Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Caution Regarding Forward-Looking
Statements
This report contains
“forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking
statements often address our expected future business and financial performance and financial condition, and often contain words
such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,”
“see,” or “will.” These forward-looking statements are not guarantees and are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such
forward-looking statements. For us, particular uncertainties that could cause our actual results to be materially different than
those expressed in our forward-looking statements include: our ability to raise capital; our ability to retain key employees; our
ability to engage third party distributors to sell our products; economic conditions; technological advances in the medical field;
demand and market acceptance risks for new and existing products, technologies, and healthcare services; the impact of competitive
products and pricing; U.S. and international regulatory, trade, and tax policies; product development risks, including technological
difficulties; ability to enforce patents; and foreseeable and unforeseeable foreign regulatory and commercialization factors, our
ability to develop new products and respond to technological changes in the markets in which we compete, our ability to obtain
government approvals of our products, our ability to market our products, changes in third-party reimbursement procedures, and
such other factors that may be identified from time to time in our Securities and Exchange Commission ("SEC") filings
and other public announcements including those set forth under the caption “Risk Factors” in Part 1, Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2012. All subsequent written and oral forward-looking statements attributable
to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Readers are cautioned not to
place undue reliance on our forward-looking statements, as they speak only as of the date made. Except as required by law, we assume
no duty to update or revise our forward-looking statements.
Overview of CytoCore, Inc.
Cytocore, Inc. (the
“Company,” “we” or “us”) is developing an integrated family of cost-effective products for
the detection, diagnosis and treatment of cancer under the trade name of
CytoCore Solutions
®
.
Currently, we have one of our own products for sale – our SoftPap collector. We are developing, and plan to sell an integrated
family of cost-effective products for the detection, diagnosis and treatment of cancer under the trade name of
CytoCore Solutions
®.
Our products are intended to address sample collection, specimen preparation, specimen evaluation (including detection/screening
and diagnosis), and patient treatment and monitoring within vertical markets related to specific cancers. Current
CytoCore Solutions
products are focused upon cervical cancer. We plan to expand our focus to include other gynecological cancers as well as bladder,
lung and breast cancers, among others. Within each of these markets, we anticipate that the
CytoCore Solutions
products
will be sold as individual value-added drop-in replacements for existing products and as integrated systems that improve the efficiency
and effectiveness of clinical and laboratory operations.
The science of medical
diagnostics has advanced significantly during the past decade. Much of this advance has come as a result of new knowledge of the
human genome and related proteins, which form the foundation of cell biology and the functioning of the human body. Our goal is
to utilize this research as a base to develop screening and diagnostic testing products for cancer and cancer-related diseases.
We believe that the success of these products will improve patient care through more accurate test performance, wider product availability
and more cost-effective service delivery. We have developed the SoftPAP®, a sample collection device approved by the U.S. Food
and Drug Administration, and are licensed to sell the PadKit
Ô
collection device
and GluCyte
Ô
cell preservative. We are focusing on the development and testing of
cocktail assay markers and stains for use with the Company’s Automated Image Proteomic System (AIPS
Ô
)
to screen for various cancers.
The Company has also
began marketing and selling a companion product which is designed to detect breast cancer. This product is manufactured by a third
party.
Our strategy is to
develop products through internal development processes, strategic partnerships, licenses and acquisitions. This strategy has required
and will continue to require additional capital. As a result, we will incur substantial operating losses until we are able to successfully
market our products.
Outlook
We have incurred significant
losses since inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement
our business plan and develop, manufacture and market our products. Implementation of our plans and our ability to continue as
a going concern will depend upon our ability to increase sales of our products, develop new products, and raise substantial additional
capital. During the year ended December 31, 2012, we raised approximately $639,000 through advances from related parties.
During the three months ended March 31, 2013, we raised approximately $55,000 through advances from related parties.
If we are unable to
obtain additional capital or generate profitable sales revenues, we may be required to curtail product development and other activities
and in the extreme case, cease operations. No assurances can be given about our ability to obtain capital. The consolidated financial
statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.
Critical Accounting Policies and Changes
to Accounting Policies
The preparation of
consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Management believes
that it is reasonably possible that the following material estimates affecting the financial statements could significantly change
in the coming year: (1) estimates concerning the method of depreciation or the useful life of the equipment used in the production
of
SoftPAP
collection kits, and (2) estimates as to the valuation allowance for the amounts recorded and held as property
and equipment.
There have been no
material changes in our critical accounting policies or critical accounting estimates since December 31, 2012, nor have we adopted
any accounting policy that has or will have a material impact on our consolidated financial statements. In the quarter ended March
31, 2013 we changed the way we estimate franchise taxes due from certain states. This change in estimate resulted in a significant
reduction in the liability we estimate to owe to certain states for past franchise tax years. Reference Note 8 of the Financial
Statements. For further discussion of our critical accounting policies, see our Annual Report on Form 10-K for the fiscal year
ended December 31, 2012, including the notes to our consolidated financial statements included therewith, as filed with the SEC.
Results of Operations
The following discussion
and analysis should be read in conjunction with our unaudited consolidated financial statements presented in Part I, Item 1 of
this Quarterly Report and the notes thereto, and our audited consolidated financial statements and notes thereto, as well as our
Management’s Discussion and Analysis, contained in our Annual Report on Form 10-K for the year ended December 31, 2012.
Three Months Ended March 31, 2013
as compared to Three Months Ended March 31, 2012
Revenue
Revenues for the three
months ended March 31, 2013 decreased $13,000, or 46%, to $11,000 from $24,000 for the three months ended March 31, 2012. This
decrease was the result of lower sales of a collection system relating to the detection of breast cancer, which we are selling
on behalf of another company. Licensing revenue decrease approximately $2,000 to $4,000 for the quarter ended March 31, 2013.
Costs and Expenses
Cost of Revenues
Cost of revenues for
the quarter ended March 31, 2013 was $6,000, a decrease of $10,000 or 63% from $16,000 for the quarter ended March 31, 2012. This
decrease was a result of lower sales of the collection system relating to the detection of breast cancer, which we are selling
on behalf of another company.
Research and Development
For the three months
ended March 31, 2013, our research and development (“R&D”) expenses were $81,000, an $8,000, or 11%, increase from
$73,000 for the corresponding period in 2012. Of this $8,000 increase, $9,000 related to an increase in payments to consultants,
which was partially offset by a decrease of $1,000 in other costs.
R&D expenses consist
primarily of costs related to specific development programs with scientists and researchers and expenses incurred by engineers
and researchers at our Chicago facility.
Selling, General
and Administrative
For the three months
ended March 31, 2013, selling, general and administrative expenses (“SG&A”) were $331,000 before an adjustment
of trade debt totaling $193,000 and an adjustment for an accrual for franchise taxes totaling $173,000, resulting in a net gain
of $35,000. The SG&A expenses represent a $494,000, or 108%, decrease from SG&A expenses of $459,000 for the corresponding
period in 2012. Of this $494,000 decrease, depreciation expense decreased $27,000, marketing costs decreased $52,000, professional
fees decreased $45,000, travel expenses decreased $7,000, administrative payroll cost decreased $5,000, transfer agent fees decrease
$1,000, $193,000 related to the adjustment of trade debt and a $173,000 reduction in the franchise tax expense. These decreases
were partially offset by an increase of $9,000 in other costs.
Other Income (Expense)
Interest expense increased
$6,000 to $63,000 for the three month period ended March 31, 2013 from $57,000 for the three month period quarter ended March 31,
2012. Of this increase, $7,000 relates to the non-cash charge for related party advances, offset by a reduction of other interest
expense.
Net Loss
The net loss from operations
for the three-month period ended March 31, 2013 was $104,000, as compared to $581,000 for the corresponding period in 2012, a decrease
of $477,000, or 93%. Of this decrease, $494,000 resulted from the decrease in SG&A expenses partially offset by increases in
R&D, interest expense and a decrease in revenues.
The net loss applicable
to common stockholders, which reflects the unpaid and undeclared preferred stock dividends from the period, decreased to $170,000
for the quarter ended March 31, 2013 from $647,000 for the quarter ended March 31, 2012, a decrease of $477,000, or 74%. The net
loss per common share for each of the three month periods ended March 31, 2013 and March 31, 2012 was $0.00 and $0.01 per share,
respectively, on 78,610,477 and 67,163,767 weighted average common shares outstanding, respectively.
Liquidity and Capital Resources
To date, our capital
resources and liquidity needs have been met from advances from related parties, and sales of our debt and equity securities to
individual and institutional investors.
Research and development,
clinical trials and other studies of the components of our
CytoCore Solutions
System, conversions from designs and prototypes
into products and product manufacturing, sales and marketing efforts, medical consultants and advisors, and research, administrative
and executive personnel are and will continue to be the principal basis for our cash requirements. We have obtained operating funds
for the business since inception through private offerings of debt and equity securities to U.S. accredited and foreign investors.
We will be required to make additional offerings in the future to support our operations until we are able to generate sufficient
income from the sale of our products. We used $86,000 for operating activities during the three months ended March 31, 2013 compared
to $243,000 during the three months ended March 31, 2012. During the quarter ending March 31, 2013, approximately $81,000 was incurred
for R&D and approximately $138,000 was incurred for SG&A functions.
We did not engage any
investing activity during the quarter ended March 31, 2013. At this time, we have no other material commitments for capital expenditures
during the remainder of the 2013 fiscal year.
We were able to raise
proceeds of $55,000 through advances from related parties during the three months ended March 31, 2013. The proceeds were used
to develop our products and satisfy certain present and past obligations. At March 31, 2013, we had $7,000 of cash on hand. We
believe that our current cash resources will not be sufficient to fund operations for the next twelve months. We continue to meet
with qualified investors and although no assurance can be given, we believe will be able to raise capital to fund operations in
the immediate future until we can be self-sufficient through operations.
Our operations have
been, and will continue to be, dependent upon management’s ability to raise operating capital through the issuance and sale
of debt and equity securities and advances from related parties. We have incurred significant operating losses since inception
of the business. We expect that significant on-going operating expenditures will be necessary to successfully implement our business
plan and develop, manufacture and market our products. If we are unable to obtain adequate additional financing or generate profitable
sales revenue, or negotiate a favorable settlement plan with creditors, we may be unable to continue our product development and
other activities and may be forced to cease operations. The consolidated financial statements presented do not include any adjustments
that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
As of March 31, 2013,
we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured
finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in such relationships.