##### 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 June 30, 2010
 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
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting
company þ o þ
  46,068,416




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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  June 30, 2010 and December 31, 2009 (unaudited)
    
    
    2b) Condensed Consolidated Statements of Operations  Six and three months ended June 30, 2010 and June 30, 2009 (unaudited)
    
    
    3c) Condensed Consolidated Statements of Cash Flows  Six and three months ended June 30, 2010 and June 30, 2009 (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
    
    
    16Item 4. Controls and Procedures
    
    
    16PART II.  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 1A. Risk Factors
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults upon Senior Securities
    
    
    19Item 4. Reserved
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20EXHIBIT INDEX
    
    
    21Exhibit 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
(Unaudited)
(Dollars in thousands)
 June 30,
    
    
    December 31,2010
    
    
    2009AssetsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    Accounts receivable
    
    
    3
    
    
    
    17Inventories
    
    
    571
    
    
    
    574Prepaid expenses and other current assets
    
    
    21
    
    
    
    44Total current assets
    
    
    595
    
    
    
    635Fixed assets, net
    
    
    1,650
    
    
    
    1,846Licenses, patents and technology, net of amortization
    
    
    111
    
    
    
    62Inventories, non-current
    
    
    325
    
    
    
    325Total assets
    
    $
    2,681
    
    
    $
    2,868Liabilities and Stockholders DeficitCurrent Liabilities:Checks issued in excess of amounts on deposit
    
    $
    11
    
    
    $
    5Accounts payable
    
    
    2,025
    
    
    
    2,102Accrued payroll costs
    
    
    1,120
    
    
    
    818Advances payable to related parties
    
    
    1,281
    
    
    
    763Accrued expenses
    
    
    495
    
    
    
    1,225Derivative liability
    
    
    216
    
    
    
    Notes payable
    
    
    113
    
    
    
    70Total current liabilities
    
    
    5,261
    
    
    
    4,983Stockholders Deficit:Preferred stock, $0.001 par value; 10,000,000 shares authorized; 373,555 shares issued and
outstanding at June 30, 2010 and December 31, 2009 (Liquidation value of all
classes of preferred stock $2,875 at June 30, 2010)
    
    
    1,492
    
    
    
    1,492Common stock, $0.001 par value; 500,000,000 shares authorized; 46,068,416 and 42,173,810 shares
issued and 46,049,207 and 42,154,601 shares outstanding at June 30, 2010 and December 31,
2009, respectively
    
    
    46
    
    
    
    42Additional paid-in-capital
    
    
    92,399
    
    
    
    92,106Treasury stock: 19,209 shares at June 30, 2010 and December 31, 2009
    
    
    (327
    )
    
    
    (327
    )Accumulated deficit
    
    
    (96,113
    )
    
    
    (95,351
    )Accumulated comprehensive lossCumulative translation adjustment
    
    
    (77
    )
    
    
    (77
    )Total stockholders deficit
    
    
    (2,580
    )
    
    
    (2,115
    )Total liabilities and stockholders deficit
    
    $
    2,681
    
    
    $
    2,868
  2




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
 Six months ended
    
    
    Three months endedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Unaudited)
    
    
    (Unaudited)Net revenues
    
    $
    16
    
    
    $
    23
    
    
    $
    8
    
    
    $
    10Operating expensesCost of revenues
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    Research and development
    
    
    130
    
    
    
    212
    
    
    
    65
    
    
    
    100Selling, general and administrative
    
    
    802
    
    
    
    1,857
    
    
    
    303
    
    
    
    978Total operating expenses
    
    
    932
    
    
    
    2,075
    
    
    
    368
    
    
    
    1,078Operating loss
    
    
    (916
    )
    
    
    (2,052
    )
    
    
    (360
    )
    
    
    (1,068
    )Other income (expense)Provision for legal settlement
    
    
    
    
    
    
    (948
    )
    
    
    
    
    
    
    Benefit from derivative liability
    
    
    182
    
    
    
    
    
    
    
    93
    
    
    
    Interest expense
    
    
    (28
    )
    
    
    (27
    )
    
    
    (26
    )
    
    
    (25
    )Total other income (expense)
    
    
    154
    
    
    
    (975
    )
    
    
    67
    
    
    
    (25
    )Net loss
    
    
    (762
    )
    
    
    (3,027
    )
    
    
    (293
    )
    
    
    (1,093
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss applicable to common stockholders
    
    $
    (762
    )
    
    $
    (3,027
    )
    
    $
    (293
    )
    
    $
    (1,093
    )Basic and diluted net loss per common share
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )Basic and diluted weighted average number
of common shares outstanding
    
    
    44,420,570
    
    
    
    41,571,015
    
    
    
    45,456,100
    
    
    
    41,894,354.
  3




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 Six Months EndedJune 30,2010
    
    
    2009Operating Activities:Net loss
    
    $
    (762
    )
    
    $
    (3,027
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    247
    
    
    
    232Amortization of discount
    
    
    22
    
    
    
    Stock issued to non-employees for services
    
    
    6
    
    
    
    5Common stock issued for compensation expense
    
    
    15
    
    
    
    Non-cash compensation expense
    
    
    1
    
    
    
    2Non-cash interest related to warrant modification
    
    
    
    
    
    
    21Benefit from derivative liability
    
    
    (182
    )
    
    
    Non-cash charge for legal settlement
    
    
    
    
    
    
    948Changes in assets and liabilities:Checks issued in excess of amounts on deposit
    
    
    6
    
    
    
    Accounts receivable
    
    
    14
    
    
    
    20Inventories
    
    
    3
    
    
    
    (131
    )Prepaid expenses and other current assets
    
    
    23
    
    
    
    4Accounts payable
    
    
    (157
    )
    
    
    328Accrued expenses
    
    
    141
    
    
    
    240Net cash used in operating activities
    
    
    (623
    )
    
    
    (1,358
    )Investing activities:Purchase of license
    
    
    (20
    )
    
    
    (33
    )Net cash used in investing activities
    
    
    (20
    )
    
    
    (33
    )Financing activities:Proceeds from related parties
    
    
    518
    
    
    
    578Proceeds from issuance of convertible note
    
    
    75
    
    
    
    Proceeds from sale of common stock
    
    
    50
    
    
    
    Proceeds from exercise of warrants
    
    
    
    
    
    
    270Net cash provided by financing activities
    
    
    643
    
    
    
    848Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    (543
    )Cash and cash equivalents at the beginning of period
    
    
    
    
    
    
    553Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    10Supplemental disclosure of cash flow information:Non-cash transactions during the period for:Issuance of common stock and warrants in settlement of a lawsuit
    
    $
    538
    
    
    $
    Payment of accrued wages with common stock
    
    
    
    
    
    
    31Stock issuable for accrued liability
    
    
    30
    
    
    
    Warrants exercised with debt in satisfaction of related party advances and other liabilities
    
    
    
    
    
    
    168Payment of directors fees with common stock
    
    
    
    
    
    
    545Intangible
cost included in accounts payable
    
    
    80
    
    
    
    
  4




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




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Note 3. Inventory
  June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)Purchased parts
    
    $
    271
    
    
    $
    272Finished goods
    
    
    625
    
    
    
    627Total inventory
    
    
    896
    
    
    
    899Less: inventory non-current
    
    
    325
    
    
    
    325Total inventory current
    
    $
    571
    
    
    $
    574
  Note 4. Fixed Assets
  June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)Furniture and fixtures
    
    $
    47
    
    
    $
    47Laboratory equipment
    
    
    508
    
    
    
    508Computer and communications equipment
    
    
    261
    
    
    
    261Design and tooling
    
    
    1,204
    
    
    
    1,204Machinery and equipment
    
    
    777
    
    
    
    777Construction in progress
    
    
    399
    
    
    
    3993,196
    
    
    
    3,196Less accumulated depreciation and amortization
    
    
    (1,546
    )
    
    
    (1,350
    )Total
    
    $
    1,650
    
    
    $
    1,846
   Note 5. Licenses, Patents, and Technology
  June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)Licenses
    
    $
    320
    
    
    $
    220Patent costs
    
    
    133
    
    
    
    133LabCorp Technology Agreement
    
    
    260
    
    
    
    260713
    
    
    
    613Less accumulated amortization
    
    
    (602
    )
    
    
    (551
    )Total
    
    $
    111
    
    
    $
    62
 6




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##### Table of Contents



Note 6. Accrued Expenses
  June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)Accrued interest
    
    $
    52
    
    
    $
    363Provision for legal settlement
    
    
    
    
    
    
    220Accrued franchise and other taxes
    
    
    214
    
    
    
    214Accrued compensation
    
    
    60
    
    
    
    40Other accrued expenses
    
    
    169
    
    
    
    388Total
    
    $
    495
    
    
    $
    1,225
 Note 7. Notes Payable and Advances-related parties
  June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)Asher Enterprises, Inc., $75,000 Convertible Promissory Note issued March 9, 2010;
interest rate 8% per annum, due December 10, 2010
    
    $
    75
    
    
    $
    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
    
    
    
    34Less discount
    
    
    (32
    )
    
    
    $
    113
    
    
    $
    70
  7




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Note 8. Stockholders Equity (Deficit)
 Loss per share
  Six months ended
    
    
    Three months endedJune 30, 2010
    
    
    June 30, 2009
    
    
    June 30, 2010
    
    
    June 30, 2009(Unaudited)
    
    
    (Unaudited)Basic and Diluted:Net loss applicable to common stockholder
    
    $
    (762
    )
    
    $
    (3,027
    )
    
    $
    (293
    )
    
    $
    (1,093
    )Weighted
average common shares outstanding
    
    
    44,420,570
    
    
    
    41,571,015
    
    
    
    45,456,100
    
    
    
    41,894,354Net loss per common share
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
   Preferred Stock
  June
30,
    

December
31,2010
    
    2009Shares Issued &
    
    Shares Issued &Offering
    
    Outstanding
    
    Outstanding(unaudited)Series A convertible
    
    
    47,250
    
    
    
    47,250Series B convertible, 10% cumulative dividend
    
    
    93,750
    
    
    
    93,750Series C convertible, 10% cumulative dividend
    
    
    38,333
    
    
    
    38,333Series D convertible, 10% cumulative dividend
    
    
    175,000
    
    
    
    175,000Series E convertible, 10% cumulative dividend
    
    
    19,222
    
    
    
    19,222Total Preferred Stock
    
    
    373,555
    
    
    
    373,555
 Summary of Preferred Stock Terms
 Series A Convertible Preferred Stock
 Liquidation Value:
    
    $4.50 per shareConversion Price:
    
    $103.034 per share
 8




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##### Table of Contents



Conversion 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 timeCumulative and undeclared dividends in arrears at June 30, 2010 were $351,000
 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 timeCumulative and undeclared dividends in arrears at June 30, 2010 were $100,000
 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 timeCumulative and undeclared dividends in arrears at June 30, 2010 were $1,517,000
 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 timeCumulative and undeclared dividends in arrears at June 30, 2010 were $369,000
 Issuance of Common Shares and Warrants for Cash
   Issuance of Common Stock and Warrants as Payment for Legal Settlement
  9




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Issuance of Common Stock as Payment for Services
  Issuance of Common Stock and Warrants as Compensation
   Application of Black-Scholes Valuation Model
  2010
    
    2009Expected volatility
    
    
    240%-250
    %
    
    
    174
    %Expected term (years)
    
    
    1.5
    
    
    
    1.5Risk-free interest rate
    
    
    1.00
    %
    
    
    1.00
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Forfeiture rate
    
    
    0
    %
    
    
    0
    %Resulting weighted average grant date fair value
    
    $
    0.15
    
    
    $
    0.20
 Note 9. Derivative Liability
  Note 10. Legal Proceedings
  10




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MedPlast Elkhorn, Inc.
 Wildman, Harrold, Allen & Dixon LLP.
 Patricia H. Gue
 Silicon Engines, Ltd.
 Securities and Exchange Commission Subpoenas
 SEC action.
 Other claims
  Contingencies
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 11




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##### Table of Contents



Overview of CytoCore, Inc.
 CytoCore Solutions Ô CytoCore Solutions CytoCore Solutions CytoCore Solutions
 ® Ô Ô Ô
  12




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Critical Accounting Policies and Changes to Accounting Policies
   Results of Operations
  Three
Months Ended June 30, 2010 as compared to Three Months Ended
June 30, 2009
 Revenue
  Costs and Expenses
 Cost of Revenues
  Research and Development
   13




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Selling, General and Administrative
  Other Income (Expense)
   Net Loss
   Six
Months Ended June 30, 2010 as compared to Six Months Ended
June 30, 2009
 Revenue
  Costs and Expenses
 Cost of Revenues
  Research and Development
   Selling, General and Administrative
  14




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Other Income (Expense)
    Net Loss
   Liquidity and Capital Resources
  CytoCore
Solutions
    15




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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
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  16




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##### Table of Contents



MedPlast Elkhorn, Inc.
 Wildman, Harrold, Allen & Dixon LLP.
 Patricia H. Gue
 Silicon Engines, Ltd.
 Securities and Exchange Commission Subpoenas
 SEC action.
 Other claims
  Contingencies
  
 Item 1A. Risk Factors.
  17




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Unregistered Sales of Equity Securities
 Issuance of Common Shares and Warrants for Cash
   Issuance of Common Stock and Warrants as Payment for Legal Settlement
  Issuance of Common Stock as Payment for Services
  Issuance of Common Stock and Warrants as Compensation
   Exemptions
  Company Repurchases of Securities
  18




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Item 3. Defaults upon Senior Securities
   
 Item 4. Reserved
 
 Item 5. Other Information
  
 Item 6. Exhibits
  19




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SIGNATURES
  CytoCore, Inc./s/ Robert F. McCullough, Jr.Robert F. McCullough, Jr.Chief Executive Officer and
Chief Financial Officer  20




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##### Table of Contents



EXHIBIT
INDEX
 ExhibitNumber
    
    Description31
    
    Section 302 certification by principal executive and chief financial officer.32
    
    Section 906 certification by principal executive and chief financial officer.
 21