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EX-31.2 - CERTIFICATION - CPC OF AMERICA INCcpc_10q-ex3102.htm
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EX-31.1 - CERTIFICATION - CPC OF AMERICA INCcpc_10q-ex3101.htm



U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission File Number 0-24053

CPC of America, Inc.
(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction
of incorporation or organization)
11-3320709
(IRS Employer
Identification No.)

5348 Vegas Drive, #89, Las Vegas, Nevada  89108
(Address of principal executive offices)

(702) 952-9650
(Registrant’s telephone number)

(Not applicable)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x          No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o          No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o  Accelerated filer  o   Non-accelerated filer  o   Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o          No x

As of May 17, 2011, the registrant had 10,149,838 shares of its $.0005 par value common stock issued and outstanding.
 



 
 

 


CPC OF AMERICA, INC.
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2011



PART I - FINANCIAL INFORMATION
 
 
Page No.
Item 1.    Financial Statements.
 
   
Unaudited Condensed Consolidated Balance Sheets at
 
  March 31, 2011 and December 31, 2010 (audited)
F-1
   
Unaudited Condensed Consolidated Statements of Operations for the
 
  three month periods ended March 31, 2011 and 2010 and
 
  for the period from inception (April 11, 1996) to March 31, 2011
F-2
   
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
 
  (Deficit) from inception (April 11, 1996) to March 31, 2011
F-3
   
Unaudited Condensed Consolidated Statements of Cash Flows for the
 
  three month periods ended March 31, 2011 and 2010 and for the period
 
  from inception (April 11, 1996) to March 31, 2011
F-7
   
Notes to Unaudited Condensed Consolidated Financial Statements
F-9

 
 
 
 
 

 
 
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(Unaudited)
 
         
December 31,
 
   
March 31,
   
2010
 
   
2011
   
(Audited)
 
ASSETS
           
             
Current assets
           
Cash and equivalents
  $ 101,351     $ 57,755  
Prepaid expenses
    43,706       51,703  
                 
Total current assets
    145,057       109,458  
                 
Patents, net of accumulated amortization
    173,747       185,127  
Trademarks, net of accumulated amortization
    169       273  
                 
TOTAL ASSETS
  $ 318,973     $ 294,858  
                 
LIABILITIES & SHAREHOLDERS'  DEFICIT
               
                 
Current liabilities
               
Current portion of convertible notes, net of discount and premium
  $ 294,138     $ -  
Accounts payable
    316,901       276,352  
Accrued payroll and related taxes
    657,356       582,569  
Accrued directors' compensation
    25,000       25,000  
Accrued interest
    150,013       103,296  
Accrued dividends payable
    3,946,946       3,789,350  
                 
Total current liabilities
    5,390,354       4,776,567  
                 
Long term debt - convertible notes, net of discount and premium
    476,363       677,447  
                 
Total liabilities
    5,866,717       5,454,014  
                 
Shareholders' deficit
               
Convertible preferred stock, 5,000,000 shares authorized, $.001 par value,
               
Series C - 271,721 shares issued and outstanding at March 31, 2011 and December 31, 2010 (Aggregate liquidation preference of $2,418,317 at March 31, 2011 and December 31, 2010)
    272       272  
Series D - 594,342 shares issued and outstanding at March 31, 2011 and December 31, 2010 (Aggregate liquidation preference of $5,438,229 at March 31, 2011 and December 31, 2010)
    594       594  
Series E - 399,037 shares issued and outstanding at March 31, 2011 and December 31, 2010 (Aggregate liquidation preference of $2,394,222 at March 31, 2011 and December 31, 2010)
    399       399  
Common stock, 20,000,000 shares authorized, $.0005 par value, 10,149,838 shares issued and outstanding at March 31, 2011 and December 31, 2010
    5,076       5,076  
Additional paid in capital - preferred
    14,650,988       14,808,584  
Additional paid in capital - common
    32,102,293       32,077,877  
Deficit accumulated during the development stage
    (52,307,366 )     (52,051,958 )
                 
Total shareholders' deficit
    (5,547,744 )     (5,159,156 )
                 
TOTAL LIABILITIES & SHAREHOLDERS' DEFICIT
  $ 318,973     $ 294,858  
 
The accompanying notes are an integral part of these condensed financial statements.
 
 
 
F-1

 
 
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
 
               
Cumulative
 
               
from inception
 
   
Three Months Ended
   
(April 11, 1996)
 
   
March 31,
   
to March 31,
 
   
2011
   
2010
   
2011
 
                   
Costs and expenses
                 
Research and development - related party
  $ -     $ -     $ 10,016,111  
Research and development - other
    35,560       35,735       13,523,229  
      35,560       35,735       23,539,340  
General and administrative - related party
    -       -       1,781,577  
General and administrative - other
    165,661       216,106       18,520,503  
      165,661       216,106       20,302,080  
                         
Operating Loss
    (201,221 )     (251,841 )     (43,841,420 )
                         
Other income (expense)
                       
Interest expense
    (54,187 )     (6,470 )     (177,211 )
Interest income
    -       -       332,588  
Loss on extinguishment of debt
    -       -       (157,413 )
Increase in cash surrender value of insurance
    -       -       790,910  
      (54,187 )     (6,470 )     788,874  
 
                       
Net Loss
  $ (255,408 )   $ (258,311 )   $ (43,052,546 )
                         
Loss Per share calculation:
                       
Net Loss
  $ (255,408 )   $ (258,311 )        
Beneficial conversion feature
    -       -          
Preferred dividend
    (157,596 )     (187,441 )        
Net loss applicable to common shares - Numerator
  $ (413,004 )   $ (445,752 )        
                         
Basic and diluted net loss per share
  $ (0.04 )   $ (0.05 )        
                         
Basic and diluted weighted average number of common shares outstanding - denominator
    10,149,838       9,537,051          
                         
Maximum number of common shares (not included in denominator of diluted loss per share calculation due to their anti-dilutive nature) attributable to exercise/conversion of:
                       
  Outstanding options
    1,853,907       1,853,907          
  Preferred stock
    2,340,771       2,758,589          
  Convertible notes
    1,665,682       350,354          
 
The accompanying notes are an integral part of these condensed financial statements.
 
 
 
 
F-2

 
 
 
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Shareholders' Equity (Deficit) (continued)
From inception (April 11, 1996) to March 31, 2011
                                                         
Deficit
       
   
Preferred Stock
   
Common Stock
         
Additional
   
Additional
   
Accumulated
   
Total
 
   
Series A
   
Series B
               
Stock
   
Paid-in
   
Paid-in
   
During the
   
Shareholders'
 
   
Number
         
Number
         
Number
         
Option
   
Capital-
   
Capital-
   
Development
    Equity  
   
of Shares
   
Total
   
of Shares
   
Total
   
of Shares
   
Total
   
Costs
   
Common
   
Preferred
   
Stage
   
(Deficit)
 
Initial capitalization
    -     $ -       -     $ -       2,400,000     $ 1,200     $ -     $ -     $ -     $ -     $ 1,200  
Issuance of common stock for a note
    -       -       -       -       300,000       150       -       -       -       -       150  
Issuance of common stock for cash
    -       -       -       -       100,000       50       -       4,950       -       -       5,000  
Issuance of common stock for services
    -       -       -       -       764,000       382       -       37,818       -       -       38,200  
Net loss for 1996
    -       -       -       -       -       -       -       -       -       (59,079 )     (59,079 )
Balance, December 31, 1996
    -       -       -       -       3,564,000       1,782       -       42,768       -       (59,079 )     (14,529 )
Exercise of options
    -       -       -       -       26,666       13       -       29,987       -       -       30,000  
Issuance of common stock for cash and conversion of note payable ($77,000)
    -       -       -       -       640,000       320       -       927,680       -       -       928,000  
Net loss for 1997
    -       -       -       -       -       -       -       -       -       (457,829 )     (457,829 )
Balance, December 31, 1997
    -       -       -       -       4,230,666       2,115       -       1,000,435       -       (516,908 )     485,642  
Exercise of options
    -       -       -       -       57,000       29       -       114,971       -       -       115,000  
Issuance of common stock for cash
    -       -       -       -       40,000       20       -       57,980       -       -       58,000  
Issuance of preferred stock for cash
    8,824       9       -       -       -       -       -       -       74,991       -       75,000  
Valuation of beneficial conversion feature on Series A Preferred
    -       -       -       -       -       -       -       -       25,000       (25,000 )     -  
Contribution of officer's salary
    -       -       -       -       -       -       -       80,000       -       -       80,000  
Net loss for 1998
    -       -       -       -       -       -       -       -       -       (640,580 )     (640,580 )
Balance, December 31, 1998
    8,824       9       -       -       4,327,666       2,164       -       1,253,386       99,991       (1,182,488 )     173,062  
Exercise of warrants
    -       -       -       -       209,490       105       -       366,503       -       -       366,608  
Exercise of options
    -       -       -       -       146,904       73       -       177,289       -       -       177,362  
Issuance of preferred stock for cash
    70,469       70       -       -       -       -       -       -       598,930       -       599,000  
Preferred stock dividend
    -       -       -       -       -       -       -       -       (25,725 )     -       (25,725 )
Valuation of beneficial conversion feature on Series A Preferred
    -       -       -       -       -       -       -       -       199,486       (199,486 )     -  
Repurchase of common shares
    -       -       -       -       (560,000 )     (280 )     -       -       -               (280 )
Net loss for 1999
    -       -       -       -       -       -       -       -       -       (1,329,328 )     (1,329,328 )
Balance, December 31, 1999
    79,293     $ 79       -     $ -       4,124,060     $ 2,062     $ -     $ 1,797,178     $ 872,682     $ (2,711,302 )   $ (39,301 )
 
 
F-3

 
 
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Shareholders' Equity (Deficit) (continued)
From inception (April 11, 1996) to March 31, 2011
                                                                                 
Deficit
       
   
Preferred Stock
   
Common Stock
         
Additional
   
Additional
   
Accumulated
   
Total
 
   
Series A
   
Series B
   
Series C
   
Series D
               
Stock
   
Paid-in
   
Paid-in
   
During the
   
Shareholders'
 
   
Number
         
Number
         
Number
         
Number
         
Number
         
Option
   
Capital-
   
Capital-
   
Development
    Equity  
   
of Shares
   
Total
   
of Shares
   
Total
   
of Shares
   
Total
   
of Shares
   
Total
   
of Shares
   
Total
   
Costs
   
Common
   
Preferred
   
Stage
   
(Deficit)
 
                                                                                           
Balance, December 31, 1999
    79,293     $ 79       -     $ -       -     $ -       -     $ -       4,124,060     $ 2,062     $ -     $ 1,797,178     $ 872,682     $ (2,711,302 )   $ (39,301 )
Exercise of warrants
    -       -       -       -       -       -       -       -       365,500       183       -       639,442       -       -       639,625  
Exercise of options
    -       -       -       -       -       -       -       -       223,832       113       -       258,528       -       -       258,641  
Issuance of preferred stock for cash
    -       -       71,429       71       -       -       -       -       -       -       -       -       624,929       -       625,000  
Valuation of beneficial conversion feature on Series B Preferred
    -       -       -       -       -       -       -       -       -       -       -       -       208,125       (208,125 )     -  
Conversion of Series A Preferred into common shares
    (70,469 )     (70 )     -       -       -       -       -       -       131,996       66       -       624,659       (598,930 )     -       25,725  
Beneficial conversion feature on
                                                                                                                       
Series  A Preferred shares
    -       -       -       -       -       -       -       -       -       -       -       199,486       (199,486 )     -       -  
Settlement of lawsuit
    -       -       -       -       -       -       -       -       33,333       17       -       199,983       -       -       200,000  
Purchase of patent
    -       -       -       -       -       -       -       -       47,042       24       -       235,184       -       -       235,208  
Stock option costs
    -       -       -       -       -       -       -       -       -       -       (280,000 )     280,000       -       -       -  
Amortization of stock option costs
    -       -       -       -       -       -       -       -       -       -       105,000       -       -       -       105,000  
Cancellation of common shares
    -       -       -       -       -       -       -       -       (89,000 )     (45 )     -       -       -       -       (45 )
Net loss for 2000
    -       -       -       -       -       -       -       -       -       -       -       -       -       (1,749,444 )     (1,749,444 )
                                                                                                                         
Balance, December 31, 2000
    8,824       9       71,429       71       -       -       -       -       4,836,763       2,420       (175,000 )     4,234,460       907,320       (4,668,871 )     300,409  
Exercise of options
    -       -       -       -       -       -       -       -       360,394       180       -       413,483       -       -       413,663  
Issuance of common stock for services
    -       -       -       -       -       -       -       -       100,000       50       -       255,450       -       -       255,500  
Issuance of preferred stock for cash
    -       -       113,715       114       95,123       95       -       -       -       -       -       -       1,841,392       -       1,841,601  
Valuation of beneficial conversion
                                                                                                                       
feature on Series B Preferred
    -       -       -       -       -       -       -       -       -       -       -       -       331,636       (331,636 )     -  
Valuation of beneficial conversion
                                                                                                                       
feature on Series C Preferred
    -       -       -       -       -       -       -       -       -       -       -       -       282,233       (282,233 )     -  
Conversion of  preferred stock and
                                                                                                                       
accrued dividends into common shares
    (8,824 )     (9 )     (113,715 )     (114 )     -       -       -       -       330,327       165       -       1,081,316       (1,069,887 )     -       11,471  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       -       -       (63,397 )     -       (63,397 )
Issuance of common stock
                                                                                                                       
options for services
    -       -       -       -       -       -       -       -       -       -       -       20,000       -       -       20,000  
Amortization of stock option costs
    -       -       -       -       -       -       -       -       -       -       140,000       -       -       -       140,000  
Net loss for 2001
    -       -       -       -       -       -       -       -       -       -       -       -       -       (1,968,471 )     (1,968,471 )
                                                                                                                         
Balance, December 31, 2001
    -       -       71,429       71       95,123       95       -       -       5,627,484       2,815       (35,000 )     6,004,709       2,229,297       (7,251,211 )     950,776  
Exercise of options
    -       -       -       -       -       -       -       -       282,480       140       -       317,650       -       -       317,790  
Conversion of  preferred stock and
                                                                                                                       
accrued dividends into common shares
    -       -       (71,429 )     (71 )     (18,576 )     (19 )     -       -       241,627       120       -       790,205       (783,495 )     -       6,740  
Valuation of beneficial conversion
                                                                                                                       
feature on Series C & D Preferred
    -       -       -       -       -       -       -       -       -       -       -       -       1,122,521       (1,122,521 )     -  
Cancellations of shares
    -       -       -       -                       -       -       (535,933 )     (268 )     -       (199,732 )     -       -       (200,000 )
Issuance of preferred stock for cash
    -       -       -       -       264,657       265       110,627       111       -       -       -               3,367,233       -       3,367,609  
Amortization of stock option costs
    -       -       -       -       -       -       -       -       -       -       35,000       -       -       -       35,000  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       -       -       (122,861 )     -       (122,861 )
Purchase of Med Enclosure Stock
    -       -       -       -       -       -       -       -       10,000       5       -       53,495       -       -       53,500  
Net loss for 2002
    -       -       -       -       -       -       -       -       -       -       -       -       -       (3,460,574 )     (3,460,574 )
Balance December 31, 2002
    -     $ -       -     $ -       341,204     $ 341       110,627     $ 111       5,625,658     $ 2,812     $ -     $ 6,966,327     $ 5,812,695     $ (11,834,306 )   $ 947,980  
 
 
F-4

 
 
 
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Shareholders' Equity (Deficit) (continued)
From inception (April 11, 1996) to March 31, 2011
                                                                                 
 
       
   
Preferred Stock
   
Common Stock
                     
Deficit
       
   
Series A
   
Series B
   
Series C
   
Series D
               
 
   
Additional
   
Additional
   
Accumulated
   
Total
 
   
Number
         
Number
         
Number
         
Number
         
Number
         
Stock
   
Paid-in
   
Paid-in
   
During the
   
Shareholders'
 
    of           of           of           of           of          
Option
   
Capital-
   
Capital-
   
Development
    Equity  
   
Shares
   
Total
   
Shares
   
Total
   
Shares
   
Total
   
Shares
   
Total
   
Shares
   
Total
   
Costs
   
Common
   
Preferred
   
Stage
   
(Deficit)
 
                                                                                           
                                                                                           
Balance, December 31, 2002
    -     $ -       -     $ -       341,204     $ 341       110,627     $ 111       5,625,658     $ 2,812     $ -     $ 6,966,327     $ 5,812,695     $ (11,834,306 )   $ 947,980  
Exercise of options
    -       -       -       -       -       -       -       -       775,117       388       -       1,351,807       -       -       1,352,195  
Conversion of  preferred stock and
                                                                                                                       
accrued dividends into common shares
    -       -       -       -       (26,786 )     (27 )     -       -       73,800       37       -       263,034       (244,973 )     -       18,071  
Valuation of beneficial conversion
                                                                                                                       
feature on Series D Preferred
    -       -       -       -       -       -       -       -       -       -       -       -       2,161,694       (2,161,694 )     -  
Issuance of preferred stock for cash
    -       -       -       -       -       -       708,824       709       -       -       -       -       6,484,373       -       6,485,082  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       -       -       (390,289 )             (390,289 )
Net loss for 2003
    -       -       -       -       -       -       -       -       -       -       -       -       -       (2,759,466 )     (2,759,466 )
Balance, December 31, 2003
    -       -       -       -       314,418       314       819,451       820       6,474,575       3,237       -       8,581,168       13,823,500       (16,755,466 )     5,653,573  
Exercise of options
    -       -       -       -       -       -       -       -       460,775       230       -       1,082,034       -       -       1,082,264  
Conversion of  preferred stock and
                                                                                                                       
accrued dividends into common shares
    -       -       -       -       (11,236 )     (11 )     (27,873 )     (28 )     70,918       36       -       383,428       (354,961 )     -       28,464  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       -       -       (478,594 )             (478,594 )
Stock option costs
    -       -       -       -       -       -       -       -       -       -       -       4,527,784       -       -       4,527,784  
Net loss for 2004
    -       -       -       -       -       -       -       -       -       -       -       -       -       (8,314,255 )     (8,314,255 )
Balance, December 31, 2004
    -       -       -       -       303,182       303       791,578       792       7,006,268       3,503       -       14,574,414       12,989,945       (25,069,721 )     2,499,236  
Exercise of options
    -       -       -       -       -       -       -       -       470,393       235       -       777,724       -       -       777,959  
Conversion of  preferred stock and
                                                                                                                    -  
accrued dividends into common shares
    -       -       -       -       (6,180 )     (6 )     (106,922 )     (107 )     176,405       88       -       1,150,457       (1,033,109 )     -       117,323  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       -       -       (501,921 )             (501,921 )
Issuance of common stock for patent
    -       -       -       -       -       -       -       -       4,000       2       -       153,998       -       -       154,000  
Net loss for 2005
    -       -       -       -       -       -       -       -       -       -       -       -       -       (1,625,516 )     (1,625,516 )
Balance, December 31, 2005
    -       -       -       -       297,002       297       684,656       685       7,657,066       3,828       -       16,656,593       11,454,915       (26,695,237 )     1,421,081  
Exercise of options
    -       -       -       -       -       -       -       -       732,699       367       -       1,187,471       -       -       1,187,838  
Conversion of  preferred stock and
                                                                                                                       
accrued dividends into common shares
    -       -       -       -       (5,618 )     (6 )     (28,418 )     (28 )     60,219       30       -       358,881       (309,966 )     -       48,911  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       -       -       (430,176 )     -       (430,176 )
Stock option costs
    -       -       -       -       -       -       -       -       -       -       -       264,297       -       -       264,297  
Expenses paid by officer/shareholder
    -       -       -       -       -       -       -       -       -       -       -       61,252       -       -       61,252  
Net loss for 2006
    -       -       -       -       -       -       -       -       -       -       -       -       -       (2,811,855 )     (2,811,855 )
Balance, December 31, 2006
    -       -       -       -       291,384       291       656,238       657       8,449,984       4,225       -       18,528,494       10,714,773       (29,507,092 )     (258,652 )
Exercise of options
    -       -       -       -       -       -       -       -       621,551       311       -       1,553,566       -       -       1,553,877  
Conversion of  preferred stock and
                                                                                                                    -  
accrued dividends into common shares
    -       -       -       -       (2,809 )     (3 )     (27,014 )     (28 )     52,964       26       -       333,659       (272,117 )     -       61,537  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       -       -       (434,044 )     -       (434,044 )
Stock option costs
    -       -       -       -       -       -       -       -       -       -       -       23,063       -       -       23,063  
Net loss for 2007
    -       -       -       -       -       -       -       -       -       -       -       -       -       (2,435,774 )     (2,435,774 )
Balance, December 31, 2007
    -     $ -       -     $ -       288,575     $ 288       629,224     $ 629       9,124,499     $ 4,562     $ -     $ 20,438,782     $ 10,008,612     $ (31,942,866 )   $ (1,489,993 )
 
 
F-5

 
 
 
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Shareholders' Equity (Deficit)
From inception (April 11, 1996) to March 31, 2011
                                                                     
Deficit
       
   
Preferred Stock
   
Common Stock
         
Additional
   
Additional
   
Accumulated
   
Total
 
   
Series C
   
Series D
   
Series E
               
Stock
   
Paid-in
   
Paid-in
   
During the
   
Shareholders'
 
   
Number
         
Number
         
Number
         
Number
         
Option
   
Capital-
   
Capital-
   
Development
    Equity  
   
of Shares
   
Total
   
of Shares
   
Total
   
of Shares
   
Total
   
of Shares
   
Total
   
Costs
   
Common
   
Preferred
   
Stage
   
(Deficit)
 
                                                                               
                                                                               
Balance, December 31, 2007
    288,575     $ 288       629,224     $ 629       -     $ -       9,124,499     $ 4,562     $ -     $ 20,438,782     $ 10,008,612     $ (31,942,866 )   $ (1,489,993 )
Exercise of options
    -       -       -       -       -       -       154,150       77       -       592,502       -       -       592,579  
Conversion of  preferred stock and
                                                                                                       
accrued dividends into common shares
    -       -       (4,826 )     (5 )     -       -       8,045       4       -       55,159       (44,145 )     -       11,013  
Valuation of beneficial conversion
                                                                                                       
on Series E Preferred
    -       -       -       -       -       -       -       -       -       -       2,459,959       (2,459,959 )     -  
Issuance of preferred stock
    -       -       -       -       551,703       552       -       -       -       -       3,309,668       -       3,310,220  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       (637,465 )             (637,465 )
Stock option costs
    -       -       -       -       -       -       -       -       -       7,712,616       -       -       7,712,616  
Contribution of officer's salary
    -       -       -       -       -       -       -       -       -       344,966       -       -       344,966  
Net loss
    -       -       -       -       -       -       -       -       -       -       -       (11,131,691 )     (11,131,691 )
Balance, December 31, 2008
    288,575       288       624,398       624       551,703       552       9,286,694       4,643       -       29,144,025       15,096,629       (45,534,516 )     (1,287,755 )
Exercise of options
    -       -       -       -       -       -       29,404       15       -       232,276       -       -       232,291  
Conversion of  preferred stock and
                                                                                                       
accrued dividends into common shares
    (16,854 )     (16 )     (30,056 )     (30 )     -       -       109,048       55       -       560,900       (424,954 )     -       135,955  
Issuance of preferred stock
    -       -       -       -       38,834       38       -       -       -       -       232,961       -       232,999  
Issuance of common stock
    -       -       -       -       -       -       111,905       56       -       288,944       -       -       289,000  
Valuation of beneficial conversion
                                                                                                       
feature on Series E Preferred
    -       -       -       -       -       -       -       -       -       -       2,464,166       (2,464,166 )     -  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       (746,449 )     -       (746,449 )
Contribution of officer's salary
    -       -       -       -       -       -       -       -       -       352,462       -       -       352,462  
Net loss
    -       -       -       -       -       -       -       -       -       -       -       (2,887,231 )     (2,887,231 )
Balance, December 31, 2009
    271,721       272       594,342       594       590,537       590       9,537,051       4,769       -       30,578,607       16,622,353       (50,885,913 )     (3,678,728 )
Conversion of  preferred stock and
                                                                                                       
accrued dividends into common shares
    -       -       -       -       (191,500 )     (191 )     491,165       246       -       1,350,443       (1,148,809 )     -       201,689  
Valuation of beneficial conversion
                                                                                                       
feature on convertible debt
    -       -       -       -       -       -       -       -       -       57,378       -       -       57,378  
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       (664,960 )     -       (664,960 )
Shares issued for commitment fee
                                                    121,622       61               47,372                       47,433  
Amortization of convertible note premium
    -       -       -       -       -       -       -       -       -       44,077       -       -       44,077  
Net loss
    -       -       -       -       -       -       -       -       -       -       -       (1,166,045 )     (1,166,045 )
Balance, December 31, 2010
    271,721       272       594,342       594       399,037       399       10,149,838       5,076       -       32,077,877       14,808,584       (52,051,958 )     (5,159,156 )
Preferred stock dividend
    -       -       -       -       -       -       -       -       -       -       (157,596 )     -       (157,596 )
Amortization of onvertible note premium
    -       -       -       -       -       -       -       -       -       24,416       -       -       24,416  
Net loss
    -       -       -       -       -       -       -       -       -       -       -       (255,408     (255,408
Balance, March 31, 2011 (unaudited)
    271,721     $ 272       594,342     $ 594       399,037     $ 399       10,149,838     $ 5,076       -     $ 32,102,293     $ 14,650,988     $ (52,307,366   $ (5,547,744)  
 
 
F-6

 
 
 
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
         
 
   
Cumulative
 
               
from inception
 
   
Three Months Ended
   
(April 11, 1996)
 
   
March 31,
   
to March 31,
 
   
2011
   
2010
   
2011
 
Cash flows from operating activities
                 
Net loss
  $ (255,408 )   $ (258,311 )   $ (43,052,546 )
Adjustments to reconcile net income to net cash used by operating activities:
                       
Depreciation and amortization
    11,484       11,484       422,469  
Amortization of loan discount
    7,469       -       18,243  
Loss on extinguishment of debt
    -       -       157,413  
Contribution of officer's salary/expenses paid by officer
    -       -       838,680  
Issuance of common stock and options for services
    -       -       17,396,008  
Issuance of preferred stock for services
    -       -       145,999  
Issuance of debt for services
    10,000       106,500       163,000  
Changes in operating assets and liabilities
                 
Decrease (increase) in other assets
    7,997       21,033       10,067  
Increase (decrease) in accounts and other payable
    40,549       (36,696 )     318,077  
Increase (decrease) in accrued expenses
    121,505       73,678       1,020,095  
Net cash used in operating activities
    (56,404 )     (82,312 )     (22,562,495 )
                         
Cash flows from investing activities
                       
Purchase of patent
    -       -       (114,795 )
Capital expenditures
    -       -       (148,016 )
Redemption of cash surrender value of life insurance
    -       -       790,910  
Increase in cash surrender value of life insurance
    -       -       (790,910 )
Net cash used in investing activities
    -       -       (262,811 )
                         
Cash flows from financing activities
                       
Proceeds from shareholder notes
    -       -       564,917  
Proceeds from convertible debt
    100,000       90,000       510,000  
Payments on note payable to shareholder
    -       -       (102,017 )
Exercise of options and warrants
    -       -       4,853,421  
Issuance of preferred stock
    -       -       16,390,512  
Issuance of common stock
    -       -       915,200  
Dividends
    -       -       (5,051 )
Cancellation of common stock
    -       -       (200,325 )
Net cash provided by financing activities
    100,000       90,000       22,926,657  
 
                       
Net increase in cash
    43,596       7,688       101,351  
                         
Cash, beginning of period
    57,755       5,583       -  
                         
Cash, end of period
  $ 101,351     $ 13,271     $ 101,351  
                         
 
The accompanying notes are an integral part of these condensed financial statements.
 
 
 
 
F-7

 
 
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
 
         
 
   
Cumulative
 
               
from inception
 
   
Three Months Ended
   
(April 11, 1996)
 
   
March 31,
   
to March 31,
 
   
2011
   
2010
   
2011
 
Non-cash investing and financing activities:
             
Issuance of common stock for note receivable
  $ -     $ -     $ 150  
Debt to equity conversion
  $ -     $ -     $ 422,033  
Acquisition of minority interest
  $ -     $ -     $ 33,250  
Sale of Tercero - elimination of goodwill
  $ -     $ -     $ (40,000 )
Preferred dividends accrued
  $ 157,596     $ 187,441     $ 4,049,932  
Preferred dividends paid through common stock issuance
  $ -     $ -     $ 1,290,759  
Acquisition of Med Enclosures for note payable
  $ -     $ -     $ 250,000  
Acquisition of patent through issuance of common stock
  $ -     $ -     $ 288,708  
Settlement of lawsuit through common stock issuance
  $ -     $ -     $ 200,000  
Valuation of beneficial conversion features
  $ -     $ -     $ 9,312,198  
Conversion of loan to convertible debt
  $ -     $ 47,717     $ 47,717  
Amortization of loan premium
  $ 24,416     $ -     $ 68,493  

The accompanying notes are an integral part of these condensed financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
F-8

 
 

CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011

1.       Organization and summary of significant accounting policies

Organization
CPC of America, Inc., a Nevada corporation (“CPC” or the “Company”), was formed on April 11, 1996 to design, develop and commercialize innovative medical devices that deliver improved therapeutic options for vascular closure and enhance the quality of patient care in endovascular procedures.  Current efforts focus on developing MedCloseTM, an investigational-stage vascular closure system (VCS) that is intended to rapidly seal the femoral arterial puncture site following diagnostic or interventional catheterization procedures.  The Company is classified as a development stage company because its principal activities involve obtaining capital and rights to certain technology, and conducting research and development activities.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany transactions and balances have been eliminated in consolidation.

Interim periods
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States of America for annual financial statements.  In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of results for any future period.  These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2010.

Liquidity and management’s plans
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has not generated any revenues from operations and there is no assurance that the Company will generate revenues in the future. The Company’s ability to generate revenue primarily depends on its success in completing development and obtaining regulatory approvals for the commercialization of its MedClose vascular closure system.  The Company incurred a net loss of $255,408 during the three months ended March 31, 2011. Also, the Company had a cash balance of $101,351, a working capital deficit of $5,245,297 and a stockholders’ deficit of $5,547,744 at March 31, 2011.

 
F-9

 

 
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011


 

1.           Organization and summary of significant accounting policies (continued)

Liquidity and management’s plans (continued)
The Company will require a minimum of $3 million of additional working capital in order to fund its proposed operations over the next 12 months, assuming that Series C and D shareholders do not make requests for a substantial amount of dividend payments in cash.  In the event the Company receives substantial requests for dividend payments in cash or encounter a material amount of unexpected expenses, additional working capital in excess of $3 million may be required.

Management plans to continue to seek sources of financing on favorable terms; however, there are no assurances that any such financing can be obtained on favorable terms, if at all.  On December 17, 2010, the Company entered into an equity line of credit agreement with Ascendiant Capital Group, LLC (“Ascendiant”) in order to establish a possible source of funding for CPC.  The equity line of credit agreement establishes what is sometimes also referred to as an equity drawdown facility.  Ascendiant will provide up to $3,000,000 of funding over a 24 month period.  No drawdowns, however, can be made until the Company files a registration statement on Form S-1 with the Securities and Exchange Commission (“SEC”).  The Company filed such a registration statement on February 14, 2011 and it is still in the approval process with the SEC at this time. Management expects to monitor and control the Company’s operating costs until cash is available through financing or operating activities.  There are no assurances that the Company will be successful in achieving these plans.  The Company anticipates that losses will continue until such time, if ever, as the Company is able to generate sufficient revenues to support its operations.

Fair value of financial instruments
The accounting standards regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, prepaid expenses, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization.

The Company has also adopted ASC 820-10 (formerly SFAS 157, “Fair Value Measurements”) which  defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follow:

 
·
Level 1   inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 
·
Level 2   inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.


 
F-10

 

CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
 
 
1.           Organization and summary of significant accounting policies (continued)

Fair value of financial instruments (continued)
 
·
Level 3   inputs to the valuation methodology are unobservable and significant to the fair value.

Since January 2010, the Company has issued convertible notes totaling $720,717. As of March 31, 2011, the carrying value of these convertible notes was $920,514, which included accrued interest of $150,013, a $88,918 premium (net of amortization) resulting from fair value calculations due to significant modification of terms, less a discount (net of amortization) of $39,134 from the beneficial conversion feature associated with the notes. The Company used level 3 inputs for its valuation methodology and the fair value was determined to be approximately $1,106,637 using cash flows discounted at relevant market interest rates in effect at the period close and Black-Scholes Pricing Model since there is no observable market price.

As of March 31, 2011, the Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with ASC 820-10.

Recent pronouncements
In April 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2010-12 (ASU 2010-12), “Income Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts”.  After consultation with the FASB, the SEC stated that it “would not object to a registrant incorporating the effects of the Health Care and Education Reconciliation Act of 2010 when accounting for the Patient Protection and Affordable Care Act.”  The Company does not expect the provisions of ASU 2010-12 to have a material impact on the Company’s consolidated financial statements.

In April 2010, the FASB issued ASU 2010-13, “Compensation-Stock Compensation (Topic 718):  Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades – a consensus of the FASB Emerging Issues Task Force”.  The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  Earlier application is permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material impact on the Company’s consolidated financial statements.

 
F-11

 


CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011







2.       Share-based payments

Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. There was no estimated share-based compensation expense recognized for the three months ended March 31, 2011 and 2010.

A summary of option activity for the three months ended March 31, 2011 is as follows:

   
Number of
   
Exercise Price
       
   
Options
   
Per Share
   
Expiration
 
                   
Outstanding at December 31, 2010
    1,853,907     $ 4.45 - 7.90       2013  
Activity for the three months ended March 31, 2011
    -                  
Outstanding at March 31, 2011
    1,853,907     $ 4.45 - 7.90       2013  
                         
Exercisable at March 31, 2011
    1,853,907                  
 
If all options outstanding at March 31, 2011 were exercised, the Company would receive $14,015,865 in capital.

3.       Accrued salary and related taxes

The Company is in breach of contract with its CEO and CFO regarding timely payment of salary.  The CEO’s salary breach originally occurred in 2006, and the breach of contract with the CFO extends back to April 1, 2009.  Salary currently due the CEO and CFO are as follows:

   
CEO
   
CFO
   
Total
 
2009 Salary
  $ 218,206     $ 45,000     $ 263,206  
2010 Salary
    175,000       120,000       295,000  
2011 Salary (through March 31, 2011)
    43,750       30,000       73,750  
    $ 436,956     $ 195,000       631,956  
Estimated employer taxes
                    25,400  
Total accrued salary and related taxes
                  $ 657,356  

 
F-12

 



CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011

 
4.       Long-term debt - convertible notes

Since January 2010, the Company has issued $720,717 in convertible notes.  The debt bears interest at rates from 20% to 30% per annum, compounded monthly, and is due two years from the date the cash is received.  Due dates range from January 2012 to February 13, 2013.  In addition, the debt and related accrued interest is convertible into the Company’s common stock at a rate equal to the closing price of the Company’s stock on the day the cash is received, which is the date of the note.  Conversion rates range from $0.33 - $0.74. Cash proceeds of $510,000 were received from existing shareholders, the Company’s CEO converted amounts owed to him totaling $47,717, and the Company issued notes totaling $163,000 in exchange for consulting expenses.

As noted above, the debt and related accrued interest is convertible into the Company’s common stock, and originally, this conversion rate was equal to the closing price of the Company’s stock on the day the cash was received.  As additional money was received from the same individuals who had loaned money in the first and second quarters of 2010, the conversion rate for all notes from these individuals was negotiated downward to reflect the Company’s common stock price at a date near the day the additional cash was received in the third quarter of 2010.  ASC 470-50-40-6 requires an exchange of debt instruments with substantially different terms to be treated as a debt extinguishment.  The modification of terms on these notes met the definition of significant because the change in the fair value of the embedded conversion option was more than 10 percent of the carrying amount of the original debt instrument immediately before and after the modification of terms.

According to ASC 470-50, the difference between the net carrying value and the price paid to acquire the debt instruments is recorded as a gain or loss.  In the Company’s situation, the acquisition price was calculated as the present value of the principal (using a 1% risk-free interest rate) plus the fair value of the conversion option (calculated using the Black-Scholes Method), less the embedded beneficial conversion feature.  Since this acquisition price was greater than the notes’ carrying value, a loss on extinguishment of $157,413 was recorded during the quarter ended September 30, 2010.

The Company has recorded a beneficial conversion feature in accordance with FASB ASC 470-20. The Company measures the embedded beneficial conversion feature by allocating a portion of the proceeds equal to the intrinsic value of the embedded beneficial conversion feature to additional paid-in capital.  Intrinsic value is calculated as the difference between the effective conversion price and the fair value of the common stock into which the debt is convertible, multiplied by the number of shares into which the debt is convertible.  A beneficial conversion feature totaling $57,378 was recorded as loan discount during the year ended December 31, 2010.  The loan discount will be amortized over the life of the convertible note.  For the three months ended March 31, 2011 and 2010, $7,469 and $0 of amortization of loan discount was recorded as interest expense, respectively.

 
F-13

 

CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011


4.       Long-term debt - convertible notes (continued)

A premium of $157,411 on the convertible notes was also recorded as part of the modification of terms.  This premium is the present value of the principal (using a 1% risk-free interest rate) plus the fair value of the conversion option (calculated using the Black-Scholes Method) and will be amortized over the life of the loans.  For the three months ended March 31, 2011 and 2010, $24,216 and $0 of amortization of premium was recorded to additional paid in capital, respectively.

The following weighted average assumptions were used to calculate the options granted: term of 1.5-1.83 years, risk-free interest rate of 0.375% - 1%, volatility ranging of 110% and a weighted fair value ranging from $0.18 - $0.36.

Another feature of the convertible notes is that interest is guaranteed for the two year period contingent on early repayment or conversion of the debt.  Total interest for the notes outstanding at March 31, 2011 is $525,732 of which $150,013 has been included as interest payable on the accompanying March 31, 2011 balance sheet.  The difference of $375,719 represents a contingent liability at March 31, 2011.  Management has determined that early repayment or conversion of the convertible notes is remote at this time, so the contingency has not been recorded.

The following cash outlays would be required in 2012 and 2013 should repayment of the convertible debt and related interest be in cash:

Quarter ending March 31, 2012:
  $ 423,148  
Quarter ending June 30, 2012:
  $ 255,030  
Quarter ending September 30, 2012
  $ 314,843  
Quarter ending December 31, 2012
  $ 91,341  
Quarter ending March 31, 2013
  $ 162,087  
Total potential cash outlay:
  $ 1,246,449  

5.       Shareholders’ equity (deficit)

There have been no preferred stock sales or conversions or common share issuances during the three months ended March 31, 2011.

If all preferred stock, related accrued dividends, options, convertible debt and related accrued interest outstanding at March 31, 2011 were converted to common stock, the total number of shares outstanding would be approximately 17,274,794.

6.       Subsequent events

Events subsequent to March 31, 2011 have been evaluated through the date these financial statements were issued, to determine whether they should be disclosed to keep the financial statements from being misleading.

 
F-14

 


 Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General
 
To date, our activities have included the market analysis and development of our MedClose device and the raising of development and working capital. Our operations are currently focused on the business of developing a patented internal puncture closure device known as “MedClose.” We have not commenced revenue producing operations. Our operations to date have predominately consisted of the design and development of our MedClose device and our counterpulsation units, and the raising of capital.
 
The MedClose is a medical device that is designed to seal arterial puncture sites in patients who have undergone diagnostic or interventional catheterization procedures. It utilizes a proprietary catheter system that is designed to enhance manual compression by delivering a biologic or synthetic sealant which forms an elastic coagulum that is fully absorbed within 10 to 14 days. The MedClose is designed to significantly reduce the time to hemostasis (the stoppage of bleeding), thereby accelerating the patient's post-operative recovery and reducing the amount of time spent by post-operative professionals. The MedClose applications and usage capabilities are intended for cardiac diagnostic and interventional cardiology procedures as well as interventional radiological and proposed carotid stenting procedures. As of the date of this report, MedClose is not available for commercial distribution. We hold three patents for both the instrument and the technique used in connection with MedClose, and two additional patents pending.
 
We intend to analyze our options for moving forward with the commercial exploitation of the MedClose, including licensing or sale of the product and our manufacture, marketing and sale of the product directly. If we pursue the manufacture or marketing of the MedClose product, we will require significant additional capital. In that event, we will endeavor to acquire the necessary working capital from the issuance of debt instruments or the sale of our securities. However, there can be no assurance we will be able to obtain the required additional working capital on commercially reasonable terms or at all.
 
We expect to commence revenue producing operations subject to U.S. or foreign regulatory approval of the MedClose device. As of the date of this report, we believe that we are likely to receive foreign regulatory approval of the MedClose device sooner than U.S. approval, and we intend to focus our development efforts on the approval of the MedClose device in the European Union.  We intend to submit an application for a CE mark for the MedClose product, as a delivery system consisting of the MedClose device coupled with our proprietary sealant.  A CE mark is a mandatory conformance mark on products placed on the market in the European Economic Area.  With the CE marking on a product, the manufacturer ensures that the product is in conformity with the essential requirements of the applicable European Conformity directives. CE mark approval is the principal requirement for commercial sale of the MedClose device in the European Union. The filing of our application for a CE mark and the regulatory approval of the MedClose in the European Union is subject to our receipt of additional capital.  Until we receive additional capital, we cannot continue progress on the CE mark application.
 
We also intend to continue our development of a proprietary synthetic sealant suitable for use in connection with the MedClose device. In March 2009, we entered into a product development agreement with Dr. Olex Hnojewyj, a holder of 13 patents in the field of vascular closure and other medical devices, pursuant to which Dr. Hnojewyj was retained by us to develop a synthetic sealant on our behalf suitable for utilization with the MedClose device.  We have developed a synthetic compound, and in May 2009, we filed our first patent for a synthetic sealant for specific application for the MedClose device.  We conducted animal testing of the sealant during April 2009 and have successfully completed animal testing to date, subject only to the completion of Good Laboratory Practices (GLP) animal testing and animal biocompatibility testing.  However, our pursuit of the GLP and biocompatibility testing is subject to our receipt of additional capital.

 
3

 


 
Upon receipt of additional capital, we expect to commence clinical trial testing of the MedClose device utilizing the synthetic sealant formula in multiple European locations.  We will also commence with completing the necessary requirements to amend the investigational device exemption, or IDE, application with the FDA, by substituting our proprietary synthetic sealant for the original biologic sealant obtained from a third party vendor. With that substitution, we anticipate a transfer back to the Center for Devices and Radiological Health (“CDRH”) branch of the FDA from the Center for Biologics Evaluation and Research (“CBER”) branch since synthetic sealants are determined to be medical devices and not biological. We also intend to pursue an ISO 13485 certification of our records and procedures relating to our development and the proposed manufacturing of our MedClose device and proprietary sealant.
 
We do not expect to purchase or sell significant plant or equipment during 2011, nor do we expect a significant change in the number of our employees during the year.
 
Currently our focus is to acquire the necessary working capital from the issuance of debt instruments or the sale of our securities.  However, there can be no assurance we will be able to obtain the required additional working capital on commercially reasonable terms or at all.  On December 17, 2010, the Company entered into an equity line of credit agreement with Ascendiant Capital Group, LLC (“Ascendiant”) in order to establish a possible source of funding.  The equity line of credit agreement establishes what is sometimes also referred to as an equity drawdown facility.  Ascendiant will provide up to $3,000,000 of funding over a 24 month period.  No drawdowns, however, can be made until the Company files a registration statement on Form S-1 with the Securities and Exchange Commission (“SEC”).  The Company filed such a registration statement on February 14, 2011 and it is still in the approval process with the SEC at this time.

Results of Operations

Revenue.  We have generated no revenue to date and do not expect to generate revenue until we have received commercial regulatory approval of our MedClose device in various countries and markets.

Research and Development.  Our expenses related to research and development during the three month period ended March 31, 2011 is nearly the same as in the prior year three month period: $35,560 and $35,735, respectively.  Research and development related to the development and testing of our internal puncture closure device and technique known as “Medclose” and our proprietary sealant have virtually ceased due to capital constraints.  Subject to our receipt of additional capital, we expect our research and development costs to increase as we get further into human trials and proceed towards the submission of applications for CE Mark/European commercial approval and eventually a FDA pre-market approval thereafter.

General and Administrative.  During the three month period ended March 31, 2011, general and administrative expenses decreased by $50,445 over the prior year three month period.  The decrease was primarily due to a decrease of $11,200 in auditing fees, and a decrease in other professional fees of $116,200, offset by increases in insurance of $29,400, continuing education of $5,000, estimated payroll taxes of $7,500 and legal fees of $31,300.  The increase in legal fees is a result of filing a registration statement on Form S-1 with the SEC.  Upon receipt of additional capital, we would expect general and administrative expenses to increase somewhat, though we do not anticipate an increase in officer salaries.

Interest expense.  During the three month period ended March 31, 2011, we incurred $54,187 in interest expense due to the issuance of the convertible notes described below.  This represents an increase of $47,717 over the prior year due to an increase in the amount of notes outstanding.

 
4

 


Net Loss.  Our net loss is approximately the same for the three month periods of March 31, 2011 and 2010: $255,408 and $258,311, respectively.  Any decrease in general and administrative expenses was offset by an increase in interest expense.  We have had inadequate capital to fund our plan of operation.

Financial Condition
 
As of March 31, 2011, we had $101,351 of cash and a working capital deficit of $5,245,297, which includes accrued dividends of $3,946,946 payable on our outstanding shares of Series C, Series D and Series E preferred stock as of such date. Our Series C and Series D preferred stock both have a 5% annual dividend payable in cash or shares of our common stock, at the option of the holder. Those dividends are convertible into our common shares at the rate of $3.57 per share in the case of the Series C preferred stock and $6.86 per share in the case of the Series D preferred stock. Our Series E preferred stock has a 10% annual dividend payable in cash or shares of our common stock, at the option of our company, subject to the holder’s right to take dividends in common shares. The dividends on Series E preferred stock are convertible into our common shares at the rate of $2.75 per share.  Dividends on our outstanding shares of preferred stock are only payable at the time those shares are converted into shares of our common stock. To date, all dividends to the holders of our Series C and D preferred shares have been paid in common shares.  However, there can be no assurance that our Series C and D preferred shareholders will continue to elect to receive dividends in common shares instead of cash.
 
Commencing in July 2009, we began to curtail certain product development and testing due to limited working capital.  We believe that we will require a minimum of $3 million of additional working capital in order to fund our proposed operations over the 12 months following the date of this report, assuming we do not receive requests for a substantial amount of dividend payments in cash. In the event we receive substantial requests for dividend payments in cash or we encounter a material amount of unexpected expenses, we may require in excess of $3 million additional capital over the next 12 months. We will seek to obtain additional working capital through the issuance of debt securities or the sale of our securities. However, we have no agreements or understandings with any third parties at this time for our receipt of such working capital. Consequently, there can be no assurance we will be able to access capital as and when needed or, if so, that the terms of any available financing will be subject to commercially reasonable terms.
 
Since January 2010, the Company has issued $720,717 in convertible notes.  The debt bears interest at rates from 20% to 30% per annum, compounded monthly, and is due two years from the date the cash is received.  In addition, the debt and related accrued interest is convertible into the Company’s common stock at a rate equal to the closing price of the Company’s stock on the day the cash is received, which is the date of the note.  Cash proceeds of $510,000 were received from existing shareholders, the Company’s CEO converted amounts owed to him totaling $47,717, and the Company issued notes totaling $163,000 in exchange for consulting expenses.
 
As noted above, the debt and related accrued interest is convertible into the Company’s common stock, and originally, this conversion rate was equal to the closing price of the Company’s stock on the day the cash was received.  As additional money was received from the same individuals who had loaned money in the first and second quarters of 2010, the conversion rate for all notes from these individuals was negotiated downward to reflect the Company’s common stock price at a date near the day the additional cash was received in the third quarter of 2010.  ASC 470-50-40-6 requires an exchange of debt instruments with substantially different terms to be treated as a debt extinguishment.  The modification of terms on these notes met the definition of significant because the change in the fair value of the embedded conversion option was more than 10 percent of the carrying amount of the original debt instrument immediately before and after the modification of terms.
 

 
5

 

According to ASC 470-50, the difference between the net carrying value and the price paid to acquire the debt instruments is recorded as a gain or loss.  In the Company’s situation, the acquisition price was calculated as the present value of the principal (using a 1% risk-free interest rate) plus the fair value of the conversion option (calculated using the Black-Scholes Method), less the embedded beneficial conversion feature.  Since this acquisition price was greater than the notes’ carrying value, a loss on extinguishment of $157,413 was recorded for the quarter ended September 30, 2010.
 
The Company has recorded a beneficial conversion feature in accordance with FASB ASC 470-20. The Company measures the embedded beneficial conversion feature by allocating a portion of the proceeds equal to the intrinsic value of the embedded beneficial conversion feature to additional paid-in capital.  Intrinsic value is calculated as the difference between the effective conversion price and the fair value of the common stock into which the debt is convertible, multiplied by the number of shares into which the debt is convertible.  A beneficial conversion feature totaling $57,378 was recorded as loan discount during the year ended December 31, 2010.  The loan discount will be amortized over the life of the convertible note.  For the three months ended March 31, 2011 and 2010, $7,469 and $0 of amortization of loan discount was recorded as interest expense, respectively.
 
A premium of $157,411 on the convertible notes was also recorded as part of the modification of terms.  This premium is the present value of the principal (using a 1% risk-free interest rate) plus the fair value of the conversion option (calculated using the Black-Scholes Method) and will be amortized over the life of the loans.  For the three months ended March 31, 2011 and 2010, $24,416 and $0 of amortization of premium was recorded to additional paid in capital, respectively.
 
The following weighted average assumptions were used to calculate the options granted: term of 1.5-1.83 years, risk-free interest rate of 0.375% - 1%, volatility ranging of 110% and a weighted fair value ranging from $0.18 - $0.36.
 
Another feature of the convertible notes is that interest is guaranteed for the two year period contingent on early repayment or conversion of the debt.  Total interest for the notes outstanding at March 31, 2011 is $525,732 of which $150,013 has been included as interest payable on the accompanying March 31, 2011 balance sheet.  The difference of $375,719 represents a contingent liability at March 31, 2011.  Management has determined that early repayment or conversion of the convertible notes is remote at this time, so the contingency has not been recorded.

The following cash outlays would be required in 2012 and 2013 should repayment of the convertible debt and related interest be in cash:

Quarter ending March 31, 2012:
  $ 423,148  
Quarter ending June 30, 2012:
  $ 255,030  
Quarter ending September 30, 2012
  $ 314,843  
Quarter ending December 31, 2012
  $ 91,341  
Quarter ending March 31, 2013
  $ 162,087  
Total potential cash outlay:
  $ 1,246,449  

The report of our independent registered public accounting firm for the fiscal year ended December 31, 2010 states that due to our working capital deficiency at December 31, 2010 there is a substantial doubt about our ability to continue as a going concern.
 
As noted above, we are currently analyzing our options for moving forward with the commercial exploitation of the MedClose, including licensing or sale of the product and our manufacturing, marketing and sale of the product directly. If we pursue the direct manufacturing and marketing of the MedClose product, we will require significant additional capital in order to (i) complete clinical trials and regulatory approvals in Europe, North America and other designated foreign markets; (ii) commence manufacturing of the device; and (iii) commence marketing and sales of the device, including the development of an internal infrastructure necessary to support manufacturing and marketing.
 

 
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We will endeavor to raise additional funds through the sale of our Series E preferred shares, convertible notes and any other available financing sources in order to meet our general working capital requirements and to fund the commercial exploitation of the MedClose. However, there are no agreements or understandings with any third parties at this time for our receipt of additional working capital, and there can be no assurance that such funds will be available on commercially reasonable terms, if at all. If we are unable to access additional capital on a timely basis, we will be unable to expand or continue our development of the MedClose device and our operating results will be adversely affected.
 
Equity Line of Credit
 
On December 17, 2010, we entered into an equity line of credit agreement with Ascendiant Capital Group, LLC (“Ascendiant”) in order to establish a possible source of funding. The equity line of credit agreement establishes what is sometimes also referred to as an equity drawdown facility pursuant to a Securities Purchase Agreement entered into between the Company and Ascendiant.
 
Pursuant to a Registration Rights Agreement entered into between the Company and Ascendiant in connection with the equity line of credit, we filed a registration statement with the Securities and Exchange Commission (the “SEC”) on February 14, 2011. The registration statement will register shares of common stock to be purchased under the equity line of credit and the shares of common stock issued to Ascendiant for their commitment to the equity line of credit. There are no penalties assessed to us in connection with the filing and effectiveness deadlines associated with the registration statement.
 
Under the equity line of credit agreement, Ascendiant has agreed to provide us with up to $3,000,000 of funding prior to 24 months after the seventh trading date after the effective date of the registration statement. During this period, we may request a drawdown under the equity line of credit by selling shares of its common stock to Ascendiant and Ascendiant will be obligated to purchase the shares. We may request a drawdown once every eleven trading days, although we are under no obligation to request any drawdowns under the equity line of credit.  There must be a minimum of two trading days between each drawdown request.
 
During the nine trading days following a drawdown request, we will calculate the amount of shares we will sell to Ascendiant and the purchase price per share.  The purchase price per share of common stock will be based on the daily volume weighted average price of our common stock during each of the nine trading days immediately following the drawdown date, less a discount of 10%.
 
We may request a drawdown by faxing a drawdown notice to Ascendiant, stating the amount of the drawdown and the lowest price, if any, at which we are willing to sell the shares. The lowest price will be set by our Chief Executive Officer or Chief Financial Officer in their sole and absolute discretion.
 
No drawdowns on the line of credit will occur until the Registration Statement mentioned above is approved by the SEC, and that process is ongoing at this time.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet financing arrangements.
 
Forward Looking Statements

This report contains forward-looking statements that are based on our beliefs as well as assumptions and information currently available to us.  When used in this report, the words “believe,” “expect,” “anticipate,” “estimate” and similar expressions are intended to identify forward-looking statements.  These statements are subject to risks, uncertainties and assumptions, including, without limitation, the risks and uncertainties concerning FDA approval of our products; the risks and uncertainties concerning the acceptance of our services and products by our potential customers; our present financial condition and the risks and uncertainties concerning the availability of additional capital as and when required; the risks and uncertainties concerning technological changes and the competition for our services and products; and the risks and uncertainties concerning general economic conditions.  These and other factors that may affect our results are discussed more fully in “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2011.  Forward-looking statements speak only as of the date they are made.  Readers are warned that we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, and are urged to review and consider disclosures we make in this and other reports that discuss factors germane to our business.  See particularly our reports on Forms 10-K, 10-Q and 8-K filed from time to time with the Securities and Exchange Commission.

 
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Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument.  The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes.  Market risk is attributed to all market sensitive financial instruments, including long-term debt.

We do not utilize derivative financial instruments or investments in available-for-sale securities.  All cash is held in both interest and non-interest bearing accounts.  However, we do not believe that our cash accounts would have significant impact as a result of changes in interest rate since we do not rely on earnings from our cash accounts for cash flow.

Item 4.     Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures” refers to the controls and procedures of our company that are designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Management, including our chief executive officer (principal executive officer) and chief financial officer (principal financial officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes in our internal control over financial reporting during the three months ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

 
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PART II - OTHER INFORMATION

Item 1.        Legal Proceedings

There have been no material developments during the quarter ended March 31, 2011 in any material pending legal proceedings to which the Company is a party or of which any of our property is the subject.

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.       Defaults Upon Senior Securities

 
None

Item 5.       Other Information

 
(a)
None
 
(b)
There were no changes to the procedures by which security holders may recommend nominees to our board of directors.

Item 6.       Exhibits.

Exhibit
No.
 
Description
 
Method of Filing
     
     
31.1
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed electronically herewith
     
31.2
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed electronically herewith
     
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Filed electronically herewith


 
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SIGNATURES


In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
CPC of America, Inc.
 
(Registrant)
   
   
Dated:  May 18, 2011
By:       /s/ Rod A. Shipman                                
 
Rod A. Shipman,
 
President and Chief Executive Officer
   
   
 
By:       /s/ Marcia J. Hein                                 
 
Marcia J. Hein,
 
Chief Financial Officer

 
 
 
 
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