Overview
CytoCore, Inc. (the “Company”, “we”, or “us”), formerly Molecular Diagnostics, Inc., is developing, and plans to sell, an integrated family of cost-effective products for the detection, diagnosis and treatment of cancer under the trade name of
CytoCore Solutions
®
.
CytoCore Solutions
products are intended to address sample collection, specimen preparation, specimen evaluation (including detection/screening and diagnosis), treatment and patient monitoring within vertical markets related to specific cancers.
Current
CytoCore Solutions
products are focused upon cervical and breast cancer.
We plan that this focus will later be expanded to include other gynecological cancers as well as bladder, lung, oral and anal cancers, among others.
Within each of these markets, we anticipate that the
CytoCore Solutions
products will be sold as individual value-added drop-in replacements for existing products and as integrated systems that improve the efficiency and effectiveness of clinical and laboratory operations.
Currently our only marketed 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 sample collection components of our
CytoCore Solutions
System. Products under development include SoftKit
®
, another sample collection device directed at ensuring female reproductive tract health; a sample collection device and associated assays for the assessment of breast cancer risk; a several biomarker-based assays for the detection and diagnosis of cancer; and our next generation specialized system for computer-assisted cytology.
We intend to market and sell these products worldwide.
We believe the
CytoCore Solutions
System will provide better detection and diagnosis of cancer and cancer-related diseases through improved specimen quality and accuracy of test results, both in terms of a lower incidence of false negatives and fewer inadequate collections of samples.
We also believe the system will expand the number of women who can be tested, thereby increasing detection and diagnosis rates.
Background
We were incorporated in Delaware in December 1998 as the successor to Bell National Corporation, a company incorporated in California in 1958. In December 1998, Bell National, which was then a shell corporation, acquired InPath, LLC, a development stage company engaged in the design and development of products used in screening for cervical and other types of cancer. For accounting purposes, the acquisition was treated as if InPath had acquired Bell National. However, Bell National continued as the legal entity and the registrant for Securities and Exchange Commission (“SEC”) filing purposes. Bell National merged into Ampersand Medical Corporation, its wholly-owned subsidiary, in May 1999 in order to change its state of incorporation to Delaware.
In September 2001, we acquired 100% of the outstanding stock of AccuMed International, Inc., by means of a merger of AccuMed into our wholly-owned subsidiary.
Shortly after the AccuMed merger, we changed our name to Molecular Diagnostics, Inc.
Subsequently, in June 2006, we changed our name to CytoCore, Inc.
Recent Developments
During 2013 and 2012, 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.
On January 11, 2014, the “Company entered into a Stock Purchase Agreement (the “
Purchase
Agreement”) with Medite Enterprises, Inc., a Florida corporation (“Medite”), Medite GMBH, a corporation organized under the laws of Germany and wholly owned by Medite (the “Subsidiary”), Michael Ott and Michaela Ott, the sole shareholders of the Company (collectively, the “Shareholders”).
Pursuant to the Agreement, the Company agreed to acquire 100% of the issued and outstanding capital stock of Medite from the Shareholders in exchange for the issuance of up to 1,500,000,000 shares of the Company’s common stock (the “Shares”) to the Shareholders. The Agreement also provides that the Shareholders will indemnify the Company for certain losses during the one year period following the closing. In connection with such indemnification rights, the Agreement provides that 375,000,000 of the Shares will be deposited with the Company and held for a period of 12 months to cover certain indemnification claims that the Company may have against the Shareholders.
Medite specializes in the development, manufacture and distribution of medical laboratory automation equipment and supplies for pathology, histology and cytology. Medite’s focus is on the development of medical devices for detection, risk assessment and diagnosis of cancer and related diseases.
Closing of the acquisition of Medite was conditioned upon: (i) the completion of a private placement transaction resulting in gross cash proceeds to the Company of $1.25 million (the “Private Placement”), and (ii) the conversion of certain accrued wages of the Company into shares of the Company’s common stock. In addition, as of the closing, there shall be no more than 1,875,000,000 shares of the Company’s common exclusive of any shares of the Company’s common stock issued in connection with the Private Placement.
On April 3, 2014, pursuant to the terms and conditions of the Purchase Agreement, as amended to date, the Company acquired 100% of the issued and outstanding capital stock of Medite in exchange for the issuance of up to 1,500,000,000 shares of the Company’s common stock to the Shareholders, of which 1,468,750,000 shares were issued upon the closing of the Acquisition. In the event that the Company issues less than $2,500,000 of shares of common stock in the Private Placement, the Company shall be required to issue up to an additional 31,250,000 shares of common stock to the Shareholders..
Also, the Company issued 69,723,439 shares of common stock for payment of certain accrued wages of the Company.
Upon closing of the Acquisition, the Company conducted an initial closing of the Private Placement. Pursuant to the Securities Purchase Agreement the Company issued 95,587,500 shares of common stock to accredited investors for an aggregate purchase price of $1,529,400.
Information About Industry Segments
We operate in one industry segment involving medical screening devices, diagnostics, and supplies. All of our operations during the reporting period were conducted and managed within this segment, with a single management team that reports directly to our Chief Executive Officer. For information on revenues, profit or loss and total assets, among other financial data, attributable to our operations, see the consolidated financial statements included herein.
Description of Business
We plan to sell an integrated family of cost-effective products for the detection and diagnosis 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), and patient monitoring within vertical markets related to specific cancers.
Current
CytoCore Solutions
products are focused upon cervical and breast cancer.
We expect that this focus will later be expanded to include other gynecological cancers as well as bladder, lung, oral and anal cancers, among others.
Within each of these markets, we anticipate that the
CytoCore Solutions
products will be sold as individual value-added drop-in replacements for existing products and as integrated systems that improve the efficiency and effectiveness of clinical and laboratory operations.
Total revenue for the years ended December 31, 2013 and 2012 were $24,000 and $198,000, respectively.
Sales of the collection system for the detection of breast cancer totaled $10,000, or 42%, and $179,000, or 90% of total revenues in 2013 and 2012, respectively. License fee revenue totaled $14,000 or 58% in 2013 and $17,000, or 9% in 2012. Sales of our
SoftPaP
®
product accounted for revenue of $2,000, or 1%, of our revenue in 2012. There was no revenue from our
SoftPaP
®
in 2013.
Products
Cell Collection Devices
Clinical diagnostics laboratories analyze or otherwise evaluate 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, the collection of samples from specific tissues is one of our major focuses.
Cervix
We currently sell the
SoftPAP
device
for the collection of cervical cell samples that are used in the detection of cervical dysplasia, cancer and human papillomavirus (“HPV”) infections.
We believe that
SoftPAP
, which has been cleared by the Food and Drug Administration (‘FDA”) for sale in the United States and which is CE Marked for international distribution, is positioned as a premium value-added alternative to the spatula, broom and brush-style devices that have traditionally been used for these purposes.
Unlike these traditional devices,
SoftPAP
collects only exfoliated cells and does not scrape, cut or abrade the cervix.
This unique sample collection method has been shown in clinical trials to reduce the frequency of false negative and false positive results when the sample is evaluated by cytological methods to detect the presence of dysplasia and cancer.
A reduction in the false negative rate means that a greater percentage of patients who have cervical dysplasia, cancer or similar abnormalities are detected during cervical cancer screening (Pap testing) and can, therefore, be treated.
A reduced false positive rate means that fewer patients are falsely identified as having cervical dysplasia or cancer, thus sparing these patients the unnecessary stress, discomfort and expense of the additional testing needed to verify that dysplasia or cancer is actually present.
In addition, women have reported that having a cervical sample taken using
SoftPAP
is more comfortable than when a traditional device is used.
The present
SoftPAP
consists of a disposable collector and a reusable handle.
A low cost
SoftPAP
that combines the collector and handle into a completely disposable device and variants of
SoftPAP
for the collection of exfoliated cell samples from tissues other than the cervix are being designed.
SoftKit
is a low cost disposable device for the self collection of a sample that can be evaluated to provide an assessment of the health of the entire female genital tract.
We are in the final stages of developing
SoftKit
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 and additional indications such as sexually transmitted disease (“STD”) testing.
SoftKit
addresses a number of market niches and segments that are not addressed effectively by
SoftPAP
or traditional gynecological sampling devices.
We believe that
SoftKit
complements
SoftPAP
in the
CytoCore Solutions
family of products.
SoftKit
is designed to eliminate the need for assistance from a medical professional when collecting gynecological samples for many screening applications.
We believe that this feature, in addition to the range of tests that can be performed on a
SoftKit
sample and
SoftKit
’s low cost, makes
SoftKit
particularly attractive for use in large scale public health screening programs.
We are also investigating the use of
SoftKit
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.
Breast
Current methods for breast cancer screening primarily comprise manual palpitation of the breast and radiographic methods including classical radiography and mammography.
Regular manual self examination is recommended for all women and periodic breast cancer screening using radiography or mammography is recommended for all women over the age of 40.
These methods, however, are widely recognized as not providing the sensitivity needed in order to detect small early stage lesions and are adversely affected by the presence of high density breast tissue.
The high error rates associated with the use of imaging modalities such as mammography on women having dense breasts (dense breasts being common in women under the age of 40) has led to medical societies and health authorities recommending against the use of these imaging methods when screening a woman under the age of 40 for breast cancer.
Since the early 1990’s it has been known that nipple aspirate fluid (NAF) can be used as a sample in the assessment of a woman’s risk of developing breast cancer and that this method is applicable to the screening of women who have dense breasts.
We are presently developing an instrument for the automated collection of NAF in a convenient and non-invasive manner and assays for the cytological evaluation of these samples.
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 (“U.S.”), but despite the technical benefits of LBPs, only about 20% of the cervical cytology slides in the European Union and much lower percentages in the rest of the world are prepared in this manner.
The primary limitations to greater adoption of LBPs outside of the United States are the high equipment and ancillary supply costs associated with the two predominant LBP methods.
Cell Preservative
We are working with Medite, an international manufacturer and distributor of cytology and histology products, to utilize their cytology preservatives with
SoftPAP,
SoftKit and NAF cell collection devices as well as with several of our assays. We selected these preservatives for inclusion in our convenience kits due to both the technical performance of these preservatives in our applications; the compatibility of samples collected into these preservatives with automated specimen preparation systems such as those manufactured by Medite; and the ability to manually prepare specimen slides from cells in this preservative.
This last is particularly important in many markets outside of the U.S. where the high equipment and consumables costs incurred when using current automated methods are not affordable or justifiable.
We believe that this methodology provides a cost effective means for laboratories to transition from smears to high quality LBPs.
We intend to introduce convenience kits combining the preservative with our cell collection devices in the European Union to address the demand for LBPs in that part of the world.
We expect that distribution of such kits will then be expanded by region. In parallel and we plan to introduce a cytocentrifuge-based slide preparation system for use in low volume laboratories.
Stains and Reagents
Once a cytology specimen has been deposited onto a microscope slide, it is stained in order to assist the cytologist in detecting and identifying the various features of the deposited cells that are relevant to determining whether the cells are normal, dysplastic or cancerous.
We are developing several proprietary stains for use in cervical cytology and other screening applications.
These stains are designed for evaluation using our automated slide imaging and analysis system (see below), but some may also be evaluated visually or using a flow cytometer.
A study has been initiated in Germany to validate certain of these stains for use in cervical cytology as well as for use in other cytological assays.
We are also developing a family of immunocytological assays that combine the measurement of biomolecular markers and cell morphology in a single test.
These assays are intended to detect the presence of specific proteins and other markers that are indicative of the presence of a target disease; allow characterization of abnormal cells in terms of the stage of disease present; or provide an estimate of the risk of disease progression.
These assays are specifically designed to be compatible each other and with our proprietary stains and may be evaluated using our automated slide imaging and analysis system. An added benefit of our 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.
Preparations for the clinical evaluation of at least one of these assays by a major cancer institute in Europe are in progress.
Specimen Evaluation
When “reading” a cytology specimen, a cytologist traditionally examines the specimen by eye through a conventional optical microscope to detect, classify, record, mark, and report abnormal cells.
While performing this examination, the cytologist is also referring to the patient’s medical history, assessing specimen adequacy, and capturing a variety of metrics and other information needed for regulatory compliance and operational purposes.
Despite the widespread deployment of computers in the laboratory, many of these operations are still largely paper-based.
Even in laboratories where medical histories are available to the cytologists in electronic form and reports are prepared on a computer, it is not uncommon for the data, and sometimes even draft reports, to be initially captured on paper and then transcribed.
In 1994 AccuMed, a corporate predecessor to CytoCore, introduced the AcCell
®
computer-assisted cytology workstation.
AcCell provided a means to assist the cytologist by automatically capturing the information relevant to screening cytology specimens in electronic form, managing the captured information, and automatically generating the necessary specimen, regulatory and operational reports.
The benefits of this approach were 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.
Workstation
Our
Workstation
is an updated and improved version of the AcCell Workstation.
Like the AcCell, the Workstation is intended to reduce operating costs and improve operating efficiency in the cytology laboratory.
Among the improvements and new features incorporated in our
Workstation
are a more efficient user interface, improved data management, workflow management and communications capabilities, and new features such as image capture, audio dictation, a “consult” mode, and support for continuing education and proficiency testing.
In keeping with the AcCell tradition, patented context-sensitive software allows these capabilities to be provided in an unobtrusive manner that permits the cytologist to concentrate on evaluating specimens rather than on operating the instrument.
We believe that our
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.
Our
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, our Workstation does not require an external PC for operation.
Instead, all necessary computing power is embedded within the workstation frame.
This provides multiple benefits ranging from eliminating a considerable quantity of equipment from a cytologist’s typically cramped work area to facilitating the periodic equipment validations that laboratories are required to perform.
In addition to use as part of a cytology screening system, our
Workstation
can also be used in conjunction with the 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.
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, diagnosis, classify and determine the extent of disease and, where appropriate, determine the appropriate treatment.
Patients who have a normal screening result are not offered these services.
In order to allow scarce medical resources to be focused upon those patients having the greatest need, screening programs are structured to differentiate between normal and abnormal patients as accurately, rapidly, reliably and cost effectively as possible.
Although the evaluation of cervical cytology specimens by automated image analysis can be traced back to the 1940s and a number of capable systems have been developed, the FDA has not to date approved any automated image analysis system to “diagnose”, or classify as normal or abnormal, cervical cytology specimens without human intervention. The FDA has, however, approved several systems including the AccuMed TracCell™ for use in “mapping” or “location-guided screening”.
In these systems, image analysis is used to identify potentially abnormal cells which are then presented to a cytologist for classification.
This approach, which has been shown to reduce the time required to differentiate between normal and abnormal specimens, has been increasingly adopted by high volume laboratories, but is presently too expensive for most laboratories. We believe that our imager will be marketable at a price that will be affordable for most laboratories.
Our
Imager
is a highly advanced version of the AccuMed TracCell location-guided cytology screening system that has been optimized for use with our proprietary stains and assays.
As these stains and assays are designed to be more effective in highlighting the cellular abnormalities associated with cancer and precancerous conditions than the traditional Pap and thionin stains used in conjunction with other automated cytology screening instruments, our
Imager
is expected to deliver superior performance when used in cytological screening applications.
Our
Imager
is intended to work in conjunction with our
Workstation
, but may also be used in conjunction with a conventional review microscope.
When a specimen slide is evaluated by our
Imager
, the locations on the slide of any potentially abnormal cells are recorded to a data file.
The slide is then transmitted to a
Workstation
where the data file guides the workstation to present each of the potentially abnormal cells detected to the cytologist for classification.
We plan several additional software modules that will expand the capabilities of our
Imager
.
These modules may include those for the analysis of specimens stained with our new stains, bulk image capture and archiving, generation of time-optimized routing plans to maximize the efficiency of specimen review on our
Workstation
, and a module that assists the cytologist in evaluating difficult specimens.
We hope that this product family will also be expanded by the addition of application kits consisting of the stains and associated software that are needed for the automated screening of other types of cytology specimens.
Product Development
Our core product development strategy is to develop the
CytoCore Solutions
System and its component products, enhance such products, and develop new and innovative diagnostic and screening devices for the early detection of various types of cancer.
To implement this strategy, we have and will continue to utilize internal resources, sponsored and collaborative agreements with medical institutions, strategic partnerships with commercial entities, and licenses and acquisitions of intellectual property.
In the future, we anticipate expanding our portfolio to include other cytological assays and tests, tests for STDs, including HPV, and other markers of vaginal health, and medicinal products related to the treatment of diseases of the female reproductive system.
If we obtain significant and timely funding, our CytoCore product pipeline for 2014 calls for the introduction of
SoftKit
, a collection device for NAF and possibly a novel cytological stain
.
In 2015, we expect to introduce our
Imager
and associated
Workstation
; the corresponding stains and assayss for the location-guided screening of cervical cancer specimens; and a completely disposable version of
SoftPap
.
Assays for use in the automated screening for additional conditions such as endometrial and bladder cancer are expected to be introduced beginning in late 2016.
Markets and Marketing Objectives
Diagnostic Focus
Our immediate chief objective is to achieve broad market acceptance of the
components of
the
CytoCore Solutions
System as a new screening and diagnostic tool for cervical and breast cancer screening, offering alternatives to the current methods.
According to Centers for Disease Control, there are approximately 73 million Pap tests and 30 million mammograms given in the United States each year. Worldwide, approximately 180 million Pap and 60 million breast cancer screening tests are performed annually.
The potential market for each of these tests amounts to approximately 1.5 to 1.8 billion women. Many studies have shown that between 70 and 80% of a person’s entire healthcare expenditures over their whole life occur in the last four to six months of life.
As a result, more and more attention is being given to the early detection of a disease or condition. Bio-molecular screening, diagnostic, and treatment products consequently are being developed to detect disease states early so they can be dealt with before they become life threatening and expensive to treat.
We are designing and developing its products to satisfy this paradigm shift and focus more on diagnostic methods and tools for early detection.
Point of Care for All Populations
We also believe we are well positioned to capitalize on trends affecting the world’s population.
The female population of the world is approximately 3 billion, of which 2 billion falls in the range where reproductive healthcare monitoring is necessary and effective.
This group falls into two sub-groups:
(1) females in the United States and other countries where effective healthcare is available to most (estimated at between 300 and 400 million women), and (2) the remainder of the female world population, where healthcare is limited or non-existent.
We believe our products can address the needs of both groups since the principal requirements for both groups – minimal cost, near point-of-care delivery, ease of use, and reduced reliance on highly-trained and skilled professionals -
are the same.
We are developing our initial products to serve the needs of females in developed nations and economies, but anticipate subsequent deployment of such products to less well-developed countries.
Within both developed and developing economies, there are macro trend drivers that are not specific to female healthcare needs, including:
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Increasing life spans, which drive the demand for healthcare services up and increase 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, thus 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.
We are focused upon utilizing these advances to provide products that address the needs of these worldwide markets.
Sales and Distribution
The
SoftPAP
has initially been targeted to the premium segment of the cervical cytology sampling market.
This premium segment comprises almost the entire cervical sampling market except for public health programs and research hospitals.
We expect that the
SoftPAP
will be primarily delivered to these customers through local and regional distributors who specialize in the value-added OB/GYN market.
SoftPAP
is presently registered for sale in a number of countries.
Our NAF collection instrument will initially be targeted toward general, ObGyn and family medical practices for use as a component of routine physical examinations and toward clinical laboratories in those countries where a significant fraction of the laboratories are controlled by clinical practices.
If funding is obtained
SoftKit
is expected to be introduced into the European market in 2014 with expansion into the Middle East and Asia in 2015.
The target market varies by country but is generally either selected clinical laboratories or national public health authorities.
It is expected that
SoftKit
will primarily incorporate one of the Medite preservatives, but other preservatives, which we are presently evaluating, also be made available to accommodate local and regional differences in laboratory practice.
Our
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 our
Workstation
has been successfully established in the laboratory market, our strategy is to form alliances with these laboratories and other medical products distribution companies and utilize their sales forces to broaden sales of the system to other markets, including hospitals, clinics, managed care organizations and office-based physician groups. Our marketing strategy to these organizations will vary depending upon the applicable cancer screening test.
Many countries in which healthcare has been partially or fully nationalized utilize a “tender system” in which contracts to supply a specified quantity of a product for a specified period of time are periodically made available for bidding. We are taking the steps necessary to become qualified to bid on tender offers in selected countries.
Government Regulation, Clinical Studies and Regulatory Strategy
The development, manufacture, sale, and distribution of medical devices are subject to extensive governmental regulation worldwide.
In the United States, our products are regulated under the Medical Device Amendments to the Food, Drug and Cosmetic Act (the “FD&C Act”) and cannot be sold, shipped or promoted in interstate commerce without prior “clearance” or “approval” by the FDA.
In the European Union (“EU”), medical devices are regulated under the Medical Device, In-Vitro Device and other Directives that require that each product be CE Marked to show that it conforms to all of the requirements of the applicable Directive(s) before it can be imported into or sold in the EU.
The regulatory systems in other major markets such as China and South America continue to undergo substantial changes and now in many respects resemble the system in the EU.
In particular, the CE Mark is now accepted or required in essentially all significant markets other than the U.S.
In addition to having to obtain the appropriate regulatory approvals, we are also required to register our products with the National Health Authority in any country in which we expect to do business; may have our quality and manufacturing systems inspected and/or audited by representatives of various National Health Authorities; and may have to conform to additional regulations imposed by individual countries.
Under these regulations, we are subject to certain registration, record-keeping and reporting requirements. Our manufacturing facilities and those of our strategic partners, may be obligated to conform to specified quality standards, and are subject to audits and inspections.
We are also subject to national, state and local laws relating to such matters as safe working conditions, manufacturing practices and environmental protection.
Failure to comply with these regulations could have a material adverse effect on our future operations and may impose additional costs and risks.
In the U.S., the FD&C Act generally bars selling, advertising, promoting, or other marketing of medical devices that have not been authorized (approved or cleared) by the FDA. The promotion or sale of medical devices for non-approved or “off-label” uses is prohibited.
The FDA also regulates the design and manufacture of medical devices.
These regulations have been largely, but not completely, harmonized with the ISO quality system standards for medical devices that are used for similar purposes in most other countries.
This incomplete harmonization requires us to maintain two separate, but equal quality systems and increases the cost and complexity of regulatory compliance.
The FDA and the corresponding regulatory agencies in other countries may withdraw product clearances or approvals for failure to comply with these regulatory standards and may impose additional sanctions.
In the US most low to moderate risk medical devices that have legally marketed predicates receive “clearance” to market through a process described in Section 510(k) of the FD&C Act.
In order to receive clearance under this so-called 510(k) process, a product must be shown to be “substantially equivalent” to an appropriate legally marketed “predicate device”.
High risk devices and devices that do not have a predicate require “approval” via a Pre Market Approval (“PMA”) submission in which de-novo demonstration of the safety and efficacy must be established.
Changes to a product, its intended use, and/or its labeling often require the submission of another 510(k) or PMA application.
Obtaining approval to market via the PMA process takes substantially longer and is far more expensive than obtaining clearance to market via the 510(k) notification process.
The e
2
Collector, which is the predecessor to the
SoftPAP
collector, was cleared for marketing by the FDA on May 31, 2002 and the
SoftPAP
collector received FDA clearance on January 31, 2008.
Although most future Company products are expected to qualify for premarket clearance via the 510(k) process, some future products may require PMA approval.
In 2010, the FDA began a major review of the 510(k) process, which has to date resulted in the announcement of a
number of changes including some that will directly impact our future products.
Additional changes, some of which have the potential to substantially increase the time and cost involved in obtaining marketing clearance via the 510(k) process, are under consideration.
In the U.S., we are subject to various federal and state laws pertaining to healthcare fraud and abuse, including federal and state anti-kickback laws and the federal Foreign Corrupt Practices Act, which make it illegal for an entity to solicit, offer, receive or pay remuneration or anything of value in exchange for, or to induce, the referral of business or the purchasing, leasing or ordering of any item or service paid for by Medicare, Medicaid or certain other federal healthcare programs.
These statutes have been broadly defined to prohibit a wide array of practices, and our activities may subject us and our partners to scrutiny under such laws.
Violations may be punishable by criminal and/or civil sanctions, including fines, as well as the exclusion from participation in government-funded healthcare programs.
Laws pertaining to these and related matters also exist in other countries.
Each country has historically imposed its own unique regulations on medical products.
In recent years, however, there has been a trend toward the harmonization of these regulations resulting in greater consistency between countries.
This has resulted in a large and growing number of countries (over 70 as of this writing) adopting the CE Mark as a central element of their regulatory process for medical devices.
The U.S. is the only major country that has not adopted the CE Mark.
In order for a product to be CE Marked, the manufacturer must demonstrate to the satisfaction of the regulatory authorities that the product is safe and effective (conforms to the “Essential Requirements” for that class of product) and that it is manufactured in accordance with specified quality standards.
In most countries the CE Mark is a pre-condition for medical device registration and in some places such as the EU, is mandatory in order for a product to be imported into or sold within the country or region.
Failure to comply with the regulations pertaining to CE Marking can result in product seizures and other sanctions.
Although company registration to the ISO 13485 quality system standard is not required for companies selling Class I (lowest risk category) medical devices and products in the EU, such registration is for all practical purposes mandatory for companies selling products in Class II and higher.
All CytoCore products that are presently being sold and a significant portion of those that are in development are currently classified as Class I devices.
However, some of our upcoming products are expected to be in Class II or Class IIa and some changes that are being discussed in the EU may, if they come to pass, result in the reclassification of some of our Class I products into Class II.
In either of these cases we will be required to undergo the expensive and time consuming process of registration to ISO 13485 in order to be able to continue selling our products in many countries outside of the U.S.
The
SoftPAP
collector and the preservative are CE Marked to the Medical Device Directive and the In-Vitro Device Directive, respectively.
As our products are intended to be marketed globally, we expect that all future products will be CE Marked to the applicable Directives and standards.
The CE Mark for a product must be renewed every five years and will generally also require renewal if the requirements imposed by these Directives and standards change.
This renewal increases the cost of regulatory compliance.
In addition, the specific quality system requirements imposed upon a product are determined by the risk category into which the product is assigned by the applicable Directives.
All of our current and planned products are presently considered to be low risk devices and are assigned to Class I which imposes the lowest level of quality system requirements.
If a new Company product falls within or a current is reclassified into a higher risk category, we will be required to register our quality system to ISO 13485 in order to maintain the CE Mark on the affected product(s).
Our quality system presently conforms to the requirements of ISO 13485, but we have not been formally registered to this standard.
Registering a quality system to ISO 13485 and maintaining this registration will substantially increase the costs of regulatory compliance.
The EU is in the process of determining whether the various Directives pertaining to medical devices should be “recast” to bring them into conformance with the recommendations of the Global Harmonization Taskforce (GHTF) and is also studying the possibility of replacing these Directives, which must be transposed into national laws by each country in order to become effective, with EU-wide laws that do not require transposition.
Conversion from the present Directives to corresponding EU laws could be beneficial in that it is expected to eliminate country-specific differences in how the Directives are applied and enforced and therefore facilitate our compliance with the pertinent regulations in the EU.
Harmonization of the current medical device classification system with that recommended by the GHTF may, however, result in some or all of our products being placed in more restrictive categories that could significantly increase our regulatory compliance costs and time to market.
Several voluntary coding systems such as GS-1/GTIN, GMDA and EDMA for the identification of medical devices are presently in use in various parts of the world.
The Global Harmonization Taskforce (GHTF), which is comprised of representatives from major medical device regulatory agencies such as the FDA, is in the process of developing a single unified medical device identification system that, when it goes into effect, will be mandatory worldwide.
In late 2013 the FDA and the corresponding regulatory agencies in several other countries issued their final rules for the implementation of such a system.
The EU and many additional countries are expected to issue similar regulations in 2014. We are well positioned to comply with these new regulations as we have both company and product specific GS-1/GTIN codes as well as product specific GMDA and EDMA for our current products and have the mechanisms in place to obtain additional such codes in the future.
The proposed regulations include user fees that will increase our cost of regulatory compliance.
We are also required to comply with certain environmental regulations with respect to products that are sold in the EU.
One of these regulations is the Directive on Packaging and Packaging Wastes that: mandates the minimization of packaging; restricts the use of certain packaging materials; and imposes requirements, including possible “take-back” provisions, with respect to the recycling of packaging materials.
All of our current products comply with the requirements of this Directive.
At present, we comply with the recycling portions of this Directive by ensuring that all packaging materials are compatible with recycling programs that are in place in the EU.
However, in the future we may be required to take a more active role in the recycling of certain types of products including possibly “taking back” and recycling laboratory instruments.
Implementing a compliant take-back program will increase our operating and regulatory compliance costs.
In the EU electronic products, including clinical laboratory instruments such as the Imager and Workstation, are required to comply with two environmental Directives, one of which requires that the manufacturer “take back” and recycle the electronic portions of these instruments and the other (the so-called RoHS Directive) of which restricts the presence of certain materials in electronic products.
We comply with the RoHS Directive by requiring our suppliers to use only RoHS complaint materials in the construction of our products.
Upon commencement of instrument sales in the EU, if ever, we expect that we will be required to comply with the take-back requirements by contracting with an established electronic waste recycler in the EU.
Such contracts will increase our operating costs.
The “REACH” regulation, which requires the registration of all chemical products produced in or imported into the EU is presently in its implementation phase.
The long term impact of this extremely complex multi-level regulation on the Company is unknown at present, but is anticipated to be minimal in the near term as our sales of chemical products (stains, preservative, etc.) are and are expected to continue to be at less than the threshold levels for registration and reporting.
An increase in sales of such products above currently forecast levels and/or a reduction in the applicable thresholds could potentially result in significant costs to us.
Data from clinical trials and studies is often required in regulatory submissions and is highly desirable for use in product marketing activities.
In general, at least one trial or study is necessary for each new product and additional studies or trials are needed to support new or modified indications for use and new marketing claims.
Each medical device is required to have an expiration date beyond which it may no longer be used.
This expiration date is generally set very conservatively at the time of product introduction and may then be extended if warranted and supported by “real-time” data.
Since
SoftPAP
was introduced, we have been collecting product life data from the field and has been conducting internal “stability tests”.
In 2011 we completed a study that demonstrated that the original expiration dating specification for SoftPAP can safely be doubled and suggested that a further extension may be possible.
We intend to continue performing real-time stability studies and extending the expiration dating of our products if supported by data from these studies.
SoftPAP
has FDA clearance and is CE Marked for the collection of samples for use in cervical cancer screening.
At the time that these approvals were obtained, the accepted standard of clinical practice was to perform the initial screening by cytology and to use a HPV test to confirm and further classify any abnormal cytological results that were obtained.
Recently several countries, most notably certain countries in the EU, have revised, or have begun revising their accepted practice such that the initial screening is now to be performed using a HPV test with reflex to cytological testing for confirmation and diagnosis of a positive HPV result.
This change in use does not affect the approvals presently held by
SoftPAP
, but a new clinical study based upon this revision to clinical practice is needed for marketing purposes.
The necessary study protocol has been prepared and discussions with potential clinical sites are in progress.
It is presently anticipated that this study will be undertaken during 2014.
This same study will also provide additional validation data for the use of our preservative with
SoftPAP
and an independent test of one of the proprietary cytology stains that we are developing.
Several additional clinical trials and studies are planned, but will not be initiated until we can obtain sufficient additional financial and operating resources.
These planned studies and trials include a formal clinical trial of SoftKit in conjunction with our preservative for the self-collection of samples for cytology and HPV testing in both the primary and reflex modes; a collaborative study with a major European oncology institute to validate our cancer risk progression assay; and
validation of certain stains and markers for use with the Imager, obtaining additional indications for use for
SoftPAP
and SoftKit, and field validation of the Workstation.
Cost and Reimbursement
In the U.S., laboratory customers bill most insurers (including Medicare) for screening and diagnostic tests such as the Pap test.
Insurers, such a private healthcare insurance or managed care payers, in addition to Medicare, reimburse for the testing, with a majority of these insurers using the annually-set Medicare reimbursement amounts as a benchmark in setting their reimbursement policies and rates.
Other private payers do not follow the Medicare rates and may reimburse for only a portion of the testing or not at all.
In addition, certain provisions of the Affordable Care Act are expected to significantly affect the reimbursements for many tests and diagnostic procedures.
These changes are expected to be introduced over the next year or two.
Outside of the U.S., 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 payer’s 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 U.S. such as Medicare, Medicaid, health maintenance organizations and health insurers, and other public and private payers in foreign jurisdictions. The coverage policies and reimbursement levels of these third-party payers may impact the decisions of healthcare providers and facilities regarding which medical products they purchase and the prices they are willing to pay for those products.
In some countries, our ability to commercialize products will also depend upon us becoming a qualified bidder on the tender offers issued by the National Healthcare Authority.
If we succeed in bringing products to the market, we cannot be assured that third-party payers will pay for such products or establish and maintain price levels sufficient for realization of an appropriate return on our investment in product development.
Additionally, we expect many payers to continue to explore cost-containment strategies (e.g., competitive bidding for clinical laboratory services within the Medicare program, so-called “pay-for-performance” programs implemented by various public and private payers, etc.) that could potentially impact 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.
Technological advances have accelerated the pace of change in recent years.
The cost of healthcare delivery has always been a significant factor in markets outside of the United States.
In recent years, the U.S. market has also become much more cost conscious.
We believe technological innovations incorporated into certain of our products offer cost-effective benefits that address this particular market opportunity.
Competitors may introduce new products that compete with ours, or those that we are developing. We believe the portion of our research and development efforts devoted to continued refinement and cost reduction of our products will permit us to remain or become competitive in the markets in which we presently distribute or intend to distribute our products.
The market for our cancer screening and diagnostic product line is significant, but highly competitive.
We are currently not aware of any other company that is duplicating our efforts to develop a fully-automated, objective analysis and diagnostic system for female reproductive-tract cancer screening that can be used at the point of care. Nonetheless, we compete with several large and well-established medical device companies, including companies with financial, marketing, and research and development resources substantially greater than ours. There can be no assurance that our technological innovations will provide us with a competitive advantage.
There are several companies that produce automated and quantitative microscopy instruments. In the past, the market for these instruments has been primarily limited to research applications.
However, as a result of recent advances in the area of molecular diagnostics, we believe the market for such instruments and applications will increase over the next several years. We believe our instruments are the most versatile and cost-effective platforms available in the current market whether as an outright purchase or a fee-for-use application.
In general, we believe that our products must compete primarily on the basis of clinical performance, accuracy, functionality, quality, product features and effectiveness of the product in standard medical applications. We also believe that cost control and cost effectiveness are additional key factors in achieving or maintaining a competitive advantage.
We focus a significant amount of product development effort on producing systems and tests that will not add to overall healthcare cost.
Specifically, there are several companies whose technologies are similar, adjunctive to, or may overlap with ours.
Of these companies, our primary competitors are Rovers and Wallach in the area of cell collection devices and Cytyc and TriPath Imaging in specimen preparation and the automated morphological screening of these specimens.
We believe that none of these companies offer a complete system comparable to
CytoCore Solutions.
In addition, both the Cytyc and TriPath systems are “closed” and are focused exclusively on the cervical cytology market whereas CytoCore offers an “open” system that is intended to address most of the 100+ types cytology tests that are currently performed.
Indirect competitors are largely companies such as Qiagen and Greiner that offer HPV tests for use in cervical cancer screening.
Our sample collection devices are suitable for use with these tests and our cytology products are adjunctive or complementary to them.
Companies such as Ventana and Dako, which specialize in the preparation and evaluation of pathology, as opposed to cytology, specimens could potentially enter market segments of interest to CytoCore at some point in the future.
Operations
We do not intend to invest capital to develop our own distribution and sales organizations, or to construct and maintain a medical-products manufacturing facility and all its related quality systems requirements. Our strategy is to utilize the operations, quality systems and facilities of contract manufacturers specializing in medical products manufacturing to meet our current and future needs in the United States and abroad.
All of our contract manufacturers and our suppliers of purchased products are FDA ISO 13485 registered and have sufficient capacity to meet our anticipated needs.
We own the tooling, fixtures and other items required for the manufacture of our products.
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 one or more U.S. or foreign patents.
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 examining patent 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 or improving upon the disclosure of the earlier application.
For these reasons, estimating the number of patents that are likely to be issued based upon the number of provisional and utility applications filed is difficult.
Prior to filing a utility application in the U.S., we review the application to determine whether obtaining patent coverage for the invention outside of the United States is necessary or desirable to support our business model.
If so, a utility patent application is filed under the Patent Cooperation Treaty (“PCT”).
Depending upon the nature of the invention and business considerations, we typically nationalize PCT applications in some number of countries, the number depending upon anticipated market size and the locations of potential competitors.
As of December 2013, 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 as no longer being appropriate to our business. One Chinese patent had been issued and one European case has been abandoned.
One U.S. and five foreign patent applications are filed and pending; in order to reduce the expenses related to patent prosecution, we are currently taking only those actions needed to keep them in effect.
This group of patents and patent applications covers all aspects of the
CytoCore Solutions
System including, but not limited to, the point of service instrument, the personal and physicians’ collectors, and the slide-based test.
We anticipate filing at least one PCT application during 2014 subject to obtaining funding.
As a result of the acquisition of AccuMed, we acquired 33 issued U.S. patents, one U.S. patent application, and nine foreign patents, of which a combined total of 17 were transferred to a third party under a license agreement. Twenty-four additional foreign patent applications primarily covering the AcCell and AcCell Savant technology and related software were also acquired.
We have recovered the 17 AcCell-related patents and patent applications from the third party. Two of the patients expire in late 2014 and early 2015. We do not consider these patients as relevant to our present business. The remaining patents expire between 2016 and 2020.
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.
Recent changes in US patent law, particularly conversion to a “first to file” system and introduction of a challenge period after a patent is granted may influence our IP strategy, especially as related to the filing of provisional applications.
Several recent court decisions are also expected to influence these decisions.
Patent applications filed prior to November 29, 2000 in the U.S. are maintained in secrecy until any resulting patents have issued.
As there have been examples of U.S. patent applications that have remained “in prosecution” and, therefore, secret for decades, it is not possible to know with certainty that any U.S. patent that we may own, file for or have issued to us will not be pre-empted or impaired by patents filed before ours and that subsequently are issued to others.
Utility patent applications filed in the United States after November 29, 2000 are published 18 months after the earliest applicable filing date.
This revised standard reduces the chances that such a “submarine” patent will impair our intellectual property portfolio. Foreign patent applications are automatically published 18 months after filing.
As the time required to prosecute a foreign utility patent application generally exceeds 18 months and the foreign patents use a “first to file” rather than a “first to invent” standard, we do not consider submarine patents to be a significant consideration in our patent protection outside of the United States.
Our products are or may be sold worldwide under trademarks that we consider to be important to our business.
We own the trademarks
SoftPAP
®
,
CytoCore
®
, and
CytoCore Solutions
®
.
We may file additional U.S. and foreign trademark applications in the future.
Our future technology acquisition efforts will be focused toward those technologies that have strong patent or trade secret protection.
We cannot be sure that patents or trademarks issued or which may be issued in the future will provide us with any significant competitive advantages.
We cannot be sure any of our patent applications will be granted or that their validity or enforceability will not be successfully challenged.
The cost of any patent-related litigation could be substantial even if we were to prevail.
In addition, we cannot be sure that someone will not independently develop similar technologies or products, duplicate our technology or design around the patented aspects of our products.
The protection provided by patents depends upon a variety of factors, which may severely limit the value of the patent protection, particularly in foreign countries. We intend to protect much of our core technology as trade secrets, either because patent protection is not possible or, in our opinion, would be less effective than maintaining secrecy.
However, we cannot be sure that our efforts to maintain secrecy will be successful or that third parties will not be able to develop the technology independently.
Research and Development Expenditures
Our research and development efforts are focused on introducing new products as well as enhancing our existing product line.
We utilize both in-house and contracted research and development personnel, including in collaboration with universities, medical centers and other entities. All of our research and development activities are presently conducted in the United States.
We believe research and development is critical to the success of our business strategy.
Our research work in the area of chemical and biological components is expected to continue for the foreseeable future as we seek to refine the current process and add additional capabilities to our analysis procedure, including the detection of other forms of cancer and precursors to cancer.
We anticipate the need to invest a substantial amount of capital in the research and development process, including the cost of clinical trials, required to complete the development and use of the
CytoCore Solutions
System and bring it to market.
Components and Raw Materials
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.
The instrument components of the laboratory version of the
CytoCore Solutions
System are also available from a number of sources. Computers, cameras, automated slide-staining instruments and automated slide-preparation instruments are currently available from several large manufacturers.
Due to certain regulatory requirements regarding the supply and manufacture of certain products, we may not be able to establish additional or replacement sources for certain components or materials.
In the event we are unable to obtain sufficient quantities of raw materials or components on commercially reasonable terms or in a timely manner, we would not be able to manufacture our products on a timely and cost-competitive basis, which may have a material adverse effect on our business and financial condition.
Working Capital Practices
We have financed our U.S. operations and research and development efforts by raising funds through borrowing and the sale of equity securities.
We will continue to use these methods to fund our operations until such time as we are able to generate adequate revenues and profits from the sale of some or all of our products.
We believe that future sales of the
CytoCore Solutions
System or other products into foreign markets may result in collection periods that may be longer than those expected for domestic sales of these products.
Our strategy will be to use down payments, letters of credit or other secured forms of payment, whenever possible, in sales of products in foreign markets.
Employees
As of March 27, 2013, we employed a total of five full-time and one part-time employee.
None of our employees are members of a labor union.
We also utilize independent consultants in the United States on an as-needed basis.
Financial Information About Foreign and Domestic Operations and Export Sales
Markets outside of North America are an important factor in our business strategy.
Any business that operates on a worldwide basis and conducts its business in one or more local currencies is subject to the risk of fluctuations in 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, 2013, we did not have any foreign operations.
You should carefully consider the following risk factors that affect our business.
Such risk factors could cause our actual results to differ materially from those that are expressed or implied by forward-looking statements contained herein. Some of the risks described relate principally to our business and the industry in which we operate. Others relate principally to the securities market and ownership of our capital stock. The risks and uncertainties described below are not the only ones we face. Additional risks are described elsewhere in this report under the Item 1 – Business, Item 3 – Legal Proceedings, and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation 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 is
no guarantee of future profitability
.
Our expenses have exceeded our revenues since our inception, and our accumulated deficit at December 31, 2013 was approximately $102,800,000.
We have sold only a very limited amount of our
CytoCore Solutions
System products to date and cannot be certain as to when, if ever, sales of our products might occur.
Our future not withstanding the acquistion of Medite depends on obtaining new funding. As a result in connection with the acquisition of Medite, we are in process of completing our private placement for $2.5 million. The initial closing resulted in gross cash proceeds to us of $1.529 million. Additional funding for working capital may be necessary to support future sales growth and development of new products. There can be no assurance that we will be able to secure necessary funds.
We currently depend on the sale of a single product and product line.
We have sold only a very limited amount of our
CytoCore Solutions
System products to date and cannot be certain as to when, if ever, sales of our products might occur.
We did not ship any product in 2013. In the foreseeable future, we expect to derive most of our revenues from the sale of the
SoftPAP
cell collection device, and the other components of the
CytoCore Solutions
System.
Our net sales and earnings will, therefore, be heavily dependent on the sale of these products.
If we are unable to successfully develop and commercialize such products as well as other new or improved products, our business, sales and profits will be materially impaired.
Our future success will depend on our ability to develop new products and respond to technological changes in the markets in which we compete.
Our long-term ability to generate product-related revenue will depend, in part, on our ability to identify products and product candidates that may utilize the different components of the
CytoCore Solutions
System, including our drug delivery system and slide-based tests. If internal efforts do not generate sufficient product candidates, we will need to identify third parties that wish to collaborate with us to develop new products and applications.
Our ability to successfully pursue third-party relationships will depend in part on our ability to negotiate acceptable license and related agreements.
Even if we are successful in establishing collaborative arrangements, they may never result in the successful development or commercialization of any product candidate or the generation of any sales or royalty revenues.
In addition, the markets for our products and services are characterized by rapid technological developments and innovations.
Our success will depend in large part on our ability to correctly identify emerging trends, enhance capabilities, and develop and manufacture new products quickly, in a cost-effective manner, and at competitive prices. The development of new and enhanced products is a complex and costly process. We may need to make substantial capital expenditures and incur significant research and development costs to develop and introduce such new products and enhancements.
Our choices for developing products may prove incorrect if customers do not adopt the products we develop or if the products ultimately prove to be medically or commercially unviable.
Development schedules also may be adversely affected as the result of the discovery of performance problems.
If we fail to timely develop and introduce competitive new products, our business, financial condition and results of operations would be adversely affected.
Our products are subject to government regulation and they may not receive necessary government approvals.
The development, manufacture, sale and use of our products in the U.S. is subject to extensive regulation, by the FDA as well as other governmental agencies at both the federal and state level. We must meet significant FDA requirements before we receive clearance to market our products.
Included in these FDA requirements may be the performance of lengthy and expensive clinical trials to prove the safety and efficacy of the products.
We have limited experience in conducting and maintaining the preclinical and clinical trials necessary for regulatory approval, and face the risk that results in later trials may be inconsistent with results from earlier trials.
A number of companies have suffered significant setbacks in advanced clinical trials, even after promising early trial results.
Delays in receiving governmental approvals can be costly in terms of lost sales opportunities and increased clinical trial costs.
The speed with which we complete such trials and receive approval will depend on several factors, many of which are beyond our control, including but not limited to, the rate of patient enrollment and retention, negative tests results, analysis of data obtained from testing activities and changes in regulatory policies.
The FDA is in the early stages of a system level review that is widely expected to result in significant changes in the way that medical devices are regulated in the United States.
Similarly, the European Union is in the later stages of revising the directives that apply to the regulation of medical devices in the EU, and other countries, particularly in Asia, are undertaking similar efforts.
In 2008, we successfully completed a clinical trial for the
SoftPAP
collector and received both FDA clearance and a CE Mark to market this device in the United States and the European Union.
Future products will require additional clinical trials and filings for regulatory approval to market in the United States, European Union, and other jurisdictions.
We cannot be certain that the results of these future trials will result in regulatory approval to market these products, or that approval, if granted, will not be limited to specific indications for use or product claims.
Obtaining regulatory approval is expensive, time-consuming and uncertain, and is expected to become even more so as a consequence of legislative and regulatory changes and initiatives that have recently been initiated in the United States, European Union and other jurisdictions.
Sales of medical devices and diagnostic tests outside the United States are subject to foreign regulatory requirements that vary from country to country. The time required to obtain regulatory clearance in a foreign country may be longer or shorter than that required for FDA marketing clearance.
Export sales of certain devices that have not received FDA marketing clearance may be subject to regulations and permits, which may restrict our ability to export the products to foreign markets. If we are unable to obtain FDA clearance for our products, we may need to seek foreign manufacturing agreements to be able to produce and deliver our products to foreign markets. We cannot be certain that we will be able to secure such foreign manufacturing agreements on acceptable terms, if at all.
Once a product gains regulatory approval, whether in the United States or abroad, the product remains subject to regulatory requirements, including adverse event reporting.
Failure to comply with post-approval requirements can, among other things, result in warning letters, recalls, fines, injunctions and suspensions or revocations of marketing licenses.
Any enforcement action, even if unsuccessful, would be time-consuming, expensive, and potentially damaging to our reputation.
Finally, we may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, if any unknown problems arise with respect to the product, its use or manufacture.
With the widespread use of any product or device, serious adverse events may occur.
Any safety issues could cause us to suspend or cease marketing our approved products, possibly subject us to substantial liabilities, and adversely affect our ability to generate revenues.
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.
Healthcare policy changes, including recently passed healthcare reform legislation, may have a material adverse effect on our business, financial condition, results of operations and cash flows.
Political, economic and regulatory influences are subjecting the healthcare industry to potential fundamental changes that could substantially affect our results of operations. Government and private sector initiatives to limit the growth of healthcare costs, including price regulation, competitive pricing, coverage and payment policies, comparative effectiveness of therapies, technology assessments and alternative payment models, are continuing in many countries where we do business, including the U.S. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective treatments. Our strategic initiatives include measures to address this trend; however, there can be no assurance that any of our strategic measures will successfully address this trend.
The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act of 2010 were enacted into law in the U.S. in March 2010. As a U.S. headquartered company, this healthcare reform law will materially impact us. Certain provisions of the law will not be effective until 2014 and 2015 and there are many programs and requirements for which the details have not yet been fully established or consequences not fully understood. However, on June 28, 2012, the United States Supreme Court upheld the constitutionality of the law's mandate requiring individuals to purchase health insurance but rejected specific provisions that would have penalized states that did not expand their current Medicaid programs. As a result of this ruling and other factors, we expect implementation of most of the major provisions of the law to continue. As currently enacted, the law imposes on medical device manufacturers a 2.3 percent excise tax on U.S. sales of Class I, II and III medical devices beginning in 2013. U.S. net sales represented approximately 50 percent of our worldwide net sales in 2012 and, therefore, this tax burden may have a material, negative impact on our results of operations and our cash flows. Other provisions of this law as currently enacted, including comparative effectiveness research, an independent payment advisory board, and pilot programs to evaluate alternative payment methodologies, could meaningfully change the way healthcare is developed and delivered, and may adversely affect our business and results of operations. Further, we cannot predict what healthcare programs and regulations will be ultimately implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or internationally. However, any changes that lower reimbursements for our products, reduce medical procedure volumes or increase cost containment pressures on us or other participants in the healthcare industry could adversely affect our business and results of operations.
Our international operations will expose us to additional risks.
We expect that international sales will account for a significant portion of our future revenues in and believe international sales are a key element to our future success.
As a result, we may be subject to the risks of doing business internationally, including:
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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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The integration of Medite into our Company following the closing of the acquisition may present challenges and impair our ability to realize the anticipated benefits of the acquisition.
We may face significant challenges in combining Medite’s operations into our operations in a timely manner. The failure to successfully integrate Medite into our company and to successfully manage the challenges presented by the integration process may result in us not achieving the anticipated benefits of the acquisition of Medite including operation and financial synergies of the acquisition which may have the effect of depressing the market price of our common stock.
We may not be able to compete with companies that are larger and have more resources.
We compete in the highly competitive medical device and diagnostics marketplace and have several U.S. and foreign competitors, both publicly-traded and privately-held.
Most of these companies have substantially greater financial, technical and research and development resources, established sales and marketing organizations and distribution networks, greater name recognition and longer-standing relationships with customers.
Competitors with greater financial resources can be more aggressive in marketing campaigns, can survive sustained price reductions in order to gain market share, and can devote greater resources to support existing products and develop new products. Any period of sustained price reductions for our products would have a material adverse effect on the Company’s financial condition and results of operations. We may not be able to compete successfully in the future and competitive pressures may result in price reductions, loss of market share or otherwise have a material adverse effect on our financial condition and results of operations.
It is also possible that competing products will emerge that may be superior in quality, effectiveness and performance and/or less expensive than our products, or that similar technologies may render our products obsolete or uncompetitive and prevent us from achieving or sustaining profitable operations.
In addition, many of our competitors have significantly greater experience in conducting preclinical testing and clinical trials of products and obtaining regulatory approvals to market such products. Accordingly, our competitors may succeed in obtaining FDA approval for products more rapidly, which may give them an advantage in achieving market acceptance of their products.
We may not be able to market our products.
Our success and growth depend on the market acceptance of the
SoftPAP
collection device and the
CytoCore
Solutions
System.
We do not intend to maintain a direct sales force to market and sell our products. Therefore, in order to successfully market and sell our products, we must be able to negotiate profitable distribution, marketing and sales agreements with organizations that have direct sales forces calling on domestic and foreign market participants that may use our products.
We would not have the ability to control any such third party distributors and such third parties may focus resources on other products that generate larger fees or commissions for them.
If we are not able to negotiate such agreements on terms acceptable to us, if at all, we may be forced to market our products through our own sales force. We cannot be certain that we will be successful in developing and training such a sales force, should one be required, or that we will have the financial resources to carry out such development and training.
The accuracy, performance and cost of our products are critical to our business and reputation.
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, among other things, 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.
Occasionally, some of our products may have quality issues resulting from the design or manufacture of the product or, in the case of the 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 us, including cancellation of orders, product returns, increased costs associated with product repair or replacement, and a negative impact on our goodwill and reputation.
We may be subject to product liability actions.
In addition, the sale and use of our products entail a risk of product failure, product liability or other claims.
Coverage is becoming increasingly expensive, and we may not be able to obtain adequate coverage at an acceptable cost in the future.
Any product liability claims and related litigation would likely be time-consuming and expensive, may not be adequately covered by our insurance coverage, and may delay or terminate research and development efforts, regulatory approvals and commercialization activities.
We may not be able to adequately protect our intellectual property.
Our success in large part depends on our ability to maintain the proprietary nature of our technologies, trade secrets and other proprietary information.
To protect our intellectual property and proprietary information, we rely primarily on patent, copyright, trademark and trade secret laws, as well as internal procedures and contractual provisions.
We 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.
If we fail to protect, defend and maintain the intellectual property rights associated with our products or if we are subject to a third-party claim of infringement, the competitive position of our products could be impaired. We may be required to obtain licenses from third parties to avoid infringing third-party patents or other proprietary rights, yet there can be no assurance that such licenses would be available to us on acceptable terms, if at all. If we are unable to obtain required third-party licenses, we may be delayed in or prohibited from developing, manufacturing or selling products that require such licenses. In addition, infringement, interference and other intellectual property claims and proceedings, with or without merit, are expensive and time-consuming to litigate, divert resources, and could adversely affect our business, financial condition and operating results.
We may not be able to maintain effective product distribution channels.
We currently rely primarily on third-party distributors for the sale and distribution of our products.
Our relationships with these distributors, therefore, must remain positive.
We have a limited a history of working with these companies and have only limited control over their performance.
We cannot predict the success of these relationships or the efforts of these companies in marketing the
SoftPAP
and our other products.
Our sales and marketing efforts, including those of our distributors, may not be sufficient to successfully compete against more extensive and well-funded operations of certain of our competitors.
Only two of our existing distributors purchased any product from us in 2013 and 2012. There were no sales in 2011. In addition, we must manage sales and marketing personnel in numerous countries around the world with the concomitant difficulties in maintaining effective communications due to distance, language and cultural barriers.
A significant portion of our revenues are attributable to the sale of products on behalf of a third-party.
For the year ended December 31, 2013, approximately 42% of our revenues were attributable to the sale by us on behalf of another company of a cell collection device used for detecting breast cancer. Any interruptions in our ability to sell these products, including manufacturing delays or regulatory hurdles, or the elimination of the product in the marketplace or the termination of our licensing arrangement, could adversely affect our business, financial condition and operating results.
Our quarterly operating results may fluctuate and our future revenues and profitability are uncertain.
We anticipate substantial fluctuations in our future operating results.
A number of factors contribute to such fluctuations, including but not limited to:
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introduction and market acceptance of new products and product enhancements by both us 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 us
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Our success depends on identifying, hiring, training, and retaining qualified professionals. Competition for qualified employees in our industry is intense and we expect this to remain so for the foreseeable future.
Currently, our limited resources make it difficult for us to competitively compensate our current employees and potential employee candidates.
If we were unable to attract and hire a sufficient number of employees, or if a significant number of our current employees or any of our senior managers resign, we may be unable to complete or maintain existing projects or develop and implement new projects of similar scope and revenue.
Our success is particularly dependent on the retention of existing management and technical personnel, including Robert F. McCullough, Jr., our Chief Executive Officer and Chief Financial Officer, and Richard A. Domanik, Ph.D., our Chief Operating Officer.
We do not have an employment with either of our executive officers and do no maintain a key man life insurance policy on any of our executive officers.
The loss or unavailability of the services of these executives could impede our ability to effectively manage our operations.
We may need to expand our operations and we may not effectively manage any future growth.
As of December 31, 2013, we employed five full-time persons and one part time person. In the event our products and services obtain greater market acceptance, we may be required to expand our management team and hire and train additional technical and skilled personnel.
We may need to scale up our operations in order to service our customers, which may strain our resources, and we may be unable to manage our growth effectively. If our systems, procedures, and controls are inadequate to support our operations, growth could be delayed or halted, and we could lose our opportunity to gain significant market share.
In order to achieve and manage growth effectively, we must continue to improve and expand our operational and financial management capabilities. Any inability to manage growth effectively could have a material adverse effect on our business, results of operations, and financial condition.
Risks Related to Our Common Stock
Trading in our common stock has been limited, there is no significant trading market for our common stock, and purchasers of our common stock may be unable to sell their shares.
Our common stock is currently eligible for quotation on the OTC Bulletin Board (the “OTCBB”), however trading to date has been limited. If activity in the market for shares of our common stock does not increase, purchasers of our shares may find it difficult to sell their shares. We currently do not meet the initial listing criteria for any registered securities exchange. The OTCBB is a less recognized market than the foregoing exchanges and is often characterized by low trading volume and significant price fluctuations. These and other factors may further impair our stockholders’ ability to sell their shares when they want to and/or could depress our stock price. As a result, stockholders may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our Company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares of common stock.
The historically volatile market price of our common stock may affect the value of our stockholders’ investments.
The market price of our common stock has in the past been highly volatile.
In fiscal years 2013 and 2012, the price of our common stock traded in a range of $0.01 to $0.06 per share.
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;
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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.
We have never been paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.
We have never declared or paid a cash dividend or distribution on our common stock and we do not anticipate doing so for the foreseeable future.
Our ability to declare dividends on our common stock is further limited by the terms of certain of our other securities, including several series of our preferred stock. We intend to reinvest any funds that might otherwise be available for the payment of dividends in the further development of our business.
Accordingly, investors seeking cash dividends should not purchase our shares.
There are currently outstanding a substantial number of securities convertible into shares of our common stock and we intend to raise additional funds in the future through issuances of shares of common stock or securities convertible into shares of our common stock, which will be dilutive to existing stockholders or impose operational restrictions.
We are authorized to issue up to 10,000,000 shares of preferred stock. As of December 31, 2013, 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 19,022 shares of Series E convertible preferred stock outstanding, which convert into approximately 52,311 shares of our common stock. There are cumulative dividends due on the Series B, Series C, Series D, and Series E convertible preferred stock, which may be paid in kind in shares of our common stock. Our Certificate of Incorporation permits our Board of Directors to issue the remaining 5,143,137 undesignated shares of preferred stock with such voting rights, if any, designations, rights, preferences and limitations as the Board may determine.
At December 31, 2013, we had outstanding warrants to purchase an aggregate 39,000 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 warrants, would cause dilution of existing stockholders’ percentage ownership of the Company.
In addition, in connection with our acquisition of Medite, we issued 1.469 billion shares of our common stock to the stockholders of Medite.
Holders of our preferred and common stocks do not have preemptive rights, meaning that
current stockholders do not have the right to purchase any new shares in order to maintain their proportionate ownership in the Company.
Such stock issuances and the resulting dilution could also adversely affect the price of our common stock.
In addition, we intend to raise additional capital in the future to fund our operations through sales of shares of our common stock or securities convertible into shares of our common stock, as well as issuances of debt. Such additional financing will be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuances of shares of our common stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholders will be reduced. These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.
Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price of our common stock.
Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act, and is, therefore, subject to SEC rules and regulations that impose limitations upon the manner in which our common stock can be publicly traded. Penny stocks generally are equity securities with a per share price of less than $5.00 (other than securities registered on some national securities exchanges). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, of our common stock and reducing the liquidity of an investment in our common stock.
Provisions of our certificate of incorporation, bylaws and Delaware law may make a contested takeover of us more difficult.
Certain provisions of our certificate of incorporation, bylaws and the General Corporation Law of the State of Delaware ("DGCL") could deter a change in our management or render more difficult an attempt to obtain control of us, even if such a proposal is favored by a majority of our stockholders. For example, we are subject to the provisions of the DGCL that prohibit a public Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation’s outstanding voting shares (an "interested stockholder") for three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Our certificate of incorporation also includes undesignated preferred stock, which may enable our board of directors to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise. Finally, w
e are currently authorized to issue 2 billion shares of common stock. Our Board of Directors has the authority to issue a significant number of shares of our common stock without further stockholder approval.
Each of the foregoing may have an anti-takeover effect of delaying or preventing a change of control which may be beneficial to our stockholders.