##### 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 March 31, 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  40,860,056




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##### 



CYTOCORE, INC.
 QUARTERLY REPORT ON FORM 10-Q
 TABLE OF CONTENTS
 PagePART I.  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2a) Condensed Consolidated Balance Sheets  March 31, 2008 (unaudited) and December 31, 2007
    
    
    2b) Condensed Consolidated Statements of Operations  Three months ended March 31, 2008 and March 31, 2007
(unaudited)
    
    
    3c) Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2008 and March 31, 2007
(unaudited)
    
    
    4d) Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15PART II.  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    15Item 1A. Risk Factors
    
    
    16Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 3. Defaults upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    17SIGNATURES
    
    
    18EXHIBIT INDEX
    
    
    19EXHIBIT 10.1 Fourth Amendment to LeaseEXHIBIT 31 Section 302 CertificationEXHIBIT 32 Section 906 Certification
  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)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    5,935
    
    
    $
    316Accounts receivable
    
    
    25
    
    
    
    15Subscriptions receivable
    
    
    159
    
    
    
    Inventories
    
    
    134
    
    
    
    14Prepaid expenses and other current assets
    
    
    91
    
    
    
    216Total current assets
    
    
    6,344
    
    
    
    561Fixed assets, net
    
    
    1,132
    
    
    
    532Licenses, patents and technology, net of amortization
    
    
    20
    
    
    
    20Total assets
    
    $
    7,496
    
    
    $
    1,113Liabilities and Stockholders Equity (Deficit)Current Liabilities:Accounts payable
    
    $
    1,396
    
    
    $
    1,778Accrued payroll costs
    
    
    228
    
    
    
    589Accrued expenses
    
    
    1,265
    
    
    
    1,912Notes payable
    
    
    70
    
    
    
    70Total current liabilities
    
    
    2,959
    
    
    
    4,349Stockholders Equity (Deficit):Preferred stock, $0.001 par value; 10,000,000 shares authorized;
402,296 and 403,272 shares issued and
outstanding at March 31, 2008 and December 31, 2007, respectively
(Liquidation value of all
classes of preferred stock $2,991 at March 31, 2008)
    
    
    1,606
    
    
    
    1,628Common stock, $0.001 par value; 500,000,000 shares authorized;
40,771,336 and 35,866,156 shares
issued and 40,752,127 and 35,846,947 shares outstanding at March 31,
2008 and December 31,
2007, respectively
    
    
    41
    
    
    
    36Additional paid-in-capital
    
    
    90,596
    
    
    
    80,917Treasury stock: 19,209 shares at March 31, 2008 and December 31, 2007
    
    
    (327
    )
    
    
    (327
    )Accumulated deficit
    
    
    (87,302
    )
    
    
    (85,413
    )Accumulated comprehensive lossCumulative translation adjustment
    
    
    (77
    )
    
    
    (77
    )Total stockholders equity (deficit)
    
    
    4,537
    
    
    
    (3,236
    )Total liabilities and stockholders equity (deficit)
    
    $
    7,496
    
    
    $
    1,113
  2




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CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
 Three Months EndedMarch 31,2008
    
    
    2007(Unaudited)Net sales
    
    $
    46
    
    
    $
    22Operating expensesCost of revenues
    
    
    77
    
    
    
    Research and development (net of settlement of trade debt
of $66 for the three months ended March 31, 2007)
    
    
    809
    
    
    
    396Selling, general, and administrative (net of interest
settlement of $85 for the three months ended March 31, 2007)
    
    
    1,015
    
    
    
    1,512Selling, general, and administrative  related party
    
    
    46
    
    
    
    195Total operating expenses
    
    
    1,947
    
    
    
    2,103Operating loss
    
    
    (1,901
    )
    
    
    (2,081
    )Other income (expense):Interest income
    
    
    15
    
    
    
    Unrealized loss on convertible securities
    
    
    
    
    
    
    (379
    )Total other income (expense)
    
    
    15
    
    
    
    (379
    )Net loss
    
    
    (1,886
    )
    
    
    (2,460
    )Preferred stock dividend
    
    
    (4
    )
    
    
    (313
    )Net loss applicable to common stockholders
    
    $
    (1,890
    )
    
    $
    (2,773
    )Basic and diluted net loss per common share(1)
    
    $
    (0.05
    )
    
    $
    (0.09
    )Basic and diluted weighed average number of common shares
outstanding (1)
    
    
    36,884,138
    
    
    
    31,953,427
 
 (1)
    
    March 31, 2007 has been restated to reflect the one-for-ten reverse stock split that was
effective November 27, 2007.  3




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CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 Three Months EndedMarch 31,2008
    
    
    2007(Unaudited)Operating Activities:Net loss
    
    $
    (1,886
    )
    
    $
    (2,460
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    31
    
    
    
    5Gain on settlements of indebtedness
    
    
    (19
    )
    
    
    (151
    )Unrealized loss on convertible securities
    
    
    
    
    
    
    379Warrants issued to non-employees for services
    
    
    5
    
    
    
    256Non-cash compensation expense
    
    
    43
    
    
    
    227Non-cash interest related to warrant modification
    
    
    
    
    
    
    566Changes in assets and liabilities:Accounts receivable
    
    
    (10
    )
    
    
    8Inventories
    
    
    (121
    )
    
    
    Prepaid expenses and other current assets
    
    
    127
    
    
    
    27Accounts payable
    
    
    (364
    )
    
    
    (140
    )Accrued expenses
    
    
    (403
    )
    
    
    91Net cash used in operating activities
    
    
    (2,597
    )
    
    
    (1,192
    )Investing activities:Purchases of fixed assets
    
    
    (631
    )
    
    
    (192
    )Net cash used in investing activities
    
    
    (631
    )
    
    
    (192
    )Financing activities:Proceeds from issuance of common stock and warrants
    
    
    9,100
    
    
    
    2,190Financing costs in connection with private placement of stock
    
    
    (395
    )
    
    
    (169
    )Proceeds from common stock subscribed
    
    
    122
    
    
    
    Proceeds from exercise of warrants
    
    
    20
    
    
    
    2,022Proceeds from exercise of options
    
    
    
    
    
    
    50Payment of notes payable
    
    
    
    
    
    
    (355
    )Net cash provided by financing activities
    
    
    8,847
    
    
    
    3,738Net increase in cash and cash equivalents
    
    
    5,619
    
    
    
    2,354Cash and cash equivalents at the beginning of period
    
    
    316
    
    
    
    874Cash and cash equivalents at end of period
    
    $
    5,935
    
    
    $
    3,228Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    48Non-cash transactions during the period for:Preferred stock and cumulative dividends converted into common stock
    
    $
    22
    
    
    $
    1,401Convertible securities
    
    $
    
    
    
    $
    394Subscriptions receivable
    
    $
    159
    
    
    $
    Payment of accrued bonuses with common stock
    
    $
    604
    
    
    $
    
  4




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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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Note 3. Fixed Assets
  March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)Furniture and fixtures
    
    $
    126
    
    
    $
    124Laboratory equipment
    
    
    625
    
    
    
    622Computer and communications equipment
    
    
    346
    
    
    
    343Design and tooling
    
    
    508
    
    
    
    486Machinery and equipment
    
    
    582Leasehold improvements
    
    
    
    
    
    
    282,187
    
    
    
    1,603Less accumulated depreciation and amortization
    
    
    (1,055
    )
    
    
    (1,071
    )Total
    
    $
    1,132
    
    
    $
    532
 Note 4. Accrued Expenses
  March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)Accrued interest
    
    $
    352
    
    
    $
    350Accrued franchise and other taxes
    
    
    366
    
    
    
    707Accrued compensation
    
    
    263
    
    
    
    637Other accrued expenses
    
    
    284
    
    
    
    218Total
    
    $
    1,265
    
    
    $
    1,912
 Note 5. Notes Payable
  March 31,
    
    
    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.
 6




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Note 6. Stockholders Equity (Deficit)
 Loss per share
  March 31,
    
    
    March 31,2008
    
    
    2007Basic and Diluted:Net loss applicable to common stockholder (in thousands)
    
    $
    (1,890
    )
    
    $
    (2,773
    )Weighted average common shares outstanding
    
    
    36,884,138
    
    
    
    31,953,427Net loss per common share
    
    $
    (0.05
    )
    
    $
    (0.09
    )
   Preferred Stock
  March 31,
    
    
    December 31,2008
    
    
    2007Shares Issued &
    
    
    Shares Issued &Offering
    
    Outstanding
    
    
    Outstanding(unaudited)Series A convertible
    
    
    47,250
    
    
    
    47,250Series B convertible, 10% cumulative dividend
    
    
    122,486
    
    
    
    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
    
    
    402,296
    
    
    
    403,272
 Summary of Preferred Stock Terms
 Series A Convertible Preferred StockLiquidation 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 StockLiquidation Value:
    
    $4.00 per shareConversion Price:
    
    $10.00 per shareConversion Rate:
    
    0.40Liquidation Value divided by Conversion Price ($4.00/$10.00)
 7




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Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2001Conversion Period:
    
    Any timeCumulative and undeclared dividends in arrears at March 31, 2008 were $348,000
 Series C Convertible Preferred StockLiquidation 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 timeCumulative and undeclared dividends in arrears at March 31, 2008 were $74,000
 Series D Convertible Preferred StockLiquidation 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 timeCumulative and undeclared dividends in arrears at March 31, 2008 were $1,123,000
 Series E Convertible Preferred StockLiquidation 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 timeCumulative and undeclared dividends in arrears at March 31, 2008 were $275,000
 Conversion of Series E Preferred Shares for Common Shares
  Issuance of Common Shares and Warrants for Cash
   8




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Issuance of Common Stock and Warrants as Payment for Services
   Issuance of Stock and Warrants as Payment for Employee Compensation
   Application of Black-Scholes Valuation Model
  2008
    
    2007Expected volatility
    
    
    125
    %
    
    
    120
    %Expected term (years)
    
    
    1.5
    
    
    
    1.5Risk-free interest rate
    
    
    4.25
    %
    
    
    4.25
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Forfeiture rate
    
    
    0
    %
    
    
    0
    %Resulting weighted average grant date fair value
    
    $
    1.58
    
    
    $
    3.20
 Convertible Securities
  9




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Note 7. Equity Incentive Plan and Employee Stock Purchase Plan and other Share-Based Employee
Payments
   Note
8. Commitments and Contingencies
 Legal
Proceedings
  Attorney General of Illinois.
 NeoMed Innovation III L.P.
 Diamics, Inc
 10




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Other claims
  Note 9. Subsequent Event
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
    Overview of CytoCore, Inc.
 SoftPAP   CytoCore Solutions
 11




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CytoCore Solutions
  Soft PaP
   Critical Accounting Policies and Changes to Accounting Policies
   Results of Operations
  Three Months Ended March 31, 2008 as compared to Three Months Ended March 31, 2007
 Revenue
 SoftPAP
 12




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Costs and Expenses
 Cost of Revenues
 SoftPAP
 Research and Development
   Selling, General and Administrative
  Other Income (Expense)
   Net Loss
  13




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Liquidity and Capital Resources
  CytoCore
Solutions
   SoftPAP SoftPAP
  14




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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
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  15




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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
   Issuance of Common Stock and Warrants as Payment for Services
   Issuance of Stock and Warrants as Payment for Employee Compensation
   16




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Conversion of Certain Preferred Shares for Common Shares
  Exemptions and Warrant Terms
   Company Repurchases of Securities
  
 Item 3. Defaults upon Senior Securities
   
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  17




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SIGNATURES
  CytoCore, Inc./s/
    
    Robert F. McCullough, Jr.Robert F. McCullough, Jr.Chief Executive Officer and
Chief Financial Officer  18




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Fourth Amendment to Lease Agreement between CytoCore, Inc. and O.P., L.L.C.,
dated February 13, 2001.31
    
    Section 302 certification by principal executive and chief financial officer.32
    
    Section 906 certification by principal executive and chief financial officer.
 19