##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-QSB
 (Mark One)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
  
 CYTOCORE, INC.
 (Exact Name of Small Business Issuer as Specified in Its Charter)
 Delaware
    
    36-4296006(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 Chicago, IL 60610  Address of Principal Executive Offices)
 (312) 222-9550  (Issuers Telephone Number, including Area Code)
 Molecular Diagnostics, Inc.
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 ý o
 o ý
  267,191,784
 o ý




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##### 



CYTOCORE, INC.
 (Formerly Molecular Diagnostics, Inc.)
 QUARTERLY REPORT ON FORM 10-QSB
 
 TABLE OF CONTENTS
 PagePART I.FINANCIAL INFORMATIONItem 1.Financial Statementsa)Consolidated Balance Sheets  June 30, 2006 (unaudited) and December 31, 2005
    
    
    3b)Consolidated Statements of Operations  Three and six months ended June 30, 2006
and June 30, 2005 (unaudited)
    
    
    4c)Consolidated Statements of Cash Flows  Six months ended June 30, 2006
and June 30, 2005 (unaudited)
    
    
    5d)Notes to Consolidated Financial Statements
    
    
    6Item 2.Managements Discussion and Analysis or Plan of Operation
    
    
    17Item 3.Controls and Procedures
    
    
    22PART II.OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    22Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.Defaults upon Senior Securities
    
    
    24Item 4.Submission of Matters to Vote of Security Holders
    
    
    25Item 5.Other Information
    
    
    25Item 6.Exhibits
    
    
    25SIGNATURES
    
    
    26EXHIBIT INDEX
    
    
    27
 2




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##### 



PART I.  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CYTOCORE, INC.
(Formerly Molecular Diagnostics, Inc.)
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share amounts)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    2,138
    
    
    $
    Accounts receivables, net of allowance for doubtful accounts of $0 at June 30,
2006 and December 31, 2005
    
    
    76
    
    
    
    38Inventories
    
    
    
    
    
    
    26Prepaid expenses and other current assets
    
    
    56
    
    
    
    73Total current assets
    
    
    2,270
    
    
    
    137Fixed Assets, net
    
    
    45
    
    
    
    233Licenses, patents and technology, net of amortization
    
    
    20
    
    
    
    20Other Assets
    
    
    16
    
    
    
    Total assets
    
    $
    2,351
    
    
    $
    390Liabilities and Stockholders DeficitCurrent Liabilities:Checks issued in excess of amounts on deposit
    
    $
    
    
    
    $
    5Accounts payable
    
    
    1,948
    
    
    
    3,714Accrued payroll costs
    
    
    978
    
    
    
    643Accrued expenses
    
    
    1,949
    
    
    
    2,292Deferred revenue
    
    
    25
    
    
    
    25Due to stockholder
    
    
    37
    
    
    
    37Lease obligation
    
    
    
    
    
    
    96Notes payablerelated party
    
    
    
    
    
    
    70Notes payable
    
    
    1,985
    
    
    
    3,557Total current liabilities
    
    
    6,922
    
    
    
    10,439Stockholders Deficit:Preferred stock, $0.001 par value; 10,000,000 shares authorized;
578,653 and 1,102,192 shares issued and
outstanding at June 30, 2006 and December 31, 2005,
respectively (Liquidation value of all
classes of preferred stock $4,937 at June 30, 2006)
    
    
    3,008
    
    
    
    7,716Common stock, $0.001 par value; 375,000,000 shares authorized;
266,191,784 and 154,665,084 shares
issued and 265,999,696 and 154,472,995 shares outstanding at
June 30, 2006 and December 31, 2005, respectively
    
    
    266
    
    
    
    155Additional paid-in-capital
    
    
    66,825
    
    
    
    52,386Treasury stock: 192,088 shares at June 30, 2006 and December 31, 2005
    
    
    (327
    )
    
    
    (327
    )Accumulated deficit
    
    
    (74,264
    )
    
    
    (69,911
    )Accumulated comprehensive lossCumulative translation adjustment
    
    
    (79
    )
    
    
    (68
    )Total stockholders deficit
    
    
    (4,571
    )
    
    
    (10,049
    )Total liabilities and stockholders deficit
    
    $
    2,351
    
    
    $
    390
  3




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##### 



CYTOCORE, INC
(Formerly Molecular Diagnostics, Inc.)
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 Six months ended
    
    
    Three months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    
    
    
    (Unaudited)Net revenues
    
    $
    49
    
    
    $
    69
    
    
    $
    26
    
    
    
    29Operating expensesCost of revenues (includes impairment charge of property
assets of $169 for the six months ended June 30, 2006,
net of settlement of trade debt of $95 for the three and six
months ended June 30, 2006)
    
    
    100
    
    
    
    
    
    
    
    (69
    )
    
    
    Research and development (net of settlement of trade debt of
$138 for the three and six months ended June 30, 2006)
    
    
    293
    
    
    
    97
    
    
    
    227
    
    
    
    25Selling, general, and administrative expenses (net of settlement
of trade debt and lease obligation of $659 for the three and
six months ended June 30, 2006)
    
    
    1,713
    
    
    
    1,101
    
    
    
    909
    
    
    
    384Total operating expenses
    
    
    2,106
    
    
    
    1,198
    
    
    
    1,067
    
    
    
    409Operating loss
    
    
    (2,057
    )
    
    
    (1,129
    )
    
    
    (1,041
    )
    
    
    (380
    )Other income (expense)
Interest expense-related party
    
    
    (14
    )
    
    
    (5
    )
    
    
    (12
    )
    
    
    (3
    )Interest expense (net of interest settlements of $59 for the
three and six months ended June 30, 2006)
    
    
    (1,635
    )
    
    
    (809
    )
    
    
    (1,471
    )
    
    
    (408
    )Interest income
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Total other income (expense)
    
    
    (1,648
    )
    
    
    (814
    )
    
    
    (1,482
    )
    
    
    (411
    )Net loss
    
    
    (3,705
    )
    
    
    (1,943
    )
    
    
    (2,523
    )
    
    
    (791
    )Preferred stock dividend
    
    
    (648
    )
    
    
    (453
    )
    
    
    (648
    )
    
    
    (228
    )Net loss applicable to common stockholders
    
    $
    (4,353
    )
    
    $
    (2,396
    )
    
    $
    (3,171
    )
    
    $
    (1,019
    )Basic and diluted net loss per common share
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )Basic and diluted weighted average number
of common shares outstanding
    
    
    198,260,257
    
    
    
    107,330,150
    
    
    
    232,343,123
    
    
    
    111,463,812
  4




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##### 



CYTOCORE, INC.
(Formerly Molecular Diagnostics, Inc.)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Six months endedJune 30,2006
    
    
    2005(Unaudited)Operating Activities:Net loss
    
    $
    (3,705
    )
    
    $
    (1,943
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of debt discount
    
    
    145
    
    
    
    353Depreciation and amortization
    
    
    21
    
    
    
    68Amortization of prepaid consulting fees
    
    
    
    
    
    
    68Gain on settlement of trade indebtedness
    
    
    (951
    )
    
    
    Impairment charge of property asset
    
    
    169
    
    
    
    Loss on sale of fixed assets
    
    
    
    
    
    
    3Interest charge on note conversion settled in stock
    
    
    1,321
    
    
    
    Notes issued in payment of an expense
    
    
    48
    
    
    
    82Warrant related expenses issued in settlement of debt
    
    
    166
    
    
    
    421Stock, warrants and options issued to non-employees for services
    
    
    590
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (37
    )
    
    
    11Inventories
    
    
    26
    
    
    
    Due to stockholder
    
    
    
    
    
    
    (1
    )Prepaid expenses and other current assets
    
    
    
    
    
    
    1Accounts payable
    
    
    (655
    )
    
    
    86Accrued expenses
    
    
    239
    
    
    
    213Net cash used in operating activities
    
    
    (2,623
    )
    
    
    (638
    )Investing activities:Purchases of fixed assets
    
    
    (1
    )
    
    
    (10
    )Net cash used in investing activities
    
    
    (1
    )
    
    
    (10
    )Financing activities:Net proceeds from issuance of common stock
    
    
    4,880
    
    
    
    643Proceeds from exercise of warrants
    
    
    39
    
    
    
    Lease obligation
    
    
    (96
    )
    
    
    Payment of notes payable
    
    
    (50
    )
    
    
    (5
    )Net cash provided by financing activities
    
    
    4,773
    
    
    
    638Effect of exchange rate changes on cash and cash equivalents
    
    
    (11
    )
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    2,138
    
    
    
    (10
    )Cash and cash equivalents at the beginning of period
    
    
    
    
    
    
    11Cash and cash equivalents at end of period
    
    $
    2,138
    
    
    $
    1Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    25Non-cash transactions during the period for:Financing costs
    
    $
    65
    
    
    $
    42Convertible promissory notes and accrued interest converted into common
stock
    
    $
    1,973
    
    
    $
    Preferred stock and cumulative dividends converted into common stock
    
    $
    4,217
    
    
    $
    
  5




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CYTOCORE, INC.
(Formerly Molecular Diagnostics, Inc.)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1. Organization
       6




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Note 2. Basis of Presentation
   Note 3. Summary of Significant Accounting Principles
  Principles of Consolidation.
 Use of Estimates.
 Revenue Recognition
  Research and Development Costs.
 Net Loss Per Share.
 Share-Based Payment.
 7




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##### 



Effect of Contingently Convertible Instruments on Diluted Earnings per Share
 Accounting Changes and Error Corrections.
 Note 4. Licenses, Patents and Technology
    June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)Licenses
    
    $
    20
    
    
    $
    20Patent costs
    
    
    133
    
    
    
    133LabCorp. technology agreement
    
    
    260
    
    
    
    260Subtotal
    
    
    413
    
    
    
    413Less accumulated amortization
    
    
    (393
    )
    
    
    (393
    )Total
    
    $
    20
    
    
    $
    20
 Note 5. Accrued Expenses
  June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)Accrued interest
    
    $
    835
    
    
    $
    898Accrued interestrelated party
    
    
    
    
    
    
    34Accrued settlement costs for legal fees
    
    
    438
    
    
    
    438Accrued franchise and other taxes
    
    
    589
    
    
    
    589Other accrued expenses
    
    
    87
    
    
    
    333Total
    
    $
    1,949
    
    
    $
    2,292
 8




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Note 6. Notes PayableRelated Party
  June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)Northlea Partners, Ltd., an affiliate of a board member, $25,000 Promissory
Note issued August 6, 2001; interest rate 18% per annum
    
    $
    
    
    
    $
    25Northlea Partners, Ltd., $15,000 Promissory Note issued September 20, 2001;
interest rate 9% per annum
    
    
    
    
    
    
    15Northlea Partners, Ltd., $15,000 Bridge II Convertible Promissory Note issued
May 1, 2003; interest rate 15% per annum (see description under Bridge II
Notes in Note 7-Notes Payable for other terms and conditions)
    
    
    
    
    
    
    15Northlea Partners, Ltd. $25,000 Bridge III Convertible Promissory Note issued
May 21, 2004 interest rate 10% per annum
    
    
    
    
    
    
    15$
    
    
    
    $
    70
  Peter Gombrich Amounts Due.
 Note 7. Notes Payable
  June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)Bridge I Convertible Promissory Notes; due December 31, 2002; interest
rate 7% per annum; convertible into common stock at 75% of the market price
on date of conversion; beneficial conversion feature valued at $1,042,000 at
June 30, 2002; warrants at an exercise price of $0.20 per share; additional
warrants at an exercise price equal to 150% of note conversion price
    
    $
    75
    
    
    $
    500Bridge II Convertible Promissory Notes; due July 31, 2004; interest rate
12% or 15% per annum; convertible into common stock at $0.10 or $0.15 per share;
beneficial conversion feature valued at $1,777,000 and $330,000 at
December 31, 2003 and December 31, 2002, respectively;
warrants at an exercise price of $0.15 or $0.20 per share
    
    
    1,225
    
    
    
    1,285Bridge III Convertible Promissory Notes; due December 31, 2008; interest rate 10%
per annum; convertible into common stock at $0.10 per share; beneficial
conversion feature valued at $1,604,000 at June 30, 2004; warrants at an
exercise price of $0.15 per share
    
    
    36
    
    
    
    130Monsun, AS $500,000 Promissory Note issued November 1, 2000; due July 31, 2002;
interest rate 20% per annum, compounded into principal amount; beneficial
conversion feature valued at $125,000 at November 1, 2000
    
    
    
    
    
    
    953MonoGen, Inc. $305,000 Promissory Note issued October 14, 2004; interest rate 14%
per annum; first installment of $25,000 due November 1, 2004 with monthly
principal and interest installments of $10,000 thereafter; due January 1, 2007
    
    
    305
    
    
    
    305Ungaretti & Harris LLP $211,368 Secured Promissory Note issued May 8, 2003; interest
rate 12% per annum; due September 30, 2003
    
    
    
    
    
    
    51Ernst & Young LLP $30,800 Promissory Note issued July 17, 2003; interest rate 12%
per annum commencing January 1, 2003; due December 31, 2003
    
    
    31
    
    
    
    31Ventana 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; represents a debt of AccuMed
    
    
    34
    
    
    
    34Western Economic Diversification $221,000 Promissory Note issued June 1989; no
interest; represents a debt of Oncometrics
    
    
    258
    
    
    
    247$
    1,985
    
    
    $
    3,557
 9




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Bridge I.
   Bridge II.
  10




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Bathgate Capital Partners, LLC  Bridge III
  Monsun.
  11




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##### 



MonoGen, Inc.
 Ungaretti & Harris LLP.
  Defaults.
 Carrying Amounts.
 12




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##### 



Note 8. Stockholders Equity
  June 30,
    
    
    December 31,2006
    
    
    2005Shares Issued &
    
    
    Shares Issued &Offering
    
    Outstanding
    
    
    Outstanding(unaudited)Series A convertible
    
    
    82,655
    
    
    
    82,655Series B convertible, 10% cumulative dividend
    
    
    225,736
    
    
    
    365,106Series C convertible, 10% cumulative dividend
    
    
    38,333
    
    
    
    245,833Series D convertible, 10% cumulative dividend
    
    
    175,000
    
    
    
    175,000Series E convertible, 10% cumulative dividend
    
    
    56,929
    
    
    
    233,598Total Preferred Stock
    
    
    578,653
    
    
    
    1,102,192
 Summary of Preferred Stock Terms


Series A Convertible Preferred StockLiquidation Value:
    
    $4.50 per shareConversion Price:
    
    $10.3034 per shareConversion Rate:
    
    0.4367Liquidation Value divided by Conversion Price ($4.50/$10.3034)Voting Rights:
    
    NoneDividends:
    
    NoneConversion Period:
    
    Any time


Series B Convertible Preferred StockLiquidation Value:
    
    $4.00 per shareConversion Price:
    
    $1.00 per shareConversion Rate:
    
    4.00Liquidation Value divided by Conversion Price ($4.00/$1.00)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2001Conversion Period:
    
    Any time




Series C Convertible Preferred StockLiquidation Value:
    
    $3.00 per shareConversion Price:
    
    $0.60 per shareConversion Rate:
    
    5.00Liquidation Value divided by Conversion Price ($3.00/$0.60)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2002Conversion Period:
    
    Any time




Series D Convertible Preferred StockLiquidation Value:
    
    $10.00 per shareConversion Price:
    
    $1.00 per shareConversion Rate:
    
    10.00Liquidation Value divided by Conversion Price ($10.00/$1.00)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing April 30, 2002Conversion Period:
    
    Any time




Series E Convertible Preferred StockLiquidation Value:
    
    $22.00 per shareConversion Price:
    
    $0.80 per shareConversion Rate:
    
    27.50Liquidation Value divided by Conversion Price ($22.00/$0.80)Voting Rights:
    
    Equal in all respects to holders of common sharesDividends:
    
    10%QuarterlyCommencing May 31, 2002Conversion Period:
    
    Any time




13



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##### 



Issuance of Common Shares for Cash
   Issuance of Warrants and Stock as a Settlement
    Issuance of Stock as Payment for Services
  Conversion of certain Convertible Promissory Notes for Common Shares
    14




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Conversion of certain Preferred Shares for Common Shares
  Application of Black-Scholes Valuation Model
  Note 9. Equity Incentive Plan and Employee Stock Purchase Plan
    Note 10. Legal Proceedings
  Lawsuits
 Ungaretti & Harris LLP.
 15




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Hill & Barlow LLP.
 Medical College of Georgia Research Institute, Inc.
 Account Resource
 Other Claims
  Dennis Bergquist.
 Leslie Bergquist.
 Stephen Wasko.
 16




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##### 



Other Creditors.
 Note 11. Impairment of Property Assets
  Note 12. Subsequent Events
  
 Item 2. Managements Discussion and Analysis or Plan of Operation
 Forward-Looking Statements
    17




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##### 



Overview of CytoCore, Inc.
     2
 Critical Accounting Policies and Changes to Accounting Policies
  18




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##### 



Results of Operations
  Three Months Ended June 30, 2006 as compared to Three Months Ended June 30, 2005
 Revenue
  Costs and Expenses
 Cost of Revenues
  Research and Development
   Selling, General and Administrative
   19




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##### 



Interest Expense
  Net Loss
  Six Months Ended June 30, 2006 as compared to Six Months Ended June 30, 2005
 Revenues
  Costs and Expenses
 Cost of Revenues
  Research and Development
  20




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##### 



Selling, General and Administrative
  Other Income and Expense
 Interest Expense
  Net Loss
  Liquidity and Capital Resources
 TM
   21




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##### 



Off-Balance Sheet Arrangements
  
 Item 3. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  Lawsuits
 Ungaretti & Harris LLP.
 22




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##### 



Hill & Barlow LLP.
 Medical College of Georgia Research Institute, Inc.
 Account Resource
 Other Claims
  Dennis Bergquist.
 Leslie Bergquist.
 Stephen Wasko.
 23




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##### 



Other Creditors.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Unregistered Sales of Equity Securities
 Common Stock.
  Conversion of certain Convertible Promissory Notes for Common Shares.
  Company Repurchases of Securities
  
 Item 3. Defaults upon Senior Securities
    
 24




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##### 



    
  Item 4. Submission of Matters to Vote of Security Holders
   FOR
    
    
    
    WITHHELDDavid J. Weissberg, M.D.
    
    
    144,661,346
    
    
    
    149,537Robert F. McCullough, Jr.
    
    
    144,661,346
    
    
    
    149,537Alexander M. Milley
    
    
    140,958,470
    
    
    
    3,852,413John H. Abeles, M.D.
    
    
    144,206,784
    
    
    
    604,099
  FOR
    
    AGAINST
    
    ABSTAIN
    
    NON VOTES144,606,955
    
    171,394
    
    32,394
    
    0
 
 Item 5. Other Information
  
 Item 6. Exhibits
  25




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##### 



SIGNATURES
  CytoCore, Inc.
f/k/a Molecular Diagnostics, Inc./s/ David Weissberg, M.D.David Weissberg, M.D.Chairman and Chief Executive Officer/s/ Robert F. McCullough, Jr.Robert F. McCullough, Jr.Chief Financial Officer  26




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##### 



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Certificate of Amendment to Certificate of Incorporation, as filed
with the Delaware Secretary of State on June 22, 200631.1
    
    Section 302 certification by principal executive officer.31.2
    
    Section 302 certification by principal financial officer.32.1
    
    Section 906 certification by principal executive officer.32.2
    
    Section 906 certification by principal financial officer.
 27