##### 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, 2009
 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.)
 414 North Orleans Street, Suite 510
Chicago, IL 60654(Address of Principal Executive Offices)(312) 222-9550(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 oAccelerated Filer o
Non-Accelerated Filer o(Do not check if a smaller reporting company)
Smaller Reporting Company þ o þ
  42,173,810




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##### 



CYTOCORE, INC.
 QUARTERLY REPORT ON FORM 10-Q
 TABLE OF CONTENTS
 PART I.  FINANCIAL INFORMATION
    
    PageItem 1.
    
    Financial Statementsa)
    
    Condensed Consolidated Balance Sheets  September 30, 2009 (unaudited) and December 31, 2008
    
    
    2b)
    
    Condensed Consolidated Statements of Operations  Nine and Three months ended September 30,
2009 and September 30, 2008 (unaudited)
    
    
    3c)
    
    Condensed Consolidated Statements of Cash Flows  Nine months ended September 30, 2009
and September 30, 2008 (unaudited)
    
    
    4d)
    
    Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17PART II.  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    18Item 1A.
    
    Risk Factors
    
    
    18Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3.
    
    Defaults upon Senior Securities
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20Item 5.
    
    Other Information
    
    
    20Item 6.
    
    Exhibits
    
    
    20SIGNATURES
    
    
    
    
    21EXHIBIT INDEX
    
    
    22EX-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 31,2009
    
    
    2008(Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    3
    
    
    $
    553Accounts receivable, net of allowance of $7 at September 30, 2009 and December 31, 2008
    
    
    12
    
    
    
    36Inventories
    
    
    1,303
    
    
    
    1,168Prepaid expenses and other current assets
    
    
    56
    
    
    
    58Total current assets
    
    
    1,374
    
    
    
    1,815Fixed assets, net
    
    
    1,945
    
    
    
    2,040Licenses, patents and technology, net of amortization
    
    
    75
    
    
    
    101Total assets
    
    $
    3,394
    
    
    $
    3,956Liabilities and Stockholders Equity (Deficit)Current Liabilities:Accounts payable
    
    $
    2,447
    
    
    $
    2,320Accrued payroll costs
    
    
    624
    
    
    
    127Advances payable to related parties
    
    
    515
    
    
    
    Accrued expenses
    
    
    1,937
    
    
    
    1,041Notes payable
    
    
    70
    
    
    
    70Total current liabilities
    
    
    5,593
    
    
    
    3,558Stockholders Equity (Deficit):Preferred stock, $0.001 par value; 10,000,000 shares authorized; 373,555 and 373,559 shares issued and
outstanding at September 30, 2009 and December 31, 2008, respectively (Liquidation value of all
classes of preferred stock $2,875 at September 30, 2009)
    
    
    1,492
    
    
    
    1,492Common stock, $0.001 par value; 500,000,000 shares authorized; 42,173,810 and 41,226,903 shares
issued and 42,154,601 and 41,207,694 shares outstanding at September 30, 2009 and December 31,
2008, respectively
    
    
    42
    
    
    
    41Additional paid-in-capital
    
    
    92,106
    
    
    
    91,065Treasury stock: 19,209 shares at September 30, 2009 and December 31, 2008
    
    
    (327
    )
    
    
    (327
    )Accumulated deficit
    
    
    (95,436
    )
    
    
    (91,799
    )Accumulated comprehensive loss  Cumulative translation adjustment
    
    
    (76
    )
    
    
    (74
    )Total stockholders equity (deficit)
    
    
    (2,199
    )
    
    
    398Total liabilities and stockholders equity (deficit)
    
    $
    3,394
    
    
    $
    3,956
  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 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited)
    
    
    (Unaudited)Net revenues
    
    $
    28
    
    
    $
    110
    
    
    $
    5
    
    
    $
    28Operating expensesCost of revenues
    
    
    6
    
    
    
    214
    
    
    
    
    
    
    
    71Research and development
    
    
    300
    
    
    
    1,649
    
    
    
    87
    
    
    
    332Selling, general and administrative
    
    
    2,381
    
    
    
    3,191
    
    
    
    525
    
    
    
    1,112Selling, general and administrative  related parties
    
    
    
    
    
    
    225
    
    
    
    
    
    
    
    60Total operating expenses
    
    
    2,687
    
    
    
    5,279
    
    
    
    612
    
    
    
    1,575Operating loss
    
    
    (2,659
    )
    
    
    (5,169
    )
    
    
    (607
    )
    
    
    (1,547
    )Other income (expense)Interest income
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    12Provision for legal settlement
    
    
    (948
    )
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    (29
    )
    
    
    (5
    )
    
    
    (3
    )
    
    
    (2
    )Total other income (expense)
    
    
    (977
    )
    
    
    45
    
    
    
    (3
    )
    
    
    10Net loss
    
    
    (3,636
    )
    
    
    (5,124
    )
    
    
    (610
    )
    
    
    (1,537
    )Preferred stock dividend
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    Net loss applicable to common stockholders
    
    $
    (3,636
    )
    
    $
    (5,182
    )
    
    $
    (610
    )
    
    $
    (1,537
    )Basic and diluted net loss per common share
    
    $
    (0.09
    )
    
    $
    (0.13
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )Basic and diluted weighted average number
of common shares outstanding
    
    
    41,925,232
    
    
    
    39,568,290
    
    
    
    42,173,810
    
    
    
    40,954,290
  3




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CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 Nine Months EndedSeptember 30,2009
    
    
    2008(Unaudited)Operating activities:Net loss
    
    $
    (3,636
    )
    
    $
    (5,124
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    355
    
    
    
    184Gain on settlements of indebtedness
    
    
    
    
    
    
    (19
    )Loss on disposal of fixed asset
    
    
    
    
    
    
    1Warrants issued to non-employees for services
    
    
    
    
    
    
    37Non-cash compensation expense
    
    
    2
    
    
    
    86Non-cash interest related to warrant modification
    
    
    21
    
    
    
    Stock issued to non-employees for services
    
    
    5
    
    
    
    Non-cash charge for legal settlement
    
    
    948
    
    
    
    Stock to be issued for directors fees
    
    
    350
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    24
    
    
    
    (16
    )Inventories
    
    
    (135
    )
    
    
    (894
    )Prepaid expenses and other current assets
    
    
    2
    
    
    
    169Accounts payable
    
    
    135
    
    
    
    29Accrued expenses
    
    
    522
    
    
    
    (716
    )Net cash used in operating activities
    
    
    (1,407
    )
    
    
    (6,263
    )Investing activities:Purchase of license
    
    
    (50
    )
    
    
    (122
    )Purchase of fixed assets
    
    
    
    
    
    
    (1,346
    )Net cash used in investing activities
    
    
    (50
    )
    
    
    (1,468
    )Financing activities:Proceeds from related parties
    
    
    637
    
    
    
    Proceeds from issuance of common stock and warrants
    
    
    
    
    
    
    9,381Financing costs in connection with private placement of stock
    
    
    
    
    
    
    (405
    )Proceeds from exercise of warrants
    
    
    270
    
    
    
    62Net cash provided by financing activities
    
    
    907
    
    
    
    9,038Net increase (decrease) in cash and cash equivalents
    
    
    (550
    )
    
    
    1,307Cash and cash equivalents at the beginning of period
    
    
    553
    
    
    
    316Cash and cash equivalents at end of period
    
    $
    3
    
    
    $
    1,623Supplemental disclosure of cash flow information:Non-cash transactions during the period for:Preferred stock and cumulative dividends converted into common stock
    
    $
    
    
    
    $
    136Warrants exercised with debt in satisfaction of related party advances and other
liabilities
    
    $
    168
    
    
    $
    180Payment of directors fees with common stock
    
    $
    195
    
    
    $
    Payment of accrued wages with common stock
    
    $
    31
    
    
    $
    604
  4




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##### Table of Contents



CYTOCORE, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1. Organization
  CytoCore Solutions Ô CytoCore Solutions CytoCore Solutions CytoCore Solutions CytoCore Solutions
    5




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##### Table of Contents



Note 2. Basis of Presentation
    Nine months ended
    
    
    Three months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited)
    
    
    (Unaudited)Net loss applicable to common stockholders
    
    $
    (3,636
    )
    
    $
    (5,182
    )
    
    $
    (610
    )
    
    $
    (1,537
    )Foreign currency adjustment
    
    
    (2
    )
    
    
    
    
    
    
    (1
    )
    
    
    Comprehensive net loss applicable to common stockholders
    
    $
    (3,638
    )
    
    $
    (5,182
    )
    
    $
    (611
    )
    
    $
    (1,537
    )Basic and diluted comprehensive net loss per common share
    
    $
    (0.09
    )
    
    $
    (0.13
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )Basic and diluted weighted average number
of common shares outstanding
    
    
    41,925,232
    
    
    
    39,568,290
    
    
    
    42,173,810
    
    
    
    40,954,290
 Note 3. Inventory
  September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)Purchased parts
    
    $
    271
    
    
    $
    136Finished goods
    
    
    1,032
    
    
    
    1,032Total
    
    $
    1,303
    
    
    $
    1,168
  6




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##### Table of Contents



Note 4. Fixed Assets
  September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)Furniture and fixtures
    
    $
    47
    
    
    $
    47Laboratory equipment
    
    
    508
    
    
    
    508Computer and communications equipment
    
    
    261
    
    
    
    261Design and tooling
    
    
    1,204
    
    
    
    1,016Machinery and equipment
    
    
    777
    
    
    
    777Construction in progress
    
    
    399
    
    
    
    4023,196
    
    
    
    3,011Less accumulated depreciation and amortization
    
    
    (1,251
    )
    
    
    (971
    )Total
    
    $
    1,945
    
    
    $
    2,040
  Note 5. Licenses, Patents, and Technology
  September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)Licenses
    
    $
    208
    
    
    $
    159Patent costs
    
    
    133
    
    
    
    133LabCorp Technology Agreement
    
    
    260
    
    
    
    260601
    
    
    
    552Less accumulated amortization
    
    
    (526
    )
    
    
    (451
    )Total
    
    $
    75
    
    
    $
    101
  Note 6. Accrued Expenses
  September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)Accrued interest
    
    $
    361
    
    
    $
    357Provision for legal settlement
    
    
    948
    
    
    
    Accrued franchise and other taxes
    
    
    184
    
    
    
    102Accrued compensation
    
    
    20
    
    
    
    241Other accrued expenses
    
    
    424
    
    
    
    341Total
    
    $
    1,937
    
    
    $
    1,041
 7




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##### Table of Contents



Note 7. Notes Payable; Advances-Related Parties
 Notes Payable
  September 30,
    
    
    December 31,2009
    
    
    2008(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
  Advances-Related Parties
  Note 8. Stockholders Equity (Deficit)
 Loss per share
  Nine months ended
    
    
    Three months endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited)
    
    
    (Unaudited)Basic and Diluted:Net loss applicable to common stockholders
    
    $
    (3,636
    )
    
    $
    (5,182
    )
    
    $
    (610
    )
    
    $
    (1,537
    )Weighted average common shares outstanding
    
    
    41,831,056
    
    
    
    39,568,290
    
    
    
    42,173,810
    
    
    
    40,954,290Net loss per common share
    
    $
    (0.09
    )
    
    $
    (0.13
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )
  8




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##### Table of Contents



Preferred Stock
  September 30,
    
    December 31,2009
    
    2008Shares 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
    
    
    
    19,226Total Preferred Stock
    
    
    373,555
    
    
    
    373,559
 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 timeSeries 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)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2001Conversion Period:
    
    Any timeCumulative and undeclared dividends in arrears at September 30, 2009 were $323,000Series 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 September 30, 2009 were $91,000Series 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 September 30, 2009 were $1,386,000
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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 September 30, 2009 were $338,000
 Conversion of Series E Preferred Shares for Common Shares
  Repricing
of Warrants for Cash and Cancellation of Debt
   Issuance of Common Stock as Payment for Services
  Issuance of Stock and Warrants as Payment for Employee Compensation
   10




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Application of Black-Scholes Valuation Model
  2009
    
    2008Expected volatility
    
    174%-207%
    
    125%-132%Expected term (years)
    
    1.5
    
    1.5Risk-free interest rate
    
    1.00%
    
    2.50-4.25%Expected dividend yield
    
    0%
    
    0%Forfeiture rate
    
    0%
    
    0%Resulting weighted average grant date fair value
    
    $0.20-$0.09
    
    $0.63-$1.72
 Note 9. Equity Incentive Plan and Employee Stock Purchase Plan and other Share-Based Employee Payments
     Note 10. Legal Proceedings
  NeoMed Innovation III L.P.
 11




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MedPlast Elkhorn, Inc.
 Other claims
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
    12




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Overview of CytoCore, Inc.
 CytoCore Solutions Ô CytoCore Solutions CytoCore Solutions CytoCore Solutions CytoCore Solutions
 Ô Ô Ô
   Critical Accounting Policies and Changes to Accounting Policies
 SoftPAP ®
  13




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Results of Operations
  Three Months Ended September 30, 2009 as compared to Three Months Ended September 30, 2008
 Revenue
 SoftPAP
 Costs and Expenses
 Cost of Revenues
 SoftPAP
 Research and Development
 SoftPAP
  Selling, General and Administrative
  Other Income (Expense)
  14




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Net Loss
 SoftPAP
  Nine Months Ended September 30, 2009 as compared to Nine Months Ended September 30, 2008
 Revenue
 SoftPAP
 Costs and Expenses
 Cost of Revenues
 SoftPAP
 Research and Development
 SoftPAP
 Selling, General and Administrative
  15




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Other Income (Expense)
    Net Loss
 SoftPAP
  Liquidity and Capital Resources
  CytoCore
Solutions
   16




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  17




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  NeoMed Innovation III L.P.
  MedPlast Elkhorn, Inc.
 Other claims
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Unregistered Sales of Equity Securities
 Repricing of Warrants for Cash and Cancellation of Debt
  18




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Issuance of Common Stock as Payment for Services
  Issuance of Stock and Warrants as Payment for Employee Compensation
    Conversion of Series E Preferred Shares for Common Shares
  Exemptions
  Company Repurchases of Securities
  19




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Item 3. Defaults upon Senior Securities
   
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  20




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SIGNATURES
  CytoCore, Inc./s/ Robert F. McCullough, Jr.Robert F. McCullough, Jr.Chief Executive Officer andChief Financial Officer  21




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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.
 22