##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark
One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended September 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from  to.
 Commission File number 0-935
 
 CYTOCORE, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    36-4296006(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 (Address of Principal Executive Offices)
 (Registrants Telephone Number, including Area Code)
 
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
  NOVEMBER 7, 2008: 41,222,361




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##### 



CYTOCORE, INC.
 QUARTERLY REPORT ON FORM 10-Q
 TABLE OF CONTENTS
 PagePART I.   FINANCIAL INFORMATIONItem 1. Financial Statementsa) Condensed Consolidated Balance Sheets  September 30, 2008 (unaudited) and December 31, 2007
    
    
    2b) Condensed Consolidated Statements of Operations  Three and nine months ended September 30, 2008 and September 30, 2007 (unaudited)
    
    
    3c) Condensed Consolidated Statements of Cash Flows  Nine months ended September 30, 2008 and September 30, 2007 (unaudited)
    
    
    4d) Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II.  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURES
    
    
    23EXHIBIT INDEX
    
    
    24Exhibit 31 Section 302 CertificationExhibit 32 Section 906 CertificationEX-31EX-32
  1




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##### Table of Contents



PART I.  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    1,623
    
    
    $
    316Accounts receivable
    
    
    31
    
    
    
    15Inventories
    
    
    908
    
    
    
    14Prepaid expenses and other current assets
    
    
    47
    
    
    
    216Total current assets
    
    
    2,609
    
    
    
    561Fixed assets, net
    
    
    1,838
    
    
    
    532Licenses, patents and technology, net of amortization
    
    
    109
    
    
    
    20Total assets
    
    $
    4,556
    
    
    $
    1,113Liabilities and Stockholders Equity (Deficit)Current Liabilities:Accounts payable
    
    $
    1,899
    
    
    $
    1,778Accrued payroll costs
    
    
    65
    
    
    
    589Accrued expenses
    
    
    922
    
    
    
    1,912Notes payable
    
    
    70
    
    
    
    70Total current liabilities
    
    
    2,956
    
    
    
    4,349Stockholders Equity (Deficit):Preferred stock, $0.001 par value; 10,000,000 shares authorized; 373,560 and 403,272 shares issued and
outstanding at September 30, 2008 and December 31, 2007, respectively (Liquidation value of all
classes of preferred stock $2,875 at September 30, 2008)
    
    
    1,491
    
    
    
    1,628Common stock, $0.001 par value; 500,000,000 shares authorized; 41,222,361 and 35,866,156 shares
issued and 41,203,152 and 35,846,947 shares outstanding at September 30, 2008 and December 31,
2007, respectively
    
    
    41
    
    
    
    36Additional paid-in-capital
    
    
    91,066
    
    
    
    80,917Treasury stock: 19,209 shares at September 30, 2008 and December 31, 2007
    
    
    (327
    )
    
    
    (327
    )Accumulated deficit
    
    
    (90,594
    )
    
    
    (85,413
    )Accumulated comprehensive lossCumulative translation adjustment
    
    
    (77
    )
    
    
    (77
    )Total stockholders equity (deficit)
    
    
    1,600
    
    
    
    (3,236
    )Total liabilities and stockholders equity (deficit)
    
    $
    4,556
    
    
    $
    1,113
  2




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Dollars in thousands, except per share amounts)
 Nine months ended
    
    
    Three months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)Net revenues
    
    $
    110
    
    
    $
    55
    
    
    $
    28
    
    
    $
    15Operating expensesCost of revenues
    
    
    214
    
    
    
    
    
    
    
    71
    
    
    
    Research and development (net of settlement of trade debt
of $207 and $141 for the nine and three months ended
September 30, 2007, respectively)
    
    
    1,649
    
    
    
    1,778
    
    
    
    332
    
    
    
    565Selling, general and administrative (net of trade debt and
interest settlement of $124 and $39 for the nine and three
months ended September 30, 2007, respectively)
    
    
    3,196
    
    
    
    2,839
    
    
    
    1,114
    
    
    
    975Selling, general and administrative  related parties
    
    
    225
    
    
    
    504
    
    
    
    60
    
    
    
    60Total operating expenses
    
    
    5,284
    
    
    
    5,121
    
    
    
    1,577
    
    
    
    1,600Operating loss
    
    
    (5,174
    )
    
    
    (5,066
    )
    
    
    (1,549
    )
    
    
    (1,585
    )Other incomeUnrealized gain on convertible securities
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    Interest income
    
    
    50
    
    
    
    17
    
    
    
    12
    
    
    
    16Total other income
    
    
    50
    
    
    
    24
    
    
    
    12
    
    
    
    16Net loss
    
    
    (5,124
    )
    
    
    (5,042
    )
    
    
    (1,537
    )
    
    
    (1,569
    )Preferred stock dividend
    
    
    (58
    )
    
    
    (323
    )
    
    
    
    
    
    
    (11
    )Net loss applicable to common stockholders
    
    $
    (5,182
    )
    
    $
    (5,365
    )
    
    $
    (1,537
    )
    
    $
    (1,580
    )Basic and diluted net loss per common share(1)
    
    $
    (0.13
    )
    
    $
    (0.15
    )
    
    $
    (0.04
    )
    
    $
    (0.04
    )Basic and diluted weighted average number
of common shares outstanding(1)
    
    
    39,568,290
    
    
    
    33,898,048
    
    
    
    40,954.290
    
    
    
    35,261,116
 
 (1)
    
    September 30, 2007 has been restated to reflect the one-for-ten reverse stock split that was
effective November 27, 2007.  3




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007(Unaudited)Operating Activities:Net loss
    
    $
    (5,124
    )
    
    $
    (5,042
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    151
    
    
    
    14Amortization of license
    
    
    33
    
    
    
    Loss on disposal of fixed asset
    
    
    1
    
    
    
    Gain on settlements of indebtedness
    
    
    (19
    )
    
    
    (331
    )Unrealized gain on convertible securities
    
    
    
    
    
    
    (7
    )Warrants issued to non-employees for services
    
    
    37
    
    
    
    460Stock and warrants issued in settlement of debt
    
    
    
    
    
    
    467Non-cash compensation expense
    
    
    86
    
    
    
    513Non-cash interest related to warrant modification
    
    
    
    
    
    
    182Changes in assets and liabilities:Accounts receivable
    
    
    (16
    )
    
    
    3Inventories
    
    
    (894
    )
    
    
    Prepaid expenses and other current assets
    
    
    169
    
    
    
    (59
    )Accounts payable
    
    
    29
    
    
    
    (284
    )Accrued expenses
    
    
    (716
    )
    
    
    (622
    )Net cash used in operating activities
    
    
    (6,263
    )
    
    
    (4,706
    )Investing activities:Purchase of license
    
    
    (122
    )
    
    
    Purchases of fixed assets
    
    
    (1,346
    )
    
    
    (249
    )Net cash used in investing activities
    
    
    (1,468
    )
    
    
    (249
    )Financing activities:Proceeds from issuance of common stock
    
    
    9,381
    
    
    
    3,335Financing costs in connection with private placement of stock
    
    
    (405
    )
    
    
    (250
    )Proceeds from exercise of warrants
    
    
    62
    
    
    
    2,189Proceeds from exercise of options
    
    
    
    
    
    
    50Payment of notes payable
    
    
    
    
    
    
    (355
    )Net cash provided by financing activities
    
    
    9,038
    
    
    
    4,969Net increase in cash and cash equivalents
    
    
    1,307
    
    
    
    14Cash and cash equivalents at the beginning of period
    
    
    316
    
    
    
    874Cash and cash equivalents at end of period
    
    $
    1,623
    
    
    $
    888Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    23Non-cash transactions during the period for:Preferred stock and cumulative dividends converted into common stock
    
    $
    136
    
    
    $
    1,133Convertible securities
    
    $
    
    
    
    $
    560Payment of accrued bonuses with common stock
    
    $
    604
    
    
    $
    Warrant exercised with debt
    
    $
    180
    
    
    
    
  4




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##### Table of Contents



CYTOCORE, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Note 1. Organization
  SoftPAP CytoCore Solutions CytoCore Solutions CytoCore Solutions CytoCore
Solutions
  Note 2. Basis of Presentation
    5




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##### Table of Contents



Fair Value Measurements Effective Date of FASB Statement No. 157
  Note 3. Fixed Assets
  September 30,
    
 
   December 31,2008
    
    
    2007(unaudited)Furniture and fixtures
    
    $
    47
    
    
    $
    124Laboratory equipment
    
    
    508
    
    
    
    622Computer and communications equipment
    
    
    261
    
    
    
    343Design and tooling
    
    
    1,138
    
    
    
    486Machinery and equipment
    
    
    777
    
    
    
    Leasehold improvements
    
    
    
    
    
    
    282,731
    
    
    
    1,603Less accumulated depreciation and amortization
    
    
    (893
    )
    
    
    (1,071
    )Total
    
    $
    1,838
    
    
    $
    532
 Note 4. Licenses, Patents and Technology
  Note 5 Accrued Expenses
  September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)Accrued interest
    
    $
    355
    
    
    $
    350Accrued franchise and other taxes
    
    
    76
    
    
    
    707Accrued compensation
    
    
    211
    
    
    
    637Other accrued expenses
    
    
    280
    
    
    
    218Total
    
    $
    922
    
    
    $
    1,912
 6




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##### Table of Contents



Note 6. Notes Payable
  September 30,
    
    
    December 31,2008
    
    

2007(unaudited)Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate
9% per annum, due December 20, 2001.
    
    $
    15
    
    
    $
    15Ventana Medical Systems, Inc. $62,946 Promissory Note issued November 30, 2003;
due December 31, 2003; interest rate 8% per annum payable
after December 31, 2003
    
    
    21
    
    
    
    21Xillix Technologies Corporation $361,000 Promissory Note issued June 26, 1998;
Interest rate Canadian Prime plus 6% per annum, due December 27, 1999;
represents a debt of AccuMed
    
    
    34
    
    
    
    34$
    70
    
    
    $
    70
 Defaults.
 Note 7. Stockholders Equity (Deficit)
 Loss per share
  Nine months ended
    
    
    Three months endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)Basic and Diluted:Net loss applicable to common stockholders
    
    $
    (5,182
    )
    
    $
    (5,365
    )
    
    $
    (1,537
    )
    
    $
    (1,580
    )Weighted average common shares outstanding
    
    
    39,568,290
    
    
    
    33,898,048
    
    
    
    40,954,290
    
    
    
    35,261,116Net loss per common share
    
    $
    (0.13
    )
    
    $
    (0.15
    )
    
    $
    (0.04
    )
    
    $
    (0.04
    )
  Earnings per Share
 7




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##### Table of Contents



Preferred Stock
  September 30,
    
    
    December 31,2008
    
    
    2007Shares Issued &
    
    
    Shares Issued &Offering
    
    Outstanding
    
    
    Outstanding(unaudited)Series A convertible
    
    
    47,250
    
    
    
    47,250Series B convertible, 10% cumulative dividend
    
    
    93,750
    
    
    
    122,486Series C convertible, 10% cumulative dividend
    
    
    38,333
    
    
    
    38,333Series D convertible, 10% cumulative dividend
    
    
    175,000
    
    
    
    175,000Series E convertible, 10% cumulative dividend
    
    
    19,227
    
    
    
    20,203Total Preferred Stock
    
    
    373,560
    
    
    
    403,272
 Summary of Preferred Stock Terms
 Series A Convertible Preferred Stock
 Liquidation Value:
    
    $4.50 per shareConversion Price:
    
    $103.034 per shareConversion Rate:
    
    0.04367Liquidation Value divided by Conversion Price ($4.50/$103.034)Voting Rights:
    
    NoneDividends:
    
    NoneConversion Period:
    
    Any time
 Series B Convertible Preferred Stock
 Liquidation Value:
    
    $4.00 per shareConversion Price:
    
    $10.00 per shareConversion Rate:
    
    0.40Liquidation Value divided by Conversion Price ($4.00/$10.00)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2001Conversion Period:
    
    Any time
  Series C Convertible Preferred Stock
 Liquidation Value:
    
    $3.00 per shareConversion Price:
    
    $6.00 per shareConversion Rate:
    
    0.50Liquidation Value divided by Conversion Price ($3.00/$6.00)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2002Conversion Period:
    
    Any time
  Series D Convertible Preferred Stock
 Liquidation Value:
    
    $10.00 per shareConversion Price:
    
    $10.00 per shareConversion Rate:
    
    1.00Liquidation Value divided by Conversion Price ($10.00/$10.00)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing April 30, 2002Conversion Period:
    
    Any time
  Series E Convertible Preferred Stock
 Liquidation Value:
    
    $22.00 per shareConversion Price:
    
    $8.00 per shareConversion Rate:
    
    2.75Liquidation Value divided by Conversion Price ($22.00/$8.00)Voting Rights:
    
    Equal in all respects to holders of common sharesDividends:
    
    10%QuarterlyCommencing May 31, 2002Conversion Period:
    
    Any time
  8




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##### Table of Contents



Conversion of Preferred Shares for Common Shares
   Issuance of Common Shares and Warrants for Cash or Cashless Exercise
      Issuance of Common Stock and Warrants as Payment for Services
   9




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Issuance of Stock and Warrants as Payment for Employee Compensation
     Registration Rights
   10




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##### Table of Contents



Application of Black-Scholes Valuation Model
  2008
    
    2007Expected volatility
    
    125%-132%
    
    120%-130%Expected term (years)
    
    1.5
    
    1.5Risk-free interest rate
    
    2.50-4.25%
    
    4.25%Expected dividend yield
    
    0%
    
    0%Forfeiture rate
    
    0%
    
    0%Resulting weighted average grant date fair value
    
    $0.63-$1.72
    
    $2.60-$3.20
 Convertible Securities
 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys
Own Stock
 Note 8. Equity Incentive Plan and Employee Stock Purchase Plan and other Share-Based Employee
Payments
   11




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##### Table of Contents



Note 9. Legal Proceedings
   Attorney General of Illinois.
 NeoMed Innovation III L.P.
 Diamics, Inc
 Daniel McMahon.
 12




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##### Table of Contents



Other claims
  Note 10 Commitments and Contingencies
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
    13




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##### Table of Contents



Overview of CytoCore, Inc.
 SoftPAP  CytoCore Solutions CytoCore
Solutions
 SoftPAP
   Critical Accounting Policies and Changes to Accounting Policies
   Results of Operations
  14




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##### Table of Contents



Three Months Ended September 30, 2008 as compared to Three Months Ended September 30, 2007
 Revenue
 SoftPAP
 Costs and Expenses
 Cost of Revenues
 SoftPAP
 Research and Development
 SoftPAP SoftPAP
  Selling, General and Administrative
  Other Income (Expense)
  Net Loss
  15




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##### Table of Contents



Nine Months Ended September 30, 2008 as
compared to Nine Months Ended September 30, 2007
 Revenue
 SoftPAP
 Costs and Expenses
 Cost of Revenues
 SoftPAP
 Research and Development
 SoftPAP SoftPap
  Selling, General and Administrative
  16




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##### Table of Contents



Other Income (Expense)
   Net Loss
   Liquidity and Capital Resources
  CytoCore
Solutions
   SoftPAP SoftPAP
 17




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risks
    
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 18




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  Diamics, Inc
 Daniel McMahon.
 Other claims
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Unregistered Sales of Equity Securities
 Issuance of Common Stock and Warrants for Cash and Cashless Exercise
  19




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Issuance of Common Stock and Warrants as Payment for Services
     Issuance of Stock and Warrants as Payment for Employee Compensation
   20




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##### Table of Contents



Conversion of Certain Preferred Shares for Common Shares
   Exemptions
  Warrant Terms
  Company Repurchases of Securities
  21




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##### Table of Contents



Item 3. Defaults upon Senior Securities
   
 Item 4. Submission of Matters to Vote of Security Holders
   FOR
    
    WITHHELDDaniel J. Burns
    
    
    23,781,703
    
    
    
    125,329Robert F. McCullough, Jr.
    
    
    23,740,217
    
    
    
    166,815Clinton H. Severson
    
    
    23,804,703
    
    
    
    102,329Alexander M. Milley
    
    
    23,806,603
    
    
    
    100,429John H. Abeles, M.D.
    
    
    23,806,403
    
    
    
    100,629David J. Weissberg, M.D.
    
    
    23,801,403
    
    
    
    105,979Philip Bradely Hall, M.D.
    
    
    23,805,693
    
    
    
    101,339
 
 Item 5. Other Information
  
 Item 6. Exhibits
  22




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##### Table of Contents



SIGNATURES
   /s/ Robert F. McCullough, Jr.Robert F. McCullough, Jr.Chief Executive Officer and
 Chief Financial Officer  23




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description31
    
    Section 302 certification.32
    
    Section 906 certification.
 24