committee has overall
responsibility for evaluating and
36
providing recommendations with respect to the compensation
plans, policies and benefit programs for the Company, as well as
the individual salary and benefits of the chief executive
officer and other officers and senior executives of the Company.
A copy of the Compensation Committees charter was filed as
an appendix to the Companys definitive proxy statement for
its annual stockholders meeting held on July 17, 2008, as
filed on June 6, 2008, and is available on the
Companys website. For more information on the compensation
of directors and officers of the Company, see the
Compensation section below.
Nominating
and Corporate Governance Committee
The Nominating and Corporate Governance Committee of the Board
(the Nominating Committee) currently consists of
Mr. Milley, who is independent under applicable
independence requirements. The goal of the Nominating Committee,
which acts pursuant to a written charter adopted in May 2008, is
to contribute to the effective representation of the
Companys stockholders and play a leadership role in
shaping the Companys corporate governance. The authority
and responsibilities of the Nominating Committee include
evaluating the appropriate size of the Board, recommending any
changes in the structure and composition of members of the
Board, considering criteria for Board membership, identifying
and evaluating prospective candidates, making recommendations to
the Board as to the nominees for directors, and proposing the
slate of directors to be elected at each annual meeting of
stockholders. The Nominating Committee will also assist the
Board by developing and recommending corporate governance
policies and practices applicable to the Company, monitoring
compliance with the Companys Code of Ethics, and handling
such other matters as the Board or Nominating Committee deems
appropriate. A copy of the Nominating Committees charter
was filed as an appendix to the Companys definitive proxy
statement for its annual stockholders meeting held on
July 17, 2008, as filed on June 6, 2008, and is
available on the Companys website. The Nominating
Committee did not meet in 2009.
Stockholder
Nominations
The Board will accept for consideration any candidate properly
recommended by a stockholder; acceptance of a recommendation for
consideration does not imply the Board will nominate the
proposed candidate.
Stockholders who wish to nominate qualified candidates to serve
as directors of the Company may do so in accordance with the
procedures set forth in the Companys By-laws. The By-laws
provide that nominations of persons for election to the Board at
a meeting of stockholders may be made (i) by or at the
direction of the Board, or (ii) by any stockholder of the
Company entitled to vote in the election of directors at the
meeting and who complies with certain notice procedures.
Such nominations, other than those made by or at the direction
of the Board, must be made pursuant to timely notice in writing
to the Secretary of the Company. In order to be considered
timely, a stockholders notice must be delivered to, or
mailed and received by, the Secretary of the Company at the
principal executive offices of the Company not less than
60 days prior to the first anniversary of the date of the
mailing of the notice of the previous years annual meeting
of stockholders.
However, if no annual meeting of stockholders was held in the
previous year or if the date of the annual meeting is advanced
by more than 30 days prior to, or delayed by more than
60 days after, such anniversary date, to be timely a
stockholders notice must be delivered, or mailed and
received, not later than the close of business on the later of
(i) the 60th day prior to such annual meeting or
(ii) the 10th day following the day on which the date
of such meeting has been first publicly disclosed by
the Company. For purposes of the nomination procedures,
publicly disclosed or public disclosure
means disclosure in a press release reported by the Dow Jones
News Service, Associated Press or a comparable national news
service, or in a document publicly filed by the Company with the
SEC.
Any stockholders notice must include the following
information:
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as to each person whom the stockholder proposes to nominate for
election or re-election as a director, all information relating
to such person that is required to be disclosed in solicitations
of proxies for election of directors or is otherwise required
under applicable securities laws (including Regulation 14A
under the Exchange Act), and such persons written consent
to being named in the proxy statement as a nominee and to serve
as a director if elected; and
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37
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as to the stockholder giving notice, the name and address, as
they appear on the Companys books, of such stockholder and
the class and number of shares of the Company which such
stockholder beneficially owns.
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At the request of the Board, any person nominated by the Board
for election as a director must furnish to the Companys
Secretary the same information required to be set forth in a
stockholders notice of nomination which pertains to the
nominee.
The Company may require any proposed nominee to furnish such
other information as may reasonably be required to determine the
eligibility of the nominee to serve as a director, as well as a
consent to be interviewed by the Board if the Board chooses to
do so in its discretion and a consent to serve as a director if
nominated and elected. Submissions received through this process
will be forwarded to the Board for review. Only those nominees
whose submissions comply with these procedures and who satisfy
the qualifications determined by the Board for directors of the
Company will be considered.
Qualifications
and Candidates
When considering candidates, the Board strives to achieve a
balance of knowledge, experience and accomplishment. While there
are no set minimum requirements, a candidate should:
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be intelligent, thoughtful and analytical;
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possess superior business-related knowledge, skills and
experience;
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reflect the highest integrity, ethics and character, and value
such qualities in others;
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have excelled in both academic and professional settings;
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demonstrate achievement in his or her chosen field;
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be free of actual or potential conflicts of interest;
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be familiar with regulatory and governance matters;
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have the ability to devote sufficient time to the business and
affairs of the Company; and
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demonstrate the capacity and desire to represent, fairly and
equally, the best interests of the Companys stockholders
as a whole.
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In addition to the above criteria (which may be modified from
time to time), the Board may consider such other factors as it
deems in the best interests of the Company and its stockholders
and that may enhance the effectiveness and responsiveness of the
Board and its committees. Finally, the Board considers a
candidates independence, financial sophistication and
special competencies.
Process;
Changes
The Board identifies potential candidates through referrals and
recommendations, including by incumbent directors, management
and stockholders, as well as through business and other
organizational networks. The Board may retain and compensate
third parties, including executive search firms, to identify or
evaluate, or assist in identifying or evaluating, potential
director nominees.
Current members of the Board with the requisite skills and
experience are considered for re-nomination, balancing the value
of the members continuity of service and familiarity with
the Company with that of obtaining a new perspective, and
considering each individuals contributions, performance
and level of participation, the current composition of the
Board, and the Companys needs. If any existing member does
not want to continue in service or if it is decided not to
re-nominate a director, new candidates are identified in
accordance with those skills, experience and characteristics
deemed necessary for new nominees, and are evaluated based on
the qualifications set forth above. In every case, the Board
meets (in person or telephonically) to discuss each candidate,
and may require personal interviews before final approval.
The Board does not currently, and does not intend in the future,
to differentiate between or alter the manner in which it
evaluates candidates based on the constituency (including
stockholders) that proposed the candidate.
38
There were no material changes to the procedures described above
by which security holders may recommend nominees to the Board
during the 2009 fiscal year.
|
|
Item 10.
|
Executive
Compensation
|
Named
Executive Officers
The following tables set forth all plan and non-plan
compensation awarded to, earned by or paid to (i) the
individual who served as the Companys principal executive
and principal financial officer during the last completed fiscal
year, and (ii) the other individual who was serving as an
executive officer of the Company at the end of the 2009 fiscal
year ((i) and (ii) together, the Named Executive
Officers), for all services rendered in all capacities to
the Company by such persons.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
(1) |
|
Mr. McCullough was elected Chairman of the Board of
Directors in April 2009, Chief Executive Officer in October 2007
and has been Chief Financial Officer since September 2005.
Mr. McCullough has deferred payment of his salary earned in
2009. |
|
(2) |
|
Represents a charge for the repricing of 485,000 warrants
exercised in 2009 in conjunction with the reduction of $121,500
of debt. |
|
(3) |
|
Of the amount shown, $160,229 was paid in cash during 2008 and
$19,771 was paid pursuant to the issuance of 39,459 shares
of the Companys common stock during the first quarter of
2009. The $19,771 paid in stock reflects an average of the
closing price of the Companys common stock as of the end
of each month for which the stock was paid; the average of said
closing prices was $0.50 per share. |
|
(4) |
|
Represents a warrant to purchase 10,000 shares with an
exercise price of $2.06 per share granted to Mr. McCullough
in April 2008 pursuant to his employment agreement, which
agreement expired November 30, 2008; such warrant issuance
was triggered by the Companys execution of a distribution
agreement for the Companys cervical cell collection
device. The warrants were fully exercisable upon grant with a
three year term. The dollar amount presented represents the
aggregate fair value of such award on the date of grant. The
fair value of the warrants was estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions: dividend yield of zero, expected
volatility of 120%, risk-free interest rate of 2.50%, and
expected life of 1.5 years. Mr. McCullough exercised
such warrants in 2009 at a reduced price of $0.25 per share.
This warrant modification was made available by the Company to
all holders of warrants to purchase shares of the common stock
of the Company. |
|
(5) |
|
Represents a reimbursement in 2008 of $71,094 for taxes incurred
in connection with the award of 100,000 shares of common
stock made to Mr. McCullough in January 2008 for services
rendered in 2007. |
|
(6) |
|
Dr. Domanik was elected President in May 2007 and served
until August 2008, and was elected Chief Operating Officer in
October 2007. Dr. Dominick has deferred payment of his
salary earned in 2009. |
|
(7) |
|
Of the amount shown, $132,757 was paid in cash during 2008 and
$12,243 was paid pursuant to the issuance of 21,685 shares
of the Companys common stock during the first quarter of
2009. The $12,243 paid in stock reflects an average of the
closing price of the Companys common stock as of the end
of each month for which the stock was paid; the average of said
closing prices was $0.50 per share. |
|
(8) |
|
Represents a reimbursement in 2008 of $83,094 for the taxes
incurred in connection with the award of 100,000 shares of
common stock made to Dr. Domanik in January 2008 for
services rendered in 2007 |
39
Executive
Officer Compensation
Robert
F. McCullough, Jr. Current Chairman, CEO and
CFO
Mr. McCullough was appointed Chairman of the Board of
Directors in April 2009, Chief Executive Officer of the Company
in October 2007, and has served as the Companys Chief
Financial Officer since September 2005. In November 2006, the
Board of Directors approved and the Company 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 of
out-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.
The agreement also provided for the issuance of warrants to
Mr. McCullough to purchase shares of common stock of the
Company upon the achievement of certain performance milestones.
In April 2008, the Company granted Mr. McCullough warrants
to purchase 10,000 shares of common stock at $2.06 per
share following achievement of the milestone that required the
Company to execute a distribution agreement for its cervical
cell collection device. The warrants were immediately
exercisable and had a three year term. In February 2007, the
Company granted Mr. McCullough warrants to purchase
25,000 shares of common stock at $2.60 per share following
achievement of the milestone that required the Companys
common stock to trade over $3.00 per share for 45 out of 60
trading days. The warrants were immediately exercisable and had
a three year term. In 2006, the Company granted
Mr. McCullough warrants to purchase 400,000 shares of
the Companys common stock at an exercise price of $1.28
per share. The warrants, and others held by him and an
affiliate, were exercisable as of January 1, 2007 and had a
three year term. Mr. McCullough exercised all of these
warrants during the 2009 fiscal year in connection with the
Companys offer to all warrant holders to permit exercise
of such warrants at the reduced exercise price of $0.25 per
share in exchange for the reduction of $121,000 of debt owed by
CCI to him. CCI recorded a charge of $15,000 related to this
warrant modification. This warrant modification was made
available by the Company to all holders of warrants to purchase
shares of the common stock of the Company.
CCI has accrued a salary of $172,000 for Mr. McCullough in
2009. Mr. McCullough has elected to defer payment of his
salary for 2009.
During 2008, the Company paid Mr. McCullough $180,000 for
his services as CEO and CFO, which included $19,771 that was
accrued but unpaid as of December 31, 2008; such amount was
paid pursuant to the issuance of 39,459 shares of common
stock during the first quarter of 2009.
Mr. McCulloughs compensation for 2008 also does not
include $45,000 that was accrued but unpaid as of
December 31, 2007, which amount was paid in 2008. In
January 2008, the Board of Directors granted Mr. McCullough
a stock bonus of 100,000 shares of restricted, unregistered
common stock. Such bonus, valued at $177,735, was made in
recognition of Mr. McCulloughs performance during the
2007 fiscal year, including his role in reducing the
Companys debts and accounts payable, work towards
achieving regulatory approval of the Companys cervical
cell collection device (which occurred in February
2008) and assistance in raising necessary capital to fund
operations. During 2008, the Company reimbursed
Mr. McCullough $71,094 for the taxes payable with respect
to such stock bonus.
Richard
A. Domanik, Ph.D. Chief Operating
Officer
Dr. Domanik became President of the Company in May 2007,
serving in such capacity until August 2008, and became Chief
Operating Officer in October 2007. The Company and
Dr. Domanik have not entered into an employment agreement,
although the basic terms of his compensation have been
established. Specifically, Dr. Domanik is entitled to
receive an annual salary of $150,000, standard benefits as
provided to other employees, and reimbursement of reasonable
business expenses. Dr. Dominick elected to defer salary
totaling $131,250 for the 2009 fiscal year.
40
During 2008, the Company paid Dr. Domanik $145,000 for his
services as President and COO, which included $12,243 that was
accrued but unpaid as of December 31, 2008; such amount was
paid pursuant to the issuance of 21,645 shares of common
stock of the Company during the first quarter of 2009. 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. Domaniks performance during the 2007 fiscal year.
During 2008, the Company reimbursed Dr. Domanik $83,094 for
the taxes payable with respect to such stock bonus.
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth certain information regarding
unexercised options, unvested stock, and equity incentive plan
awards for each Named Executive Officer outstanding as of the
end of the Companys 2009 fiscal year.
Option
/ Warrant Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
Plan Awards:
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
Number
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
of Securities
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Underlying
|
|
Option
|
|
|
|
|
Options
|
|
Options
|
|
Unexercised
|
|
Exercise
|
|
|
|
|
(#)
|
|
(#)
|
|
Unearned Options
|
|
Price
|
|
Option
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
(#)
|
|
($)
|
|
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
|
|
|
|
|
(1) |
|
Represents grant of warrants on June 29, 2007 to purchase
30,000 shares of common stock at $2.67 per share, vested in
full immediately, with a term of three years. |
|
(2) |
|
Represents grant of warrants on December 18, 2007 to
purchase 5,000 shares of common stock at $1.89 per share,
vested in full immediately, with a term of three years. |
In January 2008, each of Mr. McCullough and
Dr. Domanik was also granted a stock bonus of
100,000 shares of restricted, unregistered common stock in
consideration for services rendered during the 2007 fiscal year.
Such awards were not subject to vesting or any performance
conditions but are restricted under applicable securities laws.
In each case, the Company agreed to reimburse the recipients for
the tax effects thereof; in 2008 Mr. McCullough was paid
$71,094 and Dr. Domanik was paid $83,094 in fulfillment of
such agreement. See Executive Officer Compensation
above for more information.
Warrant grants made to the Companys executive officers and
directors are made outside of the Companys option plans,
and no options have been granted pursuant to the Companys
option plans or otherwise to executive officers or directors in
the last two fiscal years. The Company had one option plan, the
1999 Equity Incentive Plan (the Plan), which
provided for the issuance to consultants, officers, non-employee
directors and key employees of shares of common stock pursuant
to stock options (incentive and non-qualified), restricted
stock, stock appreciation rights (SARs) and
performance shares and units. Grants under the Plan are
exercisable at fair market value determined as of the date of
grant in accordance with the terms of the Plan. Grants vest to
recipients immediately or ratably over periods ranging from two
to five years, and expire five to ten years from the date of
grant. The Plan became effective on June 1, 1999 and
expired on June 1, 2009.
At the Annual Meeting of Stockholders on May 25, 1999,
stockholders also approved the 1999 Employee Stock Purchase Plan
(the Purchase Plan). The Purchase Plan offered
employees the opportunity to purchase shares of common stock of
CytoCore through a payroll deduction plan at 85% of the fair
market value of such shares at specified enrollment measurement
dates. There was no activity under the Purchase Plan in the 2009
or 2008 fiscal years, and the Purchase Plan expired in May 2009.
41
Retirement
Benefits
The Named Executive Officers received no benefits in fiscal year
2009 from the Company under defined benefit or defined
contribution retirement plans other than the Companys
401(k) tax qualified plan, which is currently inactive.
Nonqualified
Deferred Compensation
The Named Executive Officers did not receive any benefits in
fiscal year 2009 from the Company under any nonqualified
deferred compensation plan.
Potential
Payments Upon Termination or
Change-in-Control
The Company does not offer or have in place any formal
severance, change in control or similar compensation programs
for its officers or employees. Rather, the Company individually
negotiates with those employees for whom such compensation is
deemed necessary. The Company does not currently have an
agreement with any officer with respect to severance, change of
control or a similar circumstance.
Mr. McCulloughs employment agreement provided that in
the event Mr. McCulloughs employment was terminated
without cause, he would be entitled to his salary for the
remainder of the term of his employment agreement with the
Company, as well as health insurance for himself and his
children during such period. The actual value of payments made
to Mr. McCullough would have depended on the date of his
termination without cause and the remainder of his employment
term as of the date of such termination.
Mr. McCulloughs employment agreement has expired and
the Company does not have any liability to Mr. McCullough
for severance.
In November 2006, the Board adopted a plan to grant directors
warrants upon the acquisition of the Company. See
Compensation of Directors Director
Compensation Arrangements below.
Compensation
of Directors
The following table sets forth certain information regarding the
compensation of directors for the Companys 2009 fiscal
year. Directors who are or were also employees, including Robert
F. McCullough, Jr., did not receive any compensation for
their service as a director while they were employees. Daniel J.
Burns, the former Chairman 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
|
|
|
|
|
(1) |
|
Represents accrued but unpaid director fees with respect to
fiscal year 2009. Does not include amounts accrued but unpaid in
2008; these amounts were not paid in 2009 and have not been paid
to date. |
|
(2) |
|
Represents aggregate grant date fair value of a common stock
award of 100,000 shares made in April 2009; these shares
have not yet been issued to the directors. |
|
(3) |
|
These directors declined to stand for re-election at the
Companys 2009 annual meeting of stockholders held on
June 22, 2009. |
42
Director
Compensation Arrangements
In November 2006, the Board of Directors approved Board
compensation for each director at the rate of $5,000 per quarter
effective January 1, 2007. All outside directors are
entitled to receive warrants to purchase 25,000 shares of
the Companys common stock when the Companys revenues
reach $20 million and another 25,000 shares of common
stock when revenues reach $50 million. The exercise price
of such warrants will be at a 33% discount to the average
trading price of the common stock during the 45 days prior
to the date the Company achieves each revenue milestone.
All outside directors will also receive, upon the acquisition of
the Company, as follows: (1) warrants to purchase
62,500 shares of common stock at $2.50 per share if the
Company is 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 is 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 is acquired for more than $30.00 per share.
In November 2006, the Board also approved an arrangement whereby
the Company became obligated to reimburse Mr. McCullough,
Dr. Abeles, Mr. Milley, and Dr. Weissberg for
certain tax effects in connection with the exercise of warrants
issued to such individuals in September 2006. The Company will
be obligated to pay to each individual 39% of the taxable value
of such warrants when exercised, payable within three months of
such exercise, such payment to occur only if the Company is
acquired or certain other conditions are met. At the same time,
the Board of Directors approved amendments to all existing
warrant agreements between the Company and its then-current
Board members, as well as former directors and employees, such
amendment to permit all such holders to exercise all such
warrants on a cashless basis.
The Company also reimburses directors for reasonable expenses
incurred in connection with their attendance at meetings of the
Board of Directors.
For information relating to shares of the Company owned by each
of the directors, see Security Ownership of Certain
Beneficial Owners and Management below. For information
concerning the compensation of directors who are or were also
officers of the Company, see the Summary Compensation
Table and accompanying narrative disclosure above. For
information on other consideration received by directors or
their affiliates from the Company, see Transactions with
Related Persons, Promoters and Certain Control Persons in
Item 12 below.
Other
Equity Awards
In addition to the amounts shown above, Dr. Abeles is the
holder of warrants to purchase an aggregate 64,583 shares
of the Companys common stock. Of such amounts, warrants
representing the right to purchase 62,500 shares were
granted in September 2006 at an exercise price of $2.00 per
share with immediate full vesting and a term of five years, and
warrants representing the right to purchase 2,083 shares
were granted in May 2005 at an exercise price of $1.00 per share
with immediate full vesting and a term of five years.
Mr. Milley is the holder of warrants to purchase an
aggregate 62,500 shares of the Companys common stock.
These warrants were granted in September 2006 at an exercise
price of $2.00 per share with immediate full vesting and a term
of five years. Dr. Weissberg is the holder of warrants to
purchase 412,500 shares of the Companys common stock.
Of such amount warrants representing the right to purchase
400,000 were granted in September 2006 at an exercise price of
$2.00 per share with immediate full vesting and a term of five
years, and warrants to purchase 12,500 shares were issued
in connection with his participation in the Companys
private placement in the first quarter of 2008. Such warrants
were immediately exercisable at $2.00 per share with a term of
three years. For information on warrants and other rights to
purchase shares of common stock held by the Companys
employee-directors,
see Outstanding Equity Awards at Fiscal Year-End
above.
43
|
|
Item 11.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Securities
Authorized for Issuance under Equity Compensation
Plans
For information on the securities authorized for issuance under
the equity compensation plans of the Company, please see
Item 4 Market for Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities in Part I of this Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, which
information is incorporated herein by reference.
Common
Stock Five Percent Holders
The following table sets forth, as of April 22, 2010,
certain information with respect to any person, including any
group, who is known to the Company to be the beneficial owner of
more than 5% of the common stock of the Company. There were
44,832,610 shares of common stock outstanding as of the
close 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
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unless otherwise indicated, each of the persons named in the
table has sole voting and investment power with respect to the
shares set forth opposite such persons name. With respect
to each person or group, percentages are calculated based on the
number of shares beneficially owned, including shares that may
be acquired by such person or group within 60 days of
April 22, 2010 upon the exercise of stock options, warrants
or other purchase rights, but not the exercise of options,
warrants or other purchase rights held by any other person. |
|
(2) |
|
Includes 100,000 shares of common stock awarded in 2009
that have not yet been issued. |
|
(3) |
|
Includes warrants to purchase 217,000 shares that are
immediately exercisable. |
|
(4) |
|
Includes (i) 2,187,500 shares owned by Summitcrest
Capital L.P., of which Mr. McCullough is President of the
General Partner; and (ii) an aggregate 158,705 shares
owned by various trusts of which Mr. McCullough is trustee
as follows: MJM Educational Trust (12,500) shares, PFM
Educational Trust (12,500 shares), CDM Educational Trust
(12,500) shares and the MPC Trust (121,205 shares). |
|
(5) |
|
Includes: (i) an aggregate 160,000 shares held in
trust for Dr. Weissbergs minor children, for which
Dr. Weissberg acts as trustee;
(ii) 412,500 shares that are issuable upon exercise of
warrants that are exercisable at any time; and
(iii) 100,000 shares of common stock awarded in 2009
that have not yet been issued. |
44
Common
Stock Management
The following table sets forth, as of April 22, 2010,
certain information concerning the beneficial ownership of the
Companys common stock (including directors
qualifying shares, if any) of (i) each director,
(ii) each Named Executive Officer (as defined in the
Compensation section above), and (iii) all
current directors and executive officers of the Company as a
group. There were 44,832,610 shares of common stock
outstanding as of the close of business on April 22, 2010.
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
* |
|
Less than one percent of the common stock outstanding. |
|
(1) |
|
Unless otherwise indicated, each of the persons named in the
table has sole voting and investment power with respect to the
shares set forth opposite such persons name. With respect
to each person or group, percentages are calculated based on the
number of shares beneficially owned, including shares that may
be acquired by such person or group within 60 days of
April 22, 2010 upon the exercise of stock options, warrants
or other purchase rights, but not the exercise of options,
warrants or other purchase rights held by any other person. The
address of each current director and executive officer of the
Company is
c/o CytoCore,
Inc., 414 N. Orleans, Suite 510, Chicago, IL
60654. |
|
(2) |
|
Includes: (i) 213,098 shares owned by Northlea
Partners, Ltd., of which Dr. Abeles is General Partner;
(ii) 64,583 shares issuable upon exercise of warrants
granted by the Company to Dr. Abeles that are exercisable
at any time; and (iii) 100,000 shares of common stock
awarded in 2009 that have not yet been issued. Dr. Abeles
disclaims beneficial ownership of all shares owned by, or
issuable to, Northlea Partners except shares attributable to his
1% interest in Northlea Partners as General Partner. |
|
(3) |
|
Includes 100,000 shares of common stock awarded in 2009
that have not yet been issued. |
|
(4) |
|
Includes (i) 145,000 shares issuable upon exercise of
warrants that are exercisable at any time; and
(ii) 100,000 shares of common stock awarded in 2009
that have not yet been issued. |
|
(5) |
|
Includes 35,000 shares issuable upon exercise of warrants
that are exercisable at any time. |
|
(6) |
|
Includes (i) 50,000 shares owned jointly with Marlene
Barker; (ii) 4,825 shares issuable upon exercise of
warrants that are exercisable at any time; and
(iii) 100,000 shares of common stock awarded in 2009
that have not yet been issued. |
|
(7) |
|
Includes: (i) 2,187,500 shares owned by Summitcrest
Capital L.P., of which Mr. McCullough is President of the
General Partner; and (ii) an aggregate 158,705 shares
owned by various trusts of which Mr. McCullough is trustee
as follows: MJM Educational Trust (12,500 shares), PFM
Educational Trust (12,500 shares), CDM Educational Trust
(12,500 shares) and the MPC Trust (121,205 shares). |
|
(8) |
|
Includes: (i) 149,551 shares held by Azimuth
Corporation, of which Mr. Milley is President and Chairman
of the Board, 429,255 shares held by Cadmus Corporation, of
which Mr. Milley is President and a director,
80,282 shares held by Milley Management, Inc., of which
Mr. Milley is President, sole director and majority
stockholder, and 23,710 shares held by Winchester National,
Inc., of which Mr. Milley is a director and executive
officer; (ii) 62,500 shares issuable upon exercise of
options and warrants granted by the Company to Mr. Milley
that are exercisable at any time; and
(iii) 100,000 shares of common stock awarded in 2009
that |
45
|
|
|
|
|
have not yet been issued. Shares held directly by
Mr. Milley, Cadmus Corporation, Winchester National and
Milley Management, in the aggregate amount of
402,890 shares, and have been pledged to ELXSI Corp., of
which Mr. Milley is President, Chief Executive Officer and
Chairman of the Board. |
|
(9) |
|
Includes 100,000 shares of common stock awarded in 2009
that have not yet been issued. |
|
(10) |
|
Includes: (i) an aggregate 160,000 shares held in
trust for Dr. Weissbergs minor children, for which
Dr. Weissberg acts as trustee;
(ii) 412,500 shares that are issuable upon exercise of
warrants that are exercisable at any time; and
(iii) 100,000 shares of common stock awarded in 2009
that have not yet been issued. |
|
(11) |
|
Does not include ownership of Daniel J. Burns, Phillip Bradley
Hall, M.D., Erik Danielson or David J.
Weissberg, M.D., all of whom declined to stand for
re-election at the Companys 2009 annual meeting of
stockholders held on June 22, 2009. |
Series E
Convertible Preferred Stock
The following table sets forth, as of April 22, 2010,
certain information with respect to (i) any person
(including any group) who is known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of
Series E Convertible Preferred Stock, (ii) each
director and Named Executive Officer who owns such preferred
stock, and (iii) all current executive officers and
directors as a group. There were 19,222 shares of
Series E Convertible Preferred Stock outstanding as of the
close of business on April 22, 2010.
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
(1) |
|
No director or Named Executive Officer of the Company owns any
shares of any series of preferred stock of the Company. |
|
(2) |
|
Converts into 33,479 shares of common stock, including
shares issuable upon payment of cumulative dividends. |
|
(3) |
|
Converts into 10,043 shares of common stock, including
shares issuable upon payment of cumulative dividends. |
Changes
in Control
The Company is not aware of any arrangements (including any
pledge by any person of securities of CCI), the operation of
which did or may at a subsequent date result in a change of
control of the Company.
|
|
Item 12.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Transactions
with Related Persons, Promoters and Certain Control
Persons
The following section sets forth information regarding
transactions since January 1, 2008, or any currently
proposed transactions, between the Company and certain related
persons. For more information on the compensation received by
current and former directors and officers of the Company during
the 2009 fiscal year, and the beneficial ownership of equity
securities of the Company of such individuals, see the
Compensation and Security Ownership of Certain
Beneficial Owners and Management sections in Items 10
and 11, respectively, above.
46
Board
of Directors
During 2009, the Board of Directors, including former directors
Daniel J. Burns, Philip Bradley Hall, M.D., Erik Danielsen
and David J. Weissberg, M.D., voted to issue to each of its
members (other than its
employee-director
member, Robert F. McCullough) a bonus of 100,000 shares of
restricted, unregistered shares of common stock of the Company.
The shares were valued at $0.40 per share and CCI recorded a
charge of $280,000 for an aggregate 700,000 shares of
common stock during 2009. None of the 700,000 shares
authorized for issuance have been issued to date.
Robert
F. McCullough, Jr., Chairman, Chief Executive Officer and Chief
Financial Officer
In 2009, Summitcrest Capital LP, of which Mr. McCullough is
the President of its general partner, purchased 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 during
the 2009 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.
During 2009, Mr. McCullough also exercised warrants to
purchase 485,000 shares of restricted, unregistered common
stock at a modified price of $0.25 in exchange for the reduction
of $121,000 of debt owed by CCI to him. CCI recorded a charge of
$15,000 related to this warrant modification. This warrant
modification was made available by the Company to all holders of
warrants to purchase shares of the common stock of the Company.
Also in 2009, Mr. McCullough elected to receive a portion
of his compensation, totaling 39,459 shares in restricted,
unregistered common stock, for services rendered in 2008. CCI
valued the common stock at $0.50 per share for an aggregate
total of $20,000 using the fair value method.
Mr. McCullough and a party related to him loaned an
aggregate $866,000 to the Company during the 2009 fiscal year.
Of the $866,000, $121,000 was cancelled in connection with the
exercise of the warrants discussed above. The outstanding
balance of the loaned amount is repayable upon demand and does
not bear interest.
During the first quarter of 2008, Mr. McCullough and
various trusts of which Mr. McCullough serves as trustee
participated 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.
Erik
Danielsen, Former Director
Effective March 1, 2006, the Company and Mr. Danielsen
entered into a Consulting Agreement, which agreement terminated
on March 31, 2008, prior to his election as a director of
the Company. Mr. Danielsen received $25,000 from the
Company in 2008 for consulting fees under the Consulting
Agreement for services rendered prior to March 31, 2008.
Pursuant to the agreement, Mr. Danielsen provided financial
advisory services to the Company and corporate communications
and investor and public relations services as requested by
CytoCore. He was also entitled to fees for assisting the Company
with its capital raising activities; Mr. Danielsen assisted
the Company with such activities in Europe in 2007, but did not
assist in such activities in 2008.
Alexander
M. Milley, Director
In July 2003, Azimuth Corporation, of which Mr. Milley is
President and Chairman of the Board of Directors, and Cadmus
Corporation, of which Mr. Milley is President and a
director, agreed to cancel seven warrants held by Azimuth and
one warrant held by Cadmus that entitled the holders to purchase
a total of 312,500 shares of common stock at various
exercise prices. The warrants, issued between December 1999 and
August 2001, contained anti-dilution clauses which required
CytoCore to increase the number of shares of common stock the
holders were entitled to purchase under the warrants by
approximately 150,000 shares as of the date of the
agreement, with commensurate adjustments in individual exercise
prices so that gross proceeds to the Company from exercise of
the warrants remained the same. These anti-dilution provisions
could have required the Company to make additional adjustments
in shares and exercise prices based on the Companys
issuance of debt or equity instruments at prices
47
below the adjusted exercise prices of these warrants. In
consideration for the parties agreement to cancel these
warrants and the forgiveness of approximately $100,000 owed to
Azimuth and Cadmus, CytoCore agreed to issue new five-year
warrants entitling the holders to purchase an aggregate
650,000 shares of common stock at an exercise price of
$3.00 per share. In 2006, the parties again agreed to amend the
warrants, reducing the number of shares that could be purchased
upon exercise to an aggregate 350,000 shares and reducing
the exercise price to $1.00 per share. Azimuth exercised its
warrants on a cashless basis in July 2008 for an aggregate of
68,804 shares of common stock and Cadmus exercised its
warrants in July 2008 for an aggregate of 195,192 shares of
common stock, using SARs held as part of the consideration for
said exercise. In addition, during 2008, the Company paid Cadmus
$45,000 as reimbursement for taxes accruing from the warrants.
Daniel
J. Burns, Former Chairman of the Board and
Director
In 2009, Mr. Burns exercised warrants to purchase an
aggregate 185,000 shares of unregistered, restricted common
stock at a modified price of $0.25 through the reduction of
$46,000 of debt owed by CCI to him. CCI recorded a charge of
$6,000 related to this warrant modification. This warrant
modification was made available by the Company to all holders of
warrants to purchase shares of the common stock of the Company.
The Company had an agreement with Future Wave Management, a
consulting company of which Mr. Burns is President and sole
owner. The agreement, effective December 1, 2006, had a
term of two years, expiring on November 30, 2008, and
required Future Wave to provide business consulting services to
the Company. Future Wave initially received a fee of $10,000 per
month, which fee increased to $15,000 per month in April 2007
after certain milestones were met. In 2008, the Company paid
Future Wave $150,000 for consulting services and reimbursed
expenses, and awarded Future Wave warrants to purchase
10,000 shares of common stock at $2.06 per share for the
attainment of certain performance goals under the agreement. Of
the amount paid, $15,000 was deferred payments in respect of
2007.
During the first quarter of 2008, Mr. Burns participated 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. Burns invested $600,000 and
received 300,000 shares and warrants to purchase
150,000 shares of common stock.
David
J. Weissberg, M.D., Five Percent Holder and Former Chief
Executive Officer and Director
During the first quarter of 2008, Dr. Weissberg
participated 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. Dr. Weissberg invested
$50,000 and received 25,000 shares and warrants to purchase
12,500 shares of common stock.
Related
Person Transaction Approval Policy
The Company recognizes that related person transactions can
present potential or actual conflicts of interest and create the
appearance that Company decisions are based on considerations
other than the best interests of the Company and its
stockholders. The Board of Directors therefore adopted a written
policy in May 2008 that requires the review, approval or
ratification of all such transactions by the Nominating
Committee of the Board of Directors in accordance with the
procedures established for such transactions.
For these purposes, a related person transaction is
any transaction, arrangement or relationship (or series of
similar transactions, arrangements or relationships) in which
the Company or any subsidiary is, was or will be a participant
and in which a related person has, had or will have a direct or
indirect interest. A related person includes
executive officers, directors, nominees for election as a
director, five percent holders, and any immediate family members
of the foregoing. It also includes entities in which any of the
foregoing is employed or is a partner or principal or in a
similar position, or in which such person has a five percent or
greater beneficial ownership interest.
In advance of each regularly scheduled Nominating Committee
meeting, management must propose those transactions to be
entered into by the Company for the coming calendar quarter,
including the material terms of such transactions, the parties
involved, the interests of the related person(s) in such
transactions, and the proposed aggregate value of each such
transaction (if calculable). After review, the Nominating
Committee must approve or disapprove such transactions and at
each subsequently scheduled meeting, management must update the
48
Nominating Committee as to any material change to those proposed
transactions. If advance approval of a related person
transaction is not feasible, such transactions may be
preliminarily entered into by management, subject to
ratification by the Nominating Committee at its next meeting. A
transaction also may be approved by the Chairman of the
Nominating Committee, who possesses delegated authority to act
between meetings, in circumstances where it is not practicable
or desirable for the Company to wait until the next committee
meeting.
Review and evaluation of a related person transaction include an
examination of all material facts and relevant factors,
including without limitation:
|
|
|
|
|
the risks and benefits of such transaction to the Company,
|
|
|
|
the extent of the related persons interest in the
transaction,
|
|
|
|
the impact on a directors independence in the event the
related person involved in the transaction is a director, an
immediate family member or an affiliated entity,
|
|
|
|
if applicable, the availability of other sources of comparable
products and services, and
|
|
|
|
whether such transaction is on terms no less favorable than
terms generally available to an unaffiliated third party under
the same or similar circumstances.
|
The Nominating Committee shall approve or ratify only those
transactions that, in light of known circumstances, are in, or
are not inconsistent with, the best interests of the Company and
its stockholders, as the Nominating Committee determines in good
faith. The committee may also determine to provide standing
approval of certain types of transactions. No director shall
participate in any discussion or approval of a related person
transaction for which he or she is a related person, except that
the director is required to provide all material information
concerning such transaction as requested by the Nominating
Committee or the Board of Directors.
Director
Independence
As noted above, the Board has determined that each of current
directors Dr. Abeles, Mr. Milley and Mr. Severson
is independent as set forth in the rules and
regulations of The Nasdaq Stock Market, including
Rule 5605, and
Rule 10A-3
of the Exchange Act. The Company does not utilize any other
definition or criteria for determining the independence of a
director or nominee, and no other transactions, relationships,
or other arrangements exist to the Boards knowledge or
were considered by the Board, other than as may be discussed
herein, in determining an individuals independence. 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.
|
|
Item 13.
|
Principal
Accountant Fees and Services
|
LJ Soldinger Associates LLC (LJSA) served as the
Companys independent registered public accounting firm
each of the fiscal years ending December 31, 2009 and 2008.
Fees
The following table presents fees for the professional services
rendered by LJSA for fiscal years 2009 and 2008, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees represent fees billed for professional services
rendered for the audit of the Companys annual financial
statements and review of the financial statements included in
the Companys quarterly reports or services that are
normally provided in connection with statutory and regulatory
filings or engagements. |
49
|
|
|
(2) |
|
Audit-related fees represent fees billed for assurance and
related services reasonably related to the performance of the
audit or review of the Companys financial statements not
reported in (1) above, including those incurred in
connection with securities registration and/or other issues
resulting from that process. |
|
(3) |
|
Tax fees represent fees billed for professional services
rendered for tax compliance, tax advice and tax planning
services. |
|
(4) |
|
All other fees principally would include fees billed for
products and services provided by the accountant, other than the
services reported under the three captions above. |
Pre-Approval
Policies
As required by applicable law, the Audit Committee is
responsible for the appointment, compensation, retention and
oversight of the work of the Companys independent
registered public accounting firm. In connection with such
responsibilities, the Audit Committee is required, and it is the
Audit Committees policy, to pre-approve the audit and
permissible non-audit services (both the type and amount)
performed by the Companys independent registered public
accounting firm in order to ensure that the provision of such
services does not impair the firms independence, in
appearance or fact.
The Audit Committee pre-approved all audit services provided to
the Company during fiscal 2009. No non-audit services were
provided to the Company during fiscal year 2009.
|
|
Item 14.
|
Exhibits
and Financial Statement Schedules
|
|
|
|
(*) |
|
Denotes an exhibit filed herewith. |
|
(+) |
|
Denotes a management contract or compensatory plan, contract or
arrangement. |
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
2
|
.1
|
|
Stock and Membership Interest Exchange Agreement dated as of
December 4, 1998 among Bell National Corporation, InPath,
LLC and the InPath Members (as such term is defined therein).
(Incorporated herein by reference to Appendix A to the Bell
National Corporation Definitive Proxy Statement on
Schedule 14A, filed on April 30, 1999 (the 1999
Proxy Statement).)
|
|
2
|
.2
|
|
Agreement and Plan of Merger of Bell National Corporation and
Ampersand Medical Corporation. (Incorporated herein by reference
to Appendix C to 1999 Proxy Statement.)
|
|
2
|
.3
|
|
Agreement and Plan of Merger by and among AccuMed International,
Inc., AccuMed Acquisition Corp. and Ampersand Medical
Corporation, dated as of February 7, 2001, and Amendment
No. 1 thereto. (Incorporated herein by reference to
Appendix I to Registration Statement (as amended) on
Form S-4,
No. 333-61666,
as filed on May 25, 2001 (the May 2001
S-4).)
|
|
3
|
.1
|
|
Certificate of Incorporation of Ampersand Medical Corporation,
as amended. (Incorporated herein by reference to
Exhibit 3.1 to the Companys Current Report on
Form 8-K
dated September 26, 2001.)
|
|
3
|
.2
|
|
By-laws of Ampersand Medical Corporation. (Incorporated herein
by reference to Appendix E to the 1999 Proxy Statement.)
|
|
3
|
.3
|
|
Certificate of Designation, Preferences and Rights of
Series A Convertible Preferred Stock of Ampersand Medical
Corporation. (Incorporated herein by reference to
Exhibit 3.5 to the Ampersand Medical Corporation Annual
Report on
Form 10-K
(as amended) for the fiscal year ended December 31, 2000,
as filed on March 29, 2001 (the 2000
10-K).)
|
|
3
|
.4
|
|
Certificate of Designation, Preferences and Rights of
Series B Convertible Preferred Stock of Ampersand Medical
Corporation. (Incorporated herein by reference to
Exhibit 3.6 to the 2000
10-K.)
|
|
3
|
.5
|
|
Section 6 of Article VII of the By-laws of Ampersand
Medical Corporation, as amended. (Incorporated herein by
reference to Exhibit 3.3 to the May 2001
S-4.)
|
|
3
|
.6
|
|
Certificate of Designation, Preferences and Rights of
Series C Convertible Preferred Stock (Incorporated herein
by reference to Exhibit 3.4 to the Companys
Registration Statement on
Form S-2
(as amended), File
No. 333-83578,
as filed on February 28, 2002 (the February 2002
S-2).)
|
50
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.7
|
|
Certificate of Amendment of Certificate of Designation,
Preferences and Rights of Series C Convertible Preferred
Stock. (Incorporated herein by reference to Exhibit 3.5 to
the February 2002
S-2.)
|
|
3
|
.8
|
|
Certificate of Amendment of Amended Certificate of Designation,
Preferences and Rights of Series C Convertible Preferred
Stock. (Incorporated herein by reference to Exhibit 3.6 to
the February 2002
S-2.)
|
|
3
|
.9
|
|
Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock. (Incorporated herein
by reference to Exhibit 3.7 to the February 2002
S-2.)
|
|
3
|
.10
|
|
Certificate of Designation, Preferences and Rights of
Series E Convertible Preferred Stock. (Incorporated herein
by reference to Exhibit 3.8 to the February 2002
S-2.)
|
|
3
|
.11
|
|
Certificate of Amendment to Certificate of Incorporation of the
Company, dated August 5, 2004. (Incorporated herein by
reference to Exhibit 3.1 to the Companys Quarterly
Report on
Form 10-QSB
for the quarter ended June 30, 2004, as filed on
August 16, 2004 (the 2004 2Q
10-QSB).)
|
|
3
|
.12
|
|
Certificate of Amendment to Certificate of Incorporation, as
filed on June 22, 2006. (Incorporated herein by reference
to Exhibit 3.1 to the Companys Quarterly Report on
Form 10-QSB
for the quarter ended June 30, 2006, as filed on
August 21, 2006)
|
|
3
|
.13
|
|
Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Delaware Secretary of State on
June 22, 2007. (Incorporated herein by reference to
Exhibit 3.1 to the Companys Quarterly Report on
Form 10-QSB
for the quarter ended June 30, 2007, as filed on
August 17, 2007.)
|
|
3
|
.14
|
|
Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Delaware Secretary of State on
November 19, 2007. (Incorporated herein by reference to
Exhibit 3.14 to the Companys Annual Report on
Form 10-KSB
for the year ended December 31, 2007, as filed
April 2, 2008 (the 2007
10-KSB)
|
|
4
|
.1
|
|
Form of subscription agreement to purchase common stock of the
Company at $0.25 per share. (Incorporated herein by reference to
Exhibit 4.38 to the Companys Annual Report on
Form 10-KSB
for the year ended December 31, 2005, as filed on
April 17, 2006 (the 2005
10-KSB).)
|
|
4
|
.2
|
|
Form of subscription agreement used to purchase common stock of
the Company during 2006. (Incorporated herein by reference to
Exhibit 4.43 to the Companys Annual Report on
Form 10-KSB
for the year ended December 31, 2006, as filed
April 17, 2007 (the 2006
10-KSB).)
|
|
4
|
.3
|
|
Form of common stock purchase warrant issued in 2006, 2007 and
2008 to vendors in consideration for services rendered,
representing the right to purchase an aggregate
24,532 shares of common stock. (Incorporated herein by
reference to Exhibit 4.21 to the 2007
10-KSB.)
|
|
4
|
.4
|
|
Registration Rights Agreement in connection with $7 million
maximum offering of Units completed in March 2008. (Incorporated
herein by reference to Exhibit 4.22 to the 2007
10-KSB.)
|
|
4
|
.5
|
|
Form of Warrant in connection with $7 million maximum
offering of Units completed in March 2008. (Incorporated herein
by reference to Exhibit 4.23 to the 2007
10-KSB.)
|
|
10
|
.1+
|
|
1999 Equity Incentive Plan established as of June 1, 1999,
as amended. (Incorporated herein by reference to Appendix B
to the Companys Definitive Proxy Statement on
Schedule 14A, as filed on July 1, 2004.)
|
|
10
|
.2+
|
|
1999 Employee Stock Purchase Plan. (Incorporated herein by
reference to Appendix G to the 1999 Proxy Statement.)
|
|
10
|
.3
|
|
Lease Agreement between Ampersand Medical Corporation and O.P.,
L.L.C, dated May 18, 2000, pertaining to premises located
at 414 N. Orleans, Suite 510, Chicago, Illinois
60610. (Incorporated by reference to Exhibit 10.32 to the
2000 10-K.)
|
|
10
|
.4
|
|
First Amendment to Lease Agreement between Ampersand Medical
Corporation and O.P., L.L.C., dated February 13, 2001,
pertaining to additional premises at 414 N. Orleans,
Suite 503, Chicago, Illinois 60610 and extending the term
of the original lease until February 28, 2006.
(Incorporated by reference to Exhibit 10.33 to the 2000
10-K.)
|
51
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.5
|
|
Consulting Agreement, dated January 27, 2006 and effective
March 1, 2006, by and between the Company and GSG
Enterprises LLC (Incorporated herein by reference to
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-QSB
for the quarter ended September 30, 2006, as filed on
November 20, 2006 (the 2006 3Q
10-QSB/A).)
|
|
10
|
.6+
|
|
Employment agreement dated November 15, 2006 between
Augusto Ocana and the Company. (Incorporated herein by reference
to Exhibit 10.39 to the 2006
10-KSB.)
|
|
10
|
.7+
|
|
Employment agreement dated November 20, 2006 between Robert
McCullough and the Company. (Incorporated herein by reference to
Exhibit 10.40 to the 2006
10-KSB.)
|
|
10
|
.8
|
|
Consulting agreement dated November 20, 2006 between Future
Wave Management and the Company. (Incorporated herein by
reference to Exhibit 10.41 to the 2006
10-KSB.)
|
|
10
|
.9
|
|
Consulting agreement dated November 20, 2006 between EBM,
Inc. and the Company. (Incorporated herein by reference to
Exhibit 10.42 to the 2006
10-KSB.)
|
|
10
|
.10
|
|
Common Stock Purchase Warrant dated September 28, 2006
issued to David Weissberg representing the right to purchase
400,000 shares of common stock. (Incorporated herein by
reference to Exhibit 10.2 to the 2006 3Q
10-QSB/A.)
|
|
10
|
.11+
|
|
Common Stock Purchase Warrant dated September 28, 2006
issued to Alexander Milley representing the right to purchase
62,500 shares of common stock. (Incorporated herein by
reference to Exhibit 10.46 to the 2006
10-KSB.)
|
|
10
|
.12+
|
|
Common Stock Purchase Warrant dated September 28, 2006
issued to John Abeles representing the right to purchase
62,500 shares of common stock. (Incorporated herein by
reference to Exhibit 10.47 to the 2006 3Q
10-QSB/A.)
|
|
10
|
.13+
|
|
Common Stock Purchase Warrant dated January 22, 2007 issued
to Augusto Ocana representing the right to purchase
50,000 shares of common stock. (Incorporated herein by
reference to Exhibit 10.40 to the 2007
10-KSB.)
|
|
10
|
.14+
|
|
Form of common stock purchase warrants issued to Richard A.
Domanik on each of June 29, 2007 and December 18, 2007
representing the right to purchase an aggregate
35,000 shares of common stock. (Incorporated herein by
reference to Exhibit 10.42 to the 2007
10-KSB.)
|
|
10
|
.15
|
|
Form of common stock purchase warrants issued to non-executive
employees of the Company during the 2007 fiscal year
representing the right to purchase an aggregate
96,000 shares of common stock. (Incorporated herein by
reference to Exhibit 10.43 to the 2007
10-KSB.)
|
|
10
|
.16
|
|
Form of warrant amendment (Incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-QSB
for the quarter ended March 31, 2007, as filed on
May 15, 2007)
|
|
10
|
.17
|
|
Distribution Agreement with M.O.S.S. S.r.L. (Incorporated
herein by reference to Exhibit 10.45 to the 2007
10-KSB.)
|
|
10
|
.18
|
|
Distribution Agreement with MUNDITER Intercambio
Mundial de Comercio, S.A. (Incorporated herein by reference to
Exhibit 10.46 to the 2007
10-KSB.)
|
|
10
|
.19
|
|
Distribution Agreement with Palex Medical S.A. (Incorporated
herein by reference to Exhibit 10.47 to the 2007
10-KSB.)
|
|
10
|
.20
|
|
Distribution Agreement with HT Hospital Technologies GmbH.
(Incorporated herein by reference to Exhibit 10.49 to the
2007 10-KSB.)
|
|
10
|
.21+
|
|
Amendment to Employment Agreement dated as of December 15,
2006 by and between the Company and Augusto Ocana dated as of
July 15, 2007. (Incorporated herein by reference to
Exhibit 10.50 to the 2007
10-KSB.)
|
|
10
|
.22+
|
|
Second Amendment to Employment Agreement dated as of
December 15, 2006 by and between the Company and Augusto
Ocana. (Incorporated herein by reference to Exhibit 10.51
to the 2007
10-KSB.)
|
|
10
|
.23
|
|
Purchase Agreement in connection with $7 million maximum
offering of Units completed in March 2008. (Incorporated herein
by reference to Exhibit 10.52 to the 2007
10-KSB.)
|
|
10
|
.24
|
|
License agreement with Quantrx Biomedical Corporation dated
May 19, 2008 (Incorporated herein by reference to
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2008, as filed on
August 11, 2008)
|
|
10
|
.25*
|
|
Service agreement with Cell Solutions, LLC. Dated
October 9, 2009
|
52
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.26
|
|
Form of Subscription Agreement and Letter of Investment Intent
in connection with $7 million maximum offering of Units
completed in March 2008. (Incorporated herein by reference to
Exhibit 10.52 to the 2007
10-KSB.)
|
|
10
|
.27*
|
|
Consulting agreement with Dr. Mauro Scimia dated
April 14, 2010
|
|
10
|
.28*
|
|
Distribution service agreement with Amsino International, Inc.
dated April 14, 2010
|
|
14
|
|
|
Code of Ethics and Business Conduct of Officers, Directors and
Employees of CytoCore, Inc. (Incorporated herein by reference to
Exhibit 99.1 to the 2003
10-KSB.)
|
|
21
|
|
|
Subsidiaries of the Company. (Incorporated herein by reference
to Exhibit 21 to the 2007
10-KSB.)
|
|
23
|
.1*
|
|
Consent of L. J. Soldinger Associates
|
|
31
|
.1*
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer of CytoCore, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1*
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer of CytoCore, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CYTOCORE, INC.
|
|
|
|
By:
|
/s/ Robert
McCullough, Jr.
|
Robert McCullough, Jr.
Chief Executive Officer and
Chief Financial Officer
Date: May 17, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
McCullough, Jr.
Robert
McCullough, Jr.
|
|
Chief Executive Officer and
Chief Financial Officer
(Principal Accounting Officer and Director)
|
|
May 17, 2010
|
|
|
|
|
|
/s/ Alexander
M. Milley
Alexander
M. Milley
|
|
Director
|
|
May 17, 2010
|
|
|
|
|
|
/s/ John
Abeles, M.D.
John
Abeles, M.D.
|
|
Director
|
|
May 17, 2010
|
|
|
|
|
|
/s/ Clint
Severson
Clint
Severson
|
|
Director
|
|
May 17, 2010
|
54
Report of
Independent Registered Public Accounting Firm
To The Board
of Directors and
Stockholders of CytoCore, Inc.
We have audited the accompanying consolidated balance sheets of
CytoCore, Inc. and Subsidiaries as of December 31, 2009 and
2008, and the related consolidated statements of operations,
stockholders deficit, and cash flows for the years then
ended. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of CytoCore, Inc. and
Subsidiaries as of December 31, 2009 and 2008, and the
results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial
statements, the Companys recurring losses from operations
and resulting dependence upon access to additional external
financing, raise substantial doubt concerning its ability to
continue as a going concern. Managements plans in regard
to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ L J
Soldinger Associates LLC
May 14, 2010
Dear Park, Illinois
F-1
CYTOCORE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
553
|
|
Accounts receivable, net of allowance of $7,000 for the year
ended December 31, 2008
|
|
|
17
|
|
|
|
36
|
|
Inventories.
|
|
|
574
|
|
|
|
1,168
|
|
Prepaid expenses and other current assets
|
|
|
44
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
635
|
|
|
|
1,815
|
|
Fixed assets, net
|
|
|
1,846
|
|
|
|
2,040
|
|
Licenses, patents, and technology, net of amortization
|
|
|
62
|
|
|
|
101
|
|
Inventories,
non-current
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,868
|
|
|
$
|
3,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Checks issued in excess of amounts on deposit
|
|
$
|
5
|
|
|
$
|
|
|
Account payable
|
|
|
2,102
|
|
|
|
2,320
|
|
Accrued payroll costs
|
|
|
818
|
|
|
|
127
|
|
Accrued expenses
|
|
|
1,225
|
|
|
|
1,041
|
|
Advances from related parties
|
|
|
763
|
|
|
|
|
|
Notes payable
|
|
|
70
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,983
|
|
|
|
3,558
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity (Deficit):
|
|
|
|
|
|
|
|
|
Preferred stock; $0.001 par value; 10,000,000 shares
authorized; 373,555 and 373,559 shares issued and
outstanding at December 31, 2009 and 2008, respectively
(Liquidation value of all classes of preferred stock of $2,876
at December 31, 2009)
|
|
|
1,492
|
|
|
|
1,492
|
|
Common stock, $0.001 par value; 500,000,000 shares
authorized; 42,173,810 and 41,226,903 shares issued and
42,154,601 and 41,207,694 shares outstanding at
December 31, 2009 and 2008, respectively
|
|
|
42
|
|
|
|
41
|
|
Additional paid-in capital
|
|
|
92,106
|
|
|
|
91,065
|
|
Treasury stock at cost: 19,209 shares at December 31,
2009 and 2008
|
|
|
(327
|
)
|
|
|
(327
|
)
|
Accumulated deficit
|
|
|
(95,351
|
)
|
|
|
(91,799
|
)
|
Accumulated comprehensive loss Cumulative
translation adjustment
|
|
|
(77
|
)
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(2,115
|
)
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,868
|
|
|
$
|
3,956
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
CYTOCORE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Net Sales
|
|
$
|
44
|
|
|
$
|
125
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
3
|
|
|
|
81
|
|
Provision for inventory adjustment to market
|
|
|
400
|
|
|
|
|
|
Research and development (net of settlement of trade debt of
$457,000 for the year ended December 31, 2009
|
|
|
(85
|
)
|
|
|
1,852
|
|
Selling, general and administrative
|
|
|
3,022
|
|
|
|
4,301
|
|
Selling, general and administrative related parties
|
|
|
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
3,340
|
|
|
|
6,497
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(3,296
|
)
|
|
|
(6,372
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(34
|
)
|
|
|
(9
|
)
|
Provision for legal settlement
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(256
|
)
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
(3,552
|
)
|
|
|
(6,328
|
)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(3,552
|
)
|
|
|
(6,328
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(3,552
|
)
|
|
$
|
(6,386
|
)
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted net loss per common share
|
|
$
|
(.08
|
)
|
|
$
|
(.16
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
41,874,890
|
|
|
|
39,984,394
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CYTOCORE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,552
|
)
|
|
$
|
(6,328
|
)
|
Non-cash charge for legal settlement
|
|
|
222
|
|
|
|
|
|
Depreciation
|
|
|
379
|
|
|
|
229
|
|
Amortization of license
|
|
|
100
|
|
|
|
58
|
|
(Decrease) increase in allowance for doubtful accounts
|
|
|
(7
|
)
|
|
|
7
|
|
Provision for inventory adjustment to market
|
|
|
400
|
|
|
|
|
|
Loss on disposal of fixed asset
|
|
|
|
|
|
|
1
|
|
Non-cash interest related to warrant modification
|
|
|
21
|
|
|
|
|
|
Stock and warrants issued to non-employees for services
|
|
|
5
|
|
|
|
37
|
|
Non-cash compensation expense
|
|
|
2
|
|
|
|
87
|
|
Stock issued to directors for compensation
|
|
|
350
|
|
|
|
|
|
Gain on settlements of trade indebtedness
|
|
|
(457
|
)
|
|
|
(19
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
26
|
|
|
|
(28
|
)
|
Inventories
|
|
|
(131
|
)
|
|
|
(1,155
|
)
|
Prepaid expenses and other current assets
|
|
|
14
|
|
|
|
159
|
|
Checks issued in excess of deposits
|
|
|
5
|
|
|
|
|
|
Accounts payable
|
|
|
61
|
|
|
|
371
|
|
Accrued expenses
|
|
|
925
|
|
|
|
(537
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(1,637
|
)
|
|
|
(7,118
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of license
|
|
|
(61
|
)
|
|
|
(139
|
)
|
Capital purchases
|
|
|
(10
|
)
|
|
|
(1,544
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(71
|
)
|
|
|
(1,683
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
9,381
|
|
Financing costs in connection with private placement of stock
|
|
|
|
|
|
|
(405
|
)
|
Proceeds from related parties advances/demand loans
|
|
|
885
|
|
|
|
|
|
Proceeds from exercise of warrants and options
|
|
|
270
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,155
|
|
|
|
9,038
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(553
|
)
|
|
|
237
|
|
Cash and cash equivalents at beginning of year
|
|
|
553
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
|
|
|
$
|
553
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Non-cash transaction during the year for:
|
|
|
|
|
|
|
|
|
Preferred stock and cumulative dividends converted into common
stock
|
|
$
|
|
|
|
$
|
136
|
|
Payment of accrued wages with common stock
|
|
$
|
31
|
|
|
$
|
604
|
|
Warrant exercised with debt in satisfaction of related party
advances and other liabilities
|
|
$
|
168
|
|
|
$
|
180
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CYTOCORE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
par Value $0.001
|
|
|
par Value $0.001(1)
|
|
|
Treasury Stock(1)
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital(1)
|
|
|
Deficit
|
|
|
Loss
|
|
|
Deficit
|
|
|
|
(Dollars in thousands)
|
|
|
January 1, 2008
|
|
|
403,272
|
|
|
$
|
1,628
|
|
|
|
35,866,156
|
|
|
$
|
36
|
|
|
|
19,209
|
|
|
$
|
(327
|
)
|
|
$
|
80,917
|
|
|
$
|
(85,413
|
)
|
|
$
|
(77
|
)
|
|
$
|
(3,236
|
)
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,328
|
)
|
|
|
|
|
|
|
(6,328
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,325
|
)
|
Series B preferred stock converted to common stock
|
|
|
(28,736
|
)
|
|
|
(115
|
)
|
|
|
19,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
Series E preferred stock and cumulative dividends converted
to common stock
|
|
|
(977
|
)
|
|
|
(21
|
)
|
|
|
4,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Sale of common stock, net of financing costs of $405
|
|
|
|
|
|
|
|
|
|
|
4,690,500
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
8,971
|
|
|
|
|
|
|
|
|
|
|
|
8,976
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
301,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
Common stock issued for compensation
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
356
|
|
Common stock issued for services
|
|
|
|
|
|
|
|
|
|
|
144,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
261
|
|
Warrants issued for compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
Warrants issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
373,559
|
|
|
$
|
1,492
|
|
|
|
41,226,903
|
|
|
$
|
41
|
|
|
|
19,209
|
|
|
$
|
(327
|
)
|
|
$
|
91,065
|
|
|
$
|
(91,799
|
)
|
|
$
|
(74
|
)
|
|
$
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,552
|
)
|
|
|
|
|
|
|
(3,552
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,555
|
)
|
Series E preferred stock and cumulative dividends converted
to common stock
|
|
|
(4
|
)
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
869,614
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
438
|
|
Common stock issued for compensation
|
|
|
|
|
|
|
|
|
|
|
61,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
576
|
|
Common stock issued for services
|
|
|
|
|
|
|
|
|
|
|
16,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Warrants issued for compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Warrants issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
373,555
|
|
|
$
|
1,492
|
|
|
|
42,173,810
|
|
|
$
|
42
|
|
|
|
19,209
|
|
|
$
|
(327
|
)
|
|
$
|
92,106
|
|
|
$
|
(95,351
|
)
|
|
$
|
(77
|
)
|
|
$
|
(2,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
F-5
CYTOCORE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Tabular data in thousands, except per share amounts)
|
|
Note 1.
|
The
Company and Basis of Presentation
|
CytoCore, Inc. (CCI, CytoCore or the
Company) was incorporated as Ampersand Medical
Corporation in Delaware in December 1998.
In September 2001, following the Companys acquisition of
AccuMed International, Inc. (AccuMed) via the merger
of AccuMed into a wholly-owned subsidiary of CCI, the Company
changed its corporate name to Molecular Diagnostics, Inc. in
order to better represent its operations and products. On
June 16, 2006, the shareholders ratified a proposal to
change the Companys name from Molecular Diagnostics, Inc.
to CytoCore, Inc., which change was effected in Delaware on
June 22, 2006. Except where the context otherwise requires,
CCI, CytoCore, the Company,
we and our refers to CytoCore, Inc. and
our subsidiaries and predecessors.
CCI currently has one product for sale-its
SoftPAP®
collector. CCI is developing an integrated family of
cost-effective products for the detection, diagnosis and
treatment of cancer under the trade name of CytoCore
Solutions®.
CytoCore Solutions products are intended to address
sample collection, specimen preparation, specimen evaluation
(including detection/screening and diagnosis), treatment and
patient monitoring within vertical markets related to specific
cancers. Current CytoCore Solutions products are focused
upon cervical cancer. CCI plans that this focus will later be
expanded to include other gynecological cancers as well as
bladder, lung, and breast cancers, among others. Within each of
these markets CCI anticipates that the CytoCore Solutions
products will be sold as individual value-added drop-in
replacements for existing products and as integrated systems
that improve the efficiency and effectiveness of clinical and
laboratory operations.
Liquidity
The Company has incurred significant operating losses since its
inception. Management expects that significant on-going
operating expenditures will be necessary to successfully
implement CCIs business plan and develop, manufacture and
market its products. These circumstances raise substantial doubt
about CCIs ability to continue as a going concern.
Implementation of the Companys plans and its ability to
continue as a going concern depend upon its securing substantial
additional financing. During the first quarter of 2009, the
Company began an offering of 1.4 million units at an
offering price of $5.00 per unit. Each unit consisted of one
share of Series F Convertible Preferred Stock and one
warrant to purchase five shares of common stock. The warrants
were offered with an exercise price of $0.75 per share. The
preferred stock was to accrue dividends at the rate of $0.50 per
annum, payable in cash or in additional shares of Series F
preferred stock at the Companys option. The preferred
stock is convertible into common stock at $0.50 per share,
subject to adjustment, at any time. The Company did not receive
any proceeds from this offering during the 2009 fiscal year.
During the first quarter of 2009, the Company offered to holders
of its warrants to purchase common stock the opportunity to
exercise such warrants at a reduced price of $0.25 per share.
During the year ended December 31, 2009, holders of
warrants to purchase an aggregate 854,371 shares exercised
their warrants at this reduced price. The Company received
$214,000 from these exercises. In addition, other holders of
warrants to purchase 28,292 shares exercised their warrants
at the original exercise price. The Company received $56,000
from these exercises. Also holders of warrants to purchase an
aggregate 670,000 shares of common stock exercised their
warrants for a reduction of $168,000 of debt.
CCI has only enough cash to operate into June 2010.
Managements plans include efforts to obtain additional
capital, although no assurances can be given about the
Companys ability to obtain such capital. If the Company is
unable to obtain adequate additional financing or generate
profitable sales revenues, or negotiate a favorable settlement
plan with creditors, it will be unable to continue its product
development and other activities and may be forced to cease
operations. The consolidated financial statements presented
herein do not include any adjustments that might result from the
outcome of this uncertainty.
F-6
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The consolidated financial statements included herewith include
the accounts of the Company and its wholly-owned subsidiaries.
All significant inter-company balances and transactions have
been eliminated in consolidation.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Management believes that it is reasonably possible that the
following material estimates affecting the financial statements
could significantly change in the coming year:
(1) estimates concerning the method of depreciation or the
useful life of the equipment used in the production of
SoftPAP®
collection kits, (2) estimates as to the valuation
allowance for the amounts recorded and held as inventory of
goods and property and equipment and (3) estimates of
possible litigation losses.
Revenue
Recognition
CCI recognizes revenue from product sales when the following
criteria are met: shipment of a product or license to customers
has occurred and there are no remaining Company obligations or
contingencies; persuasive evidence of an arrangement exists;
sufficient vendor-specific, objective evidence exists to support
allocating the total fee to all elements of the arrangement; the
fee is fixed or determinable; and collection is probable.
Cash and
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less at the time of purchase to be
cash equivalents.
Inventory
As of December 31, 2009 and 2008, inventory consisted of
purchased parts totaling $272,000 and $136,000, and finished
goods held for sale totaling $627,000 and $1,032,000,
respectively. Inventory is valued at the lower of cost or
market, using the first in, first out method. As of
December 31, 2009, a writedown for valuation of the
finished goods inventory totaling $400,000 was recorded in the
statement of operations. Due to the uncertainty as to the timing
of expected sales, the Company has classified $325,000 of
inventory as
non-current.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation and are depreciated using the straight-line method
over the assets estimated useful lives. Principal useful
lives are as follows:
|
|
|
Furniture and fixtures
|
|
5 years
|
Laboratory equipment
|
|
5 years
|
Computer and communications equipment
|
|
3 years
|
Design and tooling
|
|
5 years
|
Machinery and equipment
|
|
7 years
|
Leasehold improvements
|
|
Useful life or term of lease, whichever is shorter
|
Normal maintenance and repairs for property and equipment are
charged to expense as incurred, while significant improvements
are capitalized.
F-7
Licenses,
Patents, and Technology
Licenses, patents, and purchased technology are recorded at
their acquisition cost. Costs to prepare patent filings are
expensed when incurred. Costs related to abandoned or denied
patents are written off at the time of abandonment or denial.
Amortization is begun as of the date of acquisition or upon the
grant of the final patent. Costs are amortized over the
assets 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 Financial Accounting Standards Board
Codification
718-10,
which requires that share-based payments be reflected as an
expense based upon the grant-date fair value of those awards.
The expense is recognized over the remaining vesting periods of
the awards, if any.
Foreign
Currency Translation
The functional currency of the Companys foreign operations
is the local currency. Accordingly, all assets and liabilities
are translated into U.S. dollars using year-end exchange
rates, and all revenues and expenses are translated using
average exchange rates during the year.
Fair
Value of Financial Instruments
The carrying value of accounts receivable, accounts payable,
accrued expenses and notes payable approximate their respective
fair values due to their short maturities.
Other
Comprehensive Income (Loss)
Translation adjustments related to the Companys foreign
dormant subsidiary are included in other comprehensive loss and
reported separately in stockholders equity (deficit).
Net Loss
Per Share
Basic loss per share is calculated based on the weighted-average
number of outstanding common shares. Diluted loss per share is
calculated based on the weighted-average number of outstanding
common shares plus the effect of dilutive potential common
shares, using the treasury stock method. CCIs calculation
of diluted net loss per share excludes potential common shares
as of December 31, 2009 and 2008 as the effect would be
anti-dilutive (i.e. would reduce the loss per share).
Income
Taxes
CCI follows the liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting
carrying amounts and the respective tax
F-8
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 adopted Codification
740-10 which
relates to Accounting for Uncertainty in Income Taxes. This
Interpretation prescribes a comprehensive model for financial
statement recognition, measurement, presentation and disclosure
of uncertain tax positions taken or expected to be taken in
income tax returns.
Risks
from Concentrations
Revenues were derived solely from two customers in 2009 and six
customers during 2008.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued new accounting guidance related to
fair value measurements and related disclosures. This new
guidance defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements. We adopted this new guidance on January 1,
2008, as required for our financial assets and financial
liabilities. However, the FASB deferred the effective date of
this new guidance for one year as it relates to fair value
measurement requirements for nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at
fair value on a recurring basis. We adopted these remaining
provisions on January 1, 2009. The adoption of this
accounting guidance did not have a material impact on our
consolidated financial statements.
In December 2007, the FASB issued new accounting guidance that
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties. It also establishes the
appropriate income statement presentation and classification for
joint operating activities and payments between participants, as
well as the sufficiency of the disclosures related to those
arrangements. This new accounting guidance was effective for us
on January 1, 2009, and its adoption did not have a
significant impact on our consolidated financial statements.
In December 2007, the FASB issued new accounting guidance
related to the accounting for non-controlling interests in
consolidated financial statements. This guidance establishes
accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance requires that non-controlling
interests in subsidiaries be reported in the equity section of
the controlling companys balance sheet. It also changes
the manner in which the net income of the subsidiary is reported
and disclosed in the controlling companys income
statement. This guidance is effective for fiscal years beginning
after December 15, 2008. We adopted this guidance on
January 1, 2009, and it had no material impact on our
consolidated financial statements.
In December 2007, the FASB issued new accounting guidance
related to business combinations. The guidance establishes
principles and requirements for how an acquirer entity
(i) recognizes and measures in its financial statements the
identifiable asset acquired, the liabilities assumed and any
controlling interests in the acquired entity;
(ii) recognizes and measures the goodwill acquired in the
business combinations or a gain from a bargain purchase; and
(iii) determines what information to disclose to enable
users of the financial statements to evaluate the nature and
financial effects of the business combination. Costs of the
acquisition will be recognized separately from the business
combinations. The new guidance was effective for periods
beginning after December 15, 2008. The Company has
considered this standard when evaluating current and potential
transactions to which it would apply.
In March 2008, new guidance was issued on disclosures about
derivative instruments and hedging activities. The new guidance
amends and expands the disclosure requirements of previously
issued guidance and is effective for financial statements issued
for fiscal years and interim periods beginning after
November 15, 2008. The disclosures required by this
guidance are included in Note 3, Acquisition of a Business
in Note 16, Financial Instruments with Off-balance Sheet
Risk and Concentrations of Credit Risk.
In June 2008, the FASB issued new accounting guidance clarifying
that non-forfeitable instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, should be included in the earnings allocation in
computing earnings per share under the two-class method. The
two-class method is an earnings allocation formula that treats
participating securities as having the same rights to earnings
as available to
F-9
common shareholders. The adoption of the new guidance in first
quarter 2009 did not impact reported basic and diluted earnings
per share amounts because the Company did not have any
non-forfeitable instruments granted in share based payment
transactions.
In November 2008, the FASB issued new accounting guidance on
equity method investment accounting considerations. The new
guidance generally continues existing practices under the equity
method of accounting for investments in common stock including
the use of a cost-accumulation approach to initial measurement
of the investment. The new guidance does not require the
investor to perform a separate impairment test on the underlying
assets of an equity method investment. However, an equity-method
investor is required to recognize its proportionate share of
impairment charges recognized by the investee, adjusted for
basis differences, if any, between the investees carrying
amount for the impaired assets and the cost allocated to such
assets by the investor. The new guidance is effective for fiscal
years beginning on or after December 15, 2008 and interim
periods within those fiscal years and shall be applied
prospectively. We adopted the guidance effective January 1,
2009, the result of which did not have a material impact on the
Company since we currently have no equity method investments.
In December 2008, the FASB issued new accounting guidance
concerning disclosures about transfers of financial assets and
interests in variable interest entities. The new guidance
includes disclosure objectives and requires public entities to
provide additional year-end and interim disclosures about
transfers of financial assets and involvement with variable
interest entities. The requirements apply to transferors,
sponsors, servicers, primary beneficiaries, and holders of
significant variable interests in a variable-interest entity or
qualifying special purpose entity. The new guidance is effective
for the first interim period or fiscal year ending after
December 15, 2008. Effective January 1, 2009, we
adopted this guidance. Adoption of these provisions did not have
a material impact on the Companys consolidated financial
statements.
In April 2009, the FASB issued new accounting guidance on fair
value measurements. The new guidance impacts certain aspects of
fair value measurement and related disclosures. The new guidance
was effective beginning in the second quarter of 2009. The
impact of adopting this new guidance did not have a material
effect on the Companys consolidated results of operations
or financial position.
In May 2009, the FASB issued new accounting guidance related to
the accounting and disclosures of subsequent events. This
guidance incorporates the subsequent events guidance contained
in the auditing standards literature into authoritative
accounting literature. It also requires entities to disclose the
date through which they have evaluated subsequent events and
whether the date corresponds with the release of their financial
statements. This guidance is effective for all interim and
annual periods ending after June 15, 2009. We adopted this
guidance upon its issuance and it had no material impact on our
consolidated financial statements.
In June 2009, the FASB issued new accounting guidance related to
the accounting and disclosures for transfers of financial
assets. This guidance requires entities to provide more
information about sales of securitized financial assets and
similar transactions, particularly if the seller retains some
risk with respect to the assets. This guidance is effective for
fiscal years beginning after November 15, 2009. The Company
adopted this guidance on January 1, 2010 and it did not
have a material impact on the consolidated financial statements.
In June 2009, the FASB issued new accounting guidance to improve
financial reporting by companies involved with variable interest
entities and to provide more relevant and reliable information
to users of financial statements. This guidance is effective for
fiscal years beginning after November 15, 2009. We are
currently evaluating the impact that the adoption of this
guidance will have on our consolidated financial statements.
In June 2009, the FASB issued new accounting guidance entitled,
The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162 (ASC), which identifies the
sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity
with GAAP. This new guidance is effective for financial
statements issued for interim and annual periods ending after
September 15, 2009 and was adopted by the Company during
the third quarter of 2009. The adoption of this guidance has
changed how we reference various elements of GAAP when preparing
our financial statement disclosures, but did not have an impact
on the Companys consolidated financial statements.
F-10
In September 2009, the accounting standard regarding
arrangements that include software elements was updated to
require tangible products that contain software and non-software
elements that work together to deliver the products essential
functionality to be evaluated under the accounting standard
regarding multiple deliverable arrangements. This standard
update must be adopted no later than January 1, 2011 and
may be adopted prospectively for revenue arrangements entered
into or materially modified after the date of adoption or
retrospectively for all revenue arrangements for all periods
presented. We are currently evaluating the impact this new
standard update will have on our consolidated financial
statements.
In October 2009, the accounting standard regarding multiple
deliverable arrangements was updated to require the use of the
relative selling price method when allocating revenue in these
types of arrangements. This method allows a vendor to use its
best estimate of selling price if neither vendor specific
objective evidence nor third party evidence of selling price
exists when evaluating multiple deliverable arrangements. This
standard update must be adopted no later than January 1,
2011 and may be adopted prospectively for revenue arrangements
entered into or materially modified after the date of adoption
or retrospectively for all revenue arrangements for all periods
presented. We are currently evaluating the impact this standard
update will have on our consolidated financial statements.
In January 2010, the FASB issued new guidance regarding
improving disclosures about fair value measurements. The
guidance requires new disclosures related to transfers in and
out of Level 1 and Level 2 as well as activity in
Level 3 fair value measurements. The guidance also provides
clarification to existing disclosures. The new disclosures and
clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. Our
effective date for the new disclosures and clarifications is the
quarter ending March 31, 2010. Our effective date for the
disclosures about purchases, sales, issuances, and settlements
in the roll forward of activity in Level 3 fair value
measurements is January 1, 2011. When effective, we will
comply with the disclosure provisions of this new guidance.
Fixed assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Furniture and fixtures
|
|
$
|
47
|
|
|
$
|
47
|
|
Laboratory equipment
|
|
|
508
|
|
|
|
508
|
|
Computer and communications equipment
|
|
|
261
|
|
|
|
261
|
|
Design and tooling
|
|
|
1,204
|
|
|
|
1,019
|
|
Machinery and equipment
|
|
|
777
|
|
|
|
777
|
|
Construction in progress
|
|
|
399
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,196
|
|
|
|
3,011
|
|
Less accumulated depreciation and amortization
|
|
|
(1,350
|
)
|
|
|
(971
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,846
|
|
|
$
|
2,040
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2009 and 2008,
depreciation expense was $379,000 and $229,000, respectively.
The Company did not allocate any of the depreciation expense of
the machinery and equipment or the design and tooling into
inventory as very little of the time was spent manufacturing.
This depreciation was included as a selling, general and
administrative expense as excess idle time. Due to the financial
condition of the Company, property and equipment was tested to
determine if an impairment was required at December 31,
2009. The Company determined no impairment was necessary.
During the second quarter of 2009, a supplier filed suit against
CCI alleging that the Company owes it approximately $377,000.
This supplier had previously placed a lien on all of the
Companys machinery and equipment. See
Note 11-Commitments and Contingencies for additional
information regarding this claim.
F-11
|
|
Note 4.
|
Licenses,
Patents, and Technology
|
|
Licenses, patents, and technology include the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Licenses
|
|
$
|
220
|
|
|
$
|
159
|
|
Patent costs
|
|
|
133
|
|
|
|
133
|
|
LabCorp Technology Agreement
|
|
|
260
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
613
|
|
|
|
552
|
|
Less accumulated amortization
|
|
|
(551
|
)
|
|
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
During 2008, the Company purchased a license for certain
technology for a total of $200,000, of which $100,000 was paid
upon signing the license agreement, and the balance of which was
due in 18 equal monthly installments of $5,556. There were no
payments remaining as of December 31, 2009. In addition,
CCI is obligated to make future payments totaling $100,000 upon
obtaining certain milestones. The Company is amortizing this
license over its estimated useful life of two years. CCI
recorded $100,000 and $58,000 as amortization expense during the
years ending December 31, 2009 and 2008, respectively. All
patents and technology have been fully amortized.
Accrued expenses include the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued interest
|
|
$
|
363
|
|
|
$
|
357
|
|
Reserve for legal settlement
|
|
|
220
|
|
|
|
|
|
Accrued taxes
|
|
|
214
|
|
|
|
102
|
|
Accrued compensation
|
|
|
40
|
|
|
|
241
|
|
Other accrued expenses
|
|
|
388
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,225
|
|
|
$
|
1,041
|
|
|
|
|
|
|
|
|
|
|
Notes payable at December 31 consist of:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Xillix Technologies Corporation, $361,000 Promissory Note issued
June 26, 1998; interest rate Canadian Prime plus 6% per
annum; represents a debt of AccuMed; due December 27, 1999
|
|
|
34
|
|
|
|
34
|
|
Robert Shaw, $25,000 Promissory Note issued September 20,
2001; interest rate 9% per annum
|
|
|
15
|
|
|
|
15
|
|
Ventana Medical Systems, Inc., $62,946 Promissory Note issued
November 30, 2003; due December 31, 2003; interest at
8% per annum payable after December 31, 2003
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70
|
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
The Company has failed to make principal and interest payments
when due and is in breach of certain warranties and
representations under certain of the notes included above. Such
notes require the holder to notify CCI in writing of a
declaration of default at which time a cure period, as specified
in each individual note, would commence. CCI has not received
any written declarations of default from holders of its
remaining outstanding notes payable.
F-12
|
|
Note 7.
|
Stockholders
Equity
|
Earnings
(loss) per share
A reconciliation of the numerator and the denominator used in
the calculation of earnings (loss) per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders (in thousands)
|
|
|
(3,552
|
)
|
|
$
|
(6,328
|
)
|
Weighted average common shares outstanding
|
|
|
41,874,890
|
|
|
|
39,984,394
|
|
Net loss per common share
|
|
$
|
(.08
|
)
|
|
$
|
(.16
|
)
|
|
|
|
|
|
|
|
|
|
Stock options and warrants to purchase 3,471,197 and
5,546,339 shares and preferred stock convertible into
522,045 and 493,628 shares for the years ended
December 31, 2009 and 2008, respectively, were not included
in the computation of diluted loss per share applicable to
common stockholders, as they are anti-dilutive as a result of
net losses for the years ended December 31, 2009 and 2008,
respectively.
Preferred
Stock
A summary of the Companys preferred stock as of December
31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued &
|
|
Shares Issued &
|
|
|
|
|
Outstanding
|
|
Outstanding
|
Offering
|
|
Shares Authorized
|
|
2009
|
|
2008
|
|
Series A convertible
|
|
|
590,197
|
|
|
|
47,250
|
|
|
|
47,250
|
|
Series B convertible, 10% cumulative
|
|
|
1,500,000
|
|
|
|
93,750
|
|
|
|
93,750
|
|
Series C convertible, 10% cumulative
|
|
|
1,666,666
|
|
|
|
38,333
|
|
|
|
38,333
|
|
Series D convertible, 10% cumulative
|
|
|
300,000
|
|
|
|
175,000
|
|
|
|
175,000
|
|
Series E convertible, 10% cumulative
|
|
|
800,000
|
|
|
|
19,222
|
|
|
|
19,226
|
|
Undesignated Preferred Series
|
|
|
5,143,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Preferred Stock
|
|
|
10,000,000
|
|
|
|
373,555
|
|
|
|
373,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
of Preferred Stock Terms
Series A Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$4.50 per share
|
Conversion Price:
|
|
$103.034 per share
|
Conversion Rate:
|
|
0.04367 Liquidation Value divided by Conversion
Price ($4.50/$103.034)
|
Voting Rights:
|
|
None
|
Dividends:
|
|
None
|
Conversion Period:
|
|
Any time
|
Series B Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$4.00 per share
|
Conversion Price:
|
|
$10.00 per share
|
Conversion Rate:
|
|
0.40 Liquidation Value divided by Conversion Price
($4.00/$10.00)
|
Voting Rights:
|
|
None
|
Dividends:
|
|
10% Quarterly Commencing March 31, 2001
|
Conversion Period:
|
|
Any time
|
Cumulative dividends in arrears at December 31, 2009 were
$332,000
F-13
Series C
Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$3.00 per share
|
Conversion Price:
|
|
$6.00 per share
|
Conversion Rate:
|
|
0.50 Liquidation Value divided by Conversion Price
($3.00/$6.00)
|
Voting Rights:
|
|
None
|
Dividends:
|
|
10% Quarterly Commencing March 31, 2002
|
Conversion Period:
|
|
Any time
|
Cumulative dividends in arrears at December 31, 2009 were
$94,000
Series D
Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$10.00 per share
|
Conversion Price:
|
|
$10.00 per share
|
Conversion Rate:
|
|
1.00 Liquidation Value divided by Conversion Price
($10.00/$10.00)
|
Voting Rights:
|
|
None
|
Dividends:
|
|
10% Quarterly Commencing April 30, 2002
|
Conversion Period:
|
|
Any time
|
Cumulative dividends in arrears at December 31, 2009 were
$1,430,000
Series E
Convertible Preferred Stock
|
|
|
Liquidation Value:
|
|
$22.00 per share
|
Conversion Price:
|
|
$8.00 per share
|
Conversion Rate:
|
|
2.75 Liquidation Value divided by Conversion Price
($22.00/$8.00)
|
Voting Rights:
|
|
Equal in all respects to holders of common shares
|
Dividends:
|
|
10% Quarterly Commencing May 31, 2002
|
Conversion Period:
|
|
Any time
|
Cumulative dividends in arrears at December 31, 2009 were
$349,000
Issuance
of Securities
Common
Stock
On March 23, 2009, the Company offered to all holders of
warrants to purchase shares of the Companys common stock
the option to exercise their warrants at a reduced exercise
price of $0.25 per share. During the year ended
December 31, 2009, the Company received gross proceeds of
$214,000 from the exercise of warrants for an aggregate
854,371 shares of unregistered, restricted common stock in
connection with its offer. In addition, our former Chairman of
the Board of Directors and our Chief Executive Officer exercised
warrants to purchase an aggregate 670,000 share of
unregistered restricted common stock through the reduction of
$168,000 of debt. CCI recorded a charge of $21,000 related to
this warrant modification and recorded the amount as interest
expense. In addition, holders of warrants to purchase 28,292
shares exercised their warrants at the original exercise price.
CCI received approximately $56,000 from these exercises.
For the year ended December 31, 2009, CCI received proceeds
totaling $270,000 and reduced its debt by $168,000 from the
exercise of warrants to purchase an aggregate
1,552,663 shares of unregistered, restricted common stock.
As of December 31, 2009, 683,049 shares were not yet
issued by the transfer agent.
During the year ended December 31, 2009, Board of Directors
voted to accept, in lieu of payment for director fees amounting
to $311,000 due to them, 778,194 shares of restricted,
unregistered common stock. The common stock was valued at a fair
value of $0.40 per share. The shares have not yet been issued by
the transfer agent.
F-14
In the first quarter of the 2009 fiscal year, as described in
Note 8 below, the Company issued to two of its executive
officers an aggregate 61,144 shares of restricted,
unregistered common stock valued at $0.50 per share as
compensation for services rendered in 2008. The shares were
valued at $31,000, and such amount was recorded as compensation
in 2008.
Also, the Board of Directors granted each director a bonus of
100,000 shares of restricted, unregistered common stock for
services rendered. The shares granted totaled 700,000 and were
valued at $0.40 per share. The Company recorded a charge of
$280,000 as a selling, general and administrative expense. Such,
shares have not yet been issued by the transfer agent.
CCI also issued 16,129 shares of unregistered, restricted
common stock to a consultant and were valued at $0.31 per share.
The Company recorded a charge of $5,000 as a selling, general
and administrative expense.
During 2008, the Company offered units in a private placement to
accredited investors in exchange for cash. Each unit consisted
of two shares of common stock and a warrant to purchase one
share of common stock at an exercise price of $2.00 per share.
These warrants are for a term of three years and are exercisable
immediately. Each unit was priced at $4.00. CCI received
proceeds totaling approximately $8,976,000, net of expenses of
$405,000 from the sale of an aggregate 2,345,250 units. The
Company issued a total of 4,690,500 shares of common stock
and warrants to purchase an aggregate 2,345,250 shares of
common stock. In addition, the Company issued warrants to
purchase an aggregate 311,500 shares of common stock to the
placement agent that assisted the Company with the unit
offering. The placement agent warrants have an exercise price of
$2.25 per share and are exercisable for three years.
Also during 2008, the Company received gross proceeds of
$242,000 from the exercise of warrants for 232,484 shares
of unregistered, restricted common stock. Of the
232,484 shares exercised, warrants with respect to
195,192 shares were exercised by an affiliate of one of the
Companys directors. Payment of the exercise price for
these warrants was made in part through tendering to the Company
stock appreciation rights with a value of $180,000 owed by CCI
to the affiliate. In addition, another affiliate of the same
director exercised a warrant to purchase 154,808 shares of
common stock under a cashless exercise option. As a result, it
received 68,804 shares of common stock.
During 2008, CCI issued an aggregate 140,000 shares of
restricted, unregistered common stock valued at $1.78 per share
to its non-employee directors as payment for services rendered
in 2007. The Company previously recorded the value of the common
stock as non-cash compensation in 2007. CCI also issued
4,868 shares of unregistered restricted common stock to a
non-affiliated consultant at a fair value of $12,000 as payment
for services rendered. In addition, during the first quarter of
2008 CCI granted to each of its Chief Executive Officer and its
Chief Operating Officer an award of 100,000 shares of
restricted, unregistered common stock for services rendered in
2007. CCI recorded the value of such shares as a non-cash
compensation expense in 2007.
Warrants
During 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.
During 2008, the Company issued warrants to a company affiliated
with the former Chairman of the Board of Directors under the
terms of a consulting agreement. The warrants, which are
exercisable immediately, entitle the recipient to purchase
10,000 shares of common stock at $2.06 per share and have a
term of three years. CCI valued the warrants at $16,000 using
the Black-Scholes valuation model and recorded the amount as a
selling, general and administrative expense. In addition, CCI
issued warrants to non-affiliated consultants to purchase an
aggregate 11,428 shares of common stock with exercise
prices ranging from $2.06 to $2.85 per share. CCI valued these
warrants at $21,000 and recorded the amount as a selling,
general and administrative expense.
F-15
During the year ended December 31, 2008, the Company issued
warrants in payment for services to purchase an aggregate
21,428 shares of common stock with exercise prices ranging
from $2.06 to $2.85 per share. The warrants are for a term of
three years and are exercisable immediately. CCI valued the
warrants at $37,000.
As noted above, the Company also issued warrants during the 2008
fiscal year to purchase an aggregate 2,345,250 shares to
participants in its unit financing and warrants to purchase an
aggregate 311,500 shares of common stock to the placement
agent that assisted the Company with such offering. All of these
warrants are exercisable for three years; the warrants issued to
investors have an exercise price of $2.00 per share and the
warrants issued to the placement agent have an exercise price of
$2.25 per share.
During 2008, the Company also issued warrants to purchase
10,000 shares of common stock with an exercise price of
$2.06 per share to its Chief Executive Officer under the terms
of his employment agreement. CCI valued the warrants at $16,000
using the Black-Scholes valuation model and recorded the amount
as a selling, general and administrative expense. The warrants
had a term of three years and were immediately exercisable.
In addition, the Company issued warrants to purchase an
aggregate 50,000 shares of common stock with exercise
prices ranging from $0.17 to $3.25 per share to employees. CCI
valued the warrants at $71,000 using the Black-Scholes valuation
model and recorded the amount as non-cash compensation expense
in selling, general and administrative expense. The employee
warrants have a term of three years and are immediately
exercisable.
Conversions
of Preferred Stock
During the year ended December 31, 2009, a holder of four
shares of Series E Convertible Preferred Stock of CCI
elected to convert such preferred shares and accrued and unpaid
dividends thereon into 20 unregistered shares of the
Companys common stock. Dividends on these preferred shares
were $7.00.
During 2008, a holder of 28,736 shares of Series B
Convertible Preferred Stock elected to convert its preferred
shares and accrued and unpaid dividends into 19,786 unregistered
shares of the Companys common stock, and holders of an
aggregate 977 shares of Series E Convertible Preferred
Stock elected to convert such preferred shares and accrued and
unpaid dividends thereon into an aggregate 4,305 unregistered
shares of the Companys common stock. Dividends paid in
common stock on these preferred shares were $58,000 for the 2008
fiscal year.
Application
of Black-Scholes Valuation Model
In applying the Black-Scholes valuation model, the Company used
the following assumptions for the years ended December 31:
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Expected volatility
|
|
171% 250%
|
|
125% 132%
|
Expected term (years)
|
|
11/2
|
|
11/2
|
Risk-free interest rate
|
|
1.00%
|
|
4.25%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Forfeiture rate
|
|
0%
|
|
0%
|
Resulting weighted average grant date fair value
|
|
$0.16
|
|
$1.49
|
Expected volatility is based solely on historical volatility of
our common stock over the period commensurate with the expected
term of the warrants or stock options. The expected term
calculation is based upon the expected term the warrant or
option is to be held, which in most cases is one-half of the
term of the warrant or option. The risk-free interest rate is
based upon the U.S. Treasury yield in effect at the time of
grant for an instrument with a maturity that is commensurate
with the expected term of the stock options. The dividend yield
of zero is based on the fact that we have never paid cash
dividends on our common stock and we have no present intention
to pay cash dividends.
F-16
Warrants
At December 31, 2009, the Company had the following
outstanding warrants to purchase shares of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrant
|
|
Warrant Shares
|
|
Exercise Price
|
|
Weighted Average
|
|
|
Shares Outstanding
|
|
Exercisable
|
|
(not Weighted)
|
|
Years Until Expiration
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
$
|
0.06
|
|
|
|
2.94
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
$
|
0.09
|
|
|
|
2.62
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
$
|
0.17
|
|
|
|
1.86
|
|
|
|
|
9,000
|
|
|
|
9,000
|
|
|
$
|
0.20
|
|
|
|
2.39
|
|
|
|
|
7,000
|
|
|
|
7,000
|
|
|
$
|
0.61
|
|
|
|
1.68
|
|
|
|
|
63,333
|
|
|
|
63,333
|
|
|
$
|
1.00
|
|
|
|
0.56
|
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
$
|
1.33
|
|
|
|
1.00
|
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
$
|
1.45
|
|
|
|
1.33
|
|
|
|
|
490,833
|
|
|
|
490,833
|
|
|
$
|
1.50
|
|
|
|
1.32
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
$
|
1.60
|
|
|
|
0.62
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
$
|
1.66
|
|
|
|
0.62
|
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
$
|
1.70
|
|
|
|
1.25
|
|
|
|
|
240,595
|
|
|
|
240,595
|
|
|
$
|
1.80
|
|
|
|
1.92
|
|
|
|
|
27,000
|
|
|
|
27,000
|
|
|
$
|
1.89
|
|
|
|
1.17
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
$
|
1.90
|
|
|
|
1.43
|
|
|
|
|
2,190,167
|
|
|
|
2,190,167
|
|
|
$
|
2.00
|
|
|
|
1.29
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
$
|
2.23
|
|
|
|
1.25
|
|
|
|
|
283,266
|
|
|
|
283,266
|
|
|
$
|
2.25
|
|
|
|
1.29
|
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
$
|
2.67
|
|
|
|
0.49
|
|
|
|
|
64,000
|
|
|
|
64,000
|
|
|
$
|
2.87
|
|
|
|
0.30
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
$
|
3.25
|
|
|
|
1.25
|
|
|
|
|
10,003
|
|
|
|
10,003
|
|
|
$
|
3.50
|
|
|
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,461,197
|
|
|
|
3,461,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8.
|
Equity
Incentive Plan and Employee Stock Purchase Plan
|
On May 25, 1999, CCI stockholders approved the
establishment of the 1999 Equity Incentive Plan effective as of
June 1, 1999 (the Plan). The Plan provided that
the Board may grant various forms of equity incentives to
directors and employees, including but not limited to Incentive
Stock Options, Non-Qualified Stock Options, Stock Appreciation
Rights, and Restricted Stock Awards. Grants under the Plan are
exercisable at fair market value determined as of the date of
grant in accordance with the terms of the Plan. Grants vest to
recipients immediately or ratably over periods ranging from two
to five years, and expire five to ten years from the date of
grant.
On May 23, 2000, stockholders approved an amendment to the
Plan, which increased the number of shares of common stock
allocated for use in the Plan from 200,000 shares to
300,000 shares. On June 21, 2002, stockholders
approved a second amendment to the Plan, which increased the
number of shares allocated for use in the Plan from
300,000 shares to 550,000 shares. On July 29,
2004, stockholders approved a third amendment to the Plan, which
increased the number of shares for use in the Plan from 550,000
to 2,000,000 shares. The Plan terminated in June 2009.
The Board of Directors has also granted options and warrants to
purchase common stock of CCI that are not covered by the terms
of the Plan.
For the years ended December 31, 2009 and 2008, the Company
did not grant any options under the Plan or otherwise.
F-17
However, during the quarter ended March 31, 2009,
CCIs Chief Executive Officer and Chief Operating Officer
elected to receive a portion of their compensation, totaling
39,459 and 21,685 shares respectively, in restricted,
unregistered common stock for services rendered in 2008. CCI
valued the common stock at $0.50 per share for an aggregate
total of $31,000 using the fair value method and recorded such
value as compensation expense in 2008.
During the quarter ended June 30, 2009, our former Chairman
of the Board of Directors and our Chief Executive Officer
exercised warrants to purchase an aggregate 670,000 shares
of unregistered, restricted common stock at a modified price of
$0.25 through the reduction of $168,000 of debt. CCI recorded a
charge of $15,000 related to this warrant modification and
recorded the amount as interest expense for the three months
ended June 30, 2009.
During 2008, the Company issued warrants to purchase
10,000 shares of common stock with an exercise price of
$2.06 per share to its Chief Executive Officer under the terms
of his employment agreement. CCI valued the warrants at $16,000
using the Black-Scholes valuation model and recorded the amount
as non-cash compensation expense in selling, general and
administrative expense. The warrants have a term of three years
and are immediately exercisable.
Also in 2008, the Company issued to non-executive employees
warrants to purchase an aggregate 50,000 shares of common
stock with exercise prices of $0.17 and $3.25 per share. The
Company valued these warrants at $71,000 using the Black-Scholes
valuation model. The warrants have a term of three years and are
immediately exercisable.
The fair value of each stock option and warrant award was
determined as of the date of grant using the Black-Scholes
option-pricing model with the following assumptions in each of
the years ended December 31:
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Expected volatility
|
|
171% 250%
|
|
125% 132%
|
Expected term (years)
|
|
11/2
|
|
11/2
2
|
Risk-free interest rate
|
|
1.00%
|
|
4.25
|
Expected dividend yield
|
|
0%
|
|
0%
|
Forfeiture rate
|
|
0%
|
|
0%
|
Resulting weighted average grant date fair value
|
|
$0.16
|
|
$1.49
|
Expected volatility is based solely on historical volatility of
our common stock over the period commensurate with the expected
term of the warrants or stock options. The expected term
calculation is based upon the expected term the warrant or
option is to be held, which in most cases is one-half of the
term of the warrant or option. The risk-free interest rate is
based upon the U.S. Treasury yield in effect at the time of
grant for an instrument with a maturity that is commensurate
with the expected term of the stock options. The dividend yield
of zero is based on the fact that we have never paid cash
dividends on our common stock and we have no present intention
to pay cash dividends.
As of December 31, 2009, there were no unrecognized
compensation costs related to unvested share-based compensation
arrangements since all costs related to grants in 2009 or
previous years were fully recognized as of December 31,
2009.
F-18
A summary of the Companys stock option activity and
related information follows:
1999
Stock Option Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted Average
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual Life
|
|
|
Options
|
|
Price
|
|
Value
|
|
(Years)
|
|
Outstanding at December 31, 2007
|
|
|
160,786
|
|
|
$
|
3.050
|
|
|
$
|
0.00
|
|
|
|
1.01
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(50,000
|
)
|
|
$
|
3.220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
110,786
|
|
|
$
|
2.974
|
|
|
$
|
0.00
|
|
|
|
0.15
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(100,786
|
)
|
|
$
|
2.000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
10,000
|
|
|
$
|
11.940
|
|
|
$
|
0.00
|
|
|
|
1.42
|
|
Warrants
and options issued outside of the Plan for employee
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted Average
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
Options and
|
|
Exercise
|
|
Intrinsic
|
|
Contractual Life
|
|
|
Warrants
|
|
Price
|
|
Value
|
|
(Years)
|
|
Outstanding at December 31, 2007
|
|
|
1,305,000
|
|
|
$
|
1.82
|
|
|
$
|
299,000
|
|
|
|
|
|
Granted
|
|
|
79,000
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
1,384,000
|
|
|
$
|
1.80
|
|
|
$
|
7,000
|
|
|
|
|
|
Granted
|
|
|
13,000
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(595,000
|
)
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
802,000
|
|
|
$
|
2.05
|
|
|
|
|
|
|
|
|
|
At the Annual Meeting of Stockholders on May 25, 1999, CCI
stockholders also approved the 1999 Employee Stock Purchase Plan
(the Purchase Plan). The Purchase Plan offered
employees the opportunity to purchase shares of common stock of
CCI through a payroll deduction plan at 85% of the fair market
value of such shares at specified enrollment measurement dates.
The Purchase Plan terminated during the second quarter of 2009.
There was no activity in the Purchase Plan in 2009 or 2008.
Stock
Appreciation Rights
During 2008, the holder of 45,000 stock appreciation rights
(SARs) tendered the debt to the Company totaling
$180,000 as payment for part of an exercise of warrants to
purchase common stock. These SARs, issued in 1989, had an
exercise price of $3.00 and could be exercised through
November 20, 2001. These SARs were deemed automatically
exercised on November 20, 2001 if not done so at the option
of the holder. In general, each SAR entitled the holder to
receive upon exercise an amount equal to the excess, if any, of
the market value per share of common stock at the date of
exercise over the exercise price of the SAR, plus any dividends
or distributions per share made by CCI prior to the exercise
date.
F-19
During the year ended December 31, 2008, the Company
amended its current facilities lease. CCI moved its
administrative and sales operations to Suite 510 from
Suite 502 in the same location, thereby increasing its
leased space by approximately 3,100 square feet to
5,627 square feet. The amended lease is for a term of five
years terminating on October 31, 2013, with one option to
terminate the lease with nine months notice on October 31,
2011. The amended lease provides for initial annual rental
payments of approximately $127,000, increasing each year to
reach $150,000 in the final year of the lease. Total rental
expense related to the Companys headquarters location
during the years ended December 31, 2009 and 2008 was
$133,000 and $136,000, respectively.
Future minimum annual lease payments under these leases as of
December 31, 2008 are:
|
|
|
|
|
|
|
Operating
|
|
Year
|
|
Leases
|
|
|
2010
|
|
$
|
137
|
|
2011
|
|
|
141
|
|
2012
|
|
|
145
|
|
2013
|
|
|
124
|
|
2014
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
547
|
|
|
|
|
|
|
The provision for income taxes consists of the following for the
years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2009 and 2008, the
provision for income taxes differs from the expected tax
provision computed by applying the U.S. federal statutory
rate to income before taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Statutory U.S. federal rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Permanent differences
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Provision for income tax expense(benefit)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
F-20
The significant components of the Companys deferred tax
assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
29,500
|
|
|
$
|
28,307
|
|
Non-cash compensation
|
|
|
156
|
|
|
|
391
|
|
Writedown of intangibles
|
|
|
(9
|
)
|
|
|
21
|
|
Provision for inventory adjustment
|
|
|
(100
|
)
|
|
|
|
|
Accrued Liabilities
|
|
|
23
|
|
|
|
188
|
|
Allowance and reserves
|
|
|
5
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets
|
|
|
29,575
|
|
|
|
28,909
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
|
29,575
|
|
|
|
28,909
|
|
Valuation Allowance
|
|
|
(29,575
|
)
|
|
|
(28,909
|
)
|
Net Deferred Tax Asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, CytoCore had net operating
loss carry forwards for U.S. federal income tax of
approximately $73.3 million and $71.7 million and
state income tax of approximately $83.0 million and
$81.2 million respectively, which will begin to expire in
2018 and 2017, respectively. In September 2001, the Company
acquired 100% of the outstanding stock of AccMed International,
Inc. by means of merger of AccuMed into a wholly-owned
subsidiary of the Company. AccuMed had a net operating loss
carry forward for U.S. federal income tax purposes. For
federal tax purposes, the acquired NOL is subject to limitation
as prescribed under IRC Section 382 to approximately
$6.2 million. The net operating loss carry forward expires
at approximately $415,000 per year, starting December 31,
2006. At December 31, 2009, the total net operating loss
carry forward from AccuMed is approximately $4.6 million.
For financial reporting purposes, the entire amount of deferred
tax assets related principally to the net operating loss carry
forwards has been offset by a valuation allowance due to
uncertainty regarding the realization of the assets. The
valuation allowance increased by approximately $0.7 million
and decreased $1.5 million for the years ended
December 31, 2009 and 2008, respectively.
Tax
Uncertainties
Effective January 1, 2007, the Company adopted the
provisions of FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109. The
interpretation prescribes recognition and measurement parameters
for the financial statement recognition and measurement of tax
positions taken or expected to be taken in the Companys
tax return. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by
taxing authorities. The amount recognized is measured as the
largest amount of benefit that has a greater than
50 percent likelihood of being realized upon ultimate
settlement.
Pursuant to FIN 48, the Company has analyzed filing
positions in all of the federal and state jurisdictions where it
is required to file income tax returns, as well as open tax
years in these jurisdictions. The periods subject to examination
for the Companys tax returns are for the years from 2003
to 2008. The Company believes that its income tax filing
positions and deductions would be sustained on audit and does
not anticipate any adjustments that would result in a material
change to its financial position. Therefore, no reserves for
uncertain income tax positions have been recorded consequently,
the Company did not record a cumulative effect adjustment. The
Company has not yet filed its 2008 income tax returns.
F-21
The following table summarizes the activity related to the
Companys gross unrecognized tax benefits (in millions):
|
|
|
|
|
|
|
Amount
|
|
|
Gross Unrecognized tax benefits at December 31, 2008
|
|
$
|
|
|
Increases in tax positions for current year
|
|
|
|
|
Settlements
|
|
|
|
|
Lapse in statute of limitations
|
|
|
|
|
|
|
|
|
|
Gross Unrecognized tax benefits at December 31, 2009
|
|
$
|
|
|
|
|
|
|
|
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 Companys accounting policy is to recognize interest
and penalties related to uncertain tax positions in income tax
expense. The Company has not accrued interest for any periods.
|
|
Note 11.
|
Commitments
and contingencies
|
Legal
Proceedings
Settled
in 2010
NeoMed Innovation III L.P. In October
2007, NeoMed Innovation III L.P. (NeoMed) filed
suit against the Company in the United State District Court,
Eastern District of Illinois (Case No. 07C 5721). NeoMed
alleged that the Company breached a contract with NeoMed. The
alleged contract provided among other things that the Company
would exchange two existing notes for a new note in the
principal amount of $1,110,000 with an interest rate of 12%,
payable on July 31, 2003 at the option of the holder in the
form of common stock valued at $1.50 (adjusted for stock splits
and equity raised at lower valuations). In 2006, the Company
paid to NeoMed $1,060,000 and accrued interest calculated at 7%
totaling $318,913. Despite accepting this payment, NeoMed
demanded that the Company honor the alleged contract.
In April 2009, the Company entered into a tentative settlement
agreement with NeoMed. The terms of the agreement provided that
the Company would issue to NeoMed 2,658,800 shares of
restricted, unregistered common stock and a warrant to purchase
217,000 shares of restricted unregistered common stock at
an exercise price of $0.50 per share. As a result of the
tentative settlement, the Company made an additional provision
totaling $948,000, which was charged to other expense in the
first quarter of 2009. In February 2010, the settlement
agreement was approved by the court and CCI issued
2,658,800 shares of restricted unregistered common stock
and a warrant to purchase 217,000 shares of restricted
unregistered common stock to NeoMed. The warrant has a term of
three years and is exercisable immediately. As a result of the
settlement becoming final, CCI reduced the $948,000 provision to
$222,000 in the fourth quarter. The $726,000 credit was applied
to other expense in the fourth quarter.
Pending
as of December 31, 2009
MedPlast Elkhorn, Inc. In May 2009, MedPlast
Elkhorn, Inc. (MedPlast) filed suit against the
Company in the Circuit Court, Walworth County, Wisconsin (Case
No. 09 CV00721). MedPlast alleges that the Company has
failed to pay for certain tools and materials used in the
manufacturing of the Companys products. MedPlast is asking
for payment of $377,000. The Company believes that it has made
adequate provision for any obligation to MedPlast.
Wildman, Harrold, Allen & Dixon
LLP. In November 2009, Wildman, Harrold,
Allen & Dixon (Wildman) filed suit against
the Company in the Circuit Court of Cook County Illinois (Case
No. 2009-L-013902).
Wildman alleged that the Company failed to pay for legal
services in the amount of $41,407. In January 2010, the Company
entered into a Confession of Judgment and a payment plan with
Wildman. The payment plan provides for an initial payment of
$5,000 in January 2010, two payments of $1,500 each in February
and March 2010, two payments of $2,500 each in April and May
2010, two payments of $4,000 each in June and July 2010, one
payment of $10,203 in
F-22
August 2010 and a final payment of $10,203 in September 2010.
The Company has made all of the required payments to date.
Securities
and Exchange Commission Subpoenas
SEC action. The Company received subpoenas
dated June 29, 2009, July 24, 2009 and March 2,
2010 (the Subpoenas) from the Securities and
Exchange Commission (the Commission). The Subpoenas
request documents pertinent to the Companys procedures to
raise equity in 2008 and 2009, as well as personal information
including trading records of insiders and certain other
documents relating to the Companys operations. CCI has
submitted to the Commission requested documents. The Company
does not know what, if any, action the Commission intends to
take at this time.
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.
In 2009, a vendor entered into a non-cash settlement releasing
the Company from an obligation totaling $457,000. The settlement
was recorded as a reduction in Research and Development expense
in the fourth quarter.
Commitments
The Company has entered into long term commitments with various
parties for the distribution of its products in foreign markets.
As a result of cash constraints experienced by the Company, the
Illinois Franchise Taxes due for the year 2009 have not been
paid. CCI believes that it has made adequate provision for the
liability including penalties and interest.
|
|
Note 12.
|
Related
Party Transactions
|
During the year ended December 31, 2009, the Company was
advanced $884,000 from related parties. Of these advances,
$121,000 was used to exercise warrants held by the lender in
lieu of the Company repaying that portion of the loan in cash.
This resulted in a remaining balance of $763,000 as of
December 31, 2009. These advance are payable upon demand
and are non-interest bearing.
Our Chief Executive Officer exercised warrants to purchase an
aggregate 485,000 shares of unregistered restricted common
stock at a modified price of $0.25 through the reduction of
$121,500 of debt. CCI recorded a charge of $15,000 related to
this warrant modification and recorded the amount as interest
expense.
In 2009, our former Chairman of the Board Daniel J. Burns
exercised warrants to purchase an aggregate 185,000 shares
of unregistered, restricted common stock at a modified price of
$0.25 through the reduction of $46,000 of debt owed by CCI to
him. This warrant modification was made available by the Company
to all holders of warrants to purchase shares of the common
stock of the Company.
During the year ended December 31, 2008, Mr. Burns was paid
directly $17,000 as reimbursement for income taxes incurred on a
common stock award made in 2006 and $23,000 as a reimbursement
for expenses. Also, Future Wave Management Inc., of which
Mr. Burns is President, was paid $181,000 for consulting
services and $25,000 for expenses. In addition, the Company
issued warrants to Future Wave under the terms of a consulting
agreement. The warrants, which are exercisable immediately,
entitle the recipient to purchase 10,000 shares of common
stock at $2.06 per share and have a term of three years. The
warrants were valued at $16,000.
During the first quarter of 2008, Mr. Burns participated 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. Burns invested $600,000 and
received 300,000 shares and warrants to purchase
150,000 shares of common stock.
During 2008, the Company paid to Erik Danielsen, who became a
director of the Company in September 2008, $25,000 under a
consulting agreement which terminated in March 2008.
F-23
|
|
Note 13.
|
Subsequent
Events
|
The Company has evaluated subsequent events through May 14,
2010, which is the date it issued its financial statements, and
concluded that the following subsequent events have occurred
that require recognition in the Financial Statements or
disclosure in the Notes to the Financial Statements.
In April 2010, the company received advances of $300,000 from a
related party to fund operations. These advances are
non-interest bearing and are due on demand.
F-24