##### 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, 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




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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  March 31, 2010 and December 31, 2009 (unaudited)
    
    
    2b) Condensed Consolidated Statements of Operations  Three months ended March 31, 2010 and March
31, 2009 (unaudited)
    
    
    3c) Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2010 and March
31, 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
    
    
    14Item 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. Reserved
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    17SIGNATURES
    
    
    18EXHIBIT INDEX
    
    
    19Exhibit 10.1 Convertible promissory note to Asher Enterprises, Inc.Exhibit 31 Section 302 CertificationExhibit 32 Section 906 CertificationEX-10.1EX-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)
 March 31,
    
    
    December 31,2010
    
    
    2009AssetsCurrent Assets:Cash and cash equivalents
    
    $
    18
    
    
    $
    Accounts receivable
    
    
    11
    
    
    
    17Inventories
    
    
    573
    
    
    
    574Prepaid expenses and other current assets
    
    
    28
    
    
    
    44Total current assets
    
    
    630
    
    
    
    635Fixed assets, net
    
    
    1,748
    
    
    
    1,846Licenses, patents and technology, net of amortization
    
    
    36
    
    
    
    62Inventories, non-current
    
    
    325
    
    
    
    325Total assets
    
    $
    2,739
    
    
    $
    2,868Liabilities and Stockholders DeficitCurrent Liabilities:Checks issued in excess of amounts on
deposit
    
    $
    
    
    
    $
    5Accounts payable
    
    
    2,150
    
    
    
    2,102Accrued payroll costs
    
    
    1,005
    
    
    
    818Advances payable to related parties
    
    
    878
    
    
    
    763Accrued expenses
    
    
    660
    
    
    
    1,225Derivative liability
    
    
    279
    
    
    
    Notes payable
    
    
    90
    
    
    
    70Total current liabilities
    
    
    5,062
    
    
    
    4,983Stockholders Deficit:Preferred
stock, $0.001 par value; 10,000,000 shares authorized; 373,555 shares issued and
outstanding at March 31, 2010 and December 31, 2009 (Liquidation value of all
classes of preferred stock $2,875 at March 31, 2010)
    
    
    1,491
    
    
    
    1,492Common
stock, $0.001 par value; 500,000,000 shares authorized; 44,832,610 and 42,173,810 shares
issued and 44,813,401 and 42,154,601 shares outstanding at March 31, 2010 and December 31,
2009, respectively
    
    
    45
    
    
    
    42Additional paid-in-capital
    
    
    92,365
    
    
    
    92,106Treasury stock: 19,209 shares at March 31, 2010 and December 31, 2009
    
    
    (327
    )
    
    
    (327
    )Accumulated deficit
    
    
    (95,820
    )
    
    
    (95,351
    )Accumulated comprehensive loss
Cumulative translation adjustment
    
    
    (77
    )
    
    
    (77
    )Total stockholders deficit
    
    
    (2,323)
    
    
    
    (2,115
    )Total liabilities and stockholders deficit
    
    $
    2,739
    
    
    $
    2,868
  2




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
 Three Months EndedMarch 31,2010
    
    
    2009Net sales
    
    $
    8
    
    
    $
    14Operating expensesCost of revenues
    
    
    
    
    
    
    6Research and development
    
    
    65
    
    
    
    113Selling, general, and administrative
    
    
    499
    
    
    
    878Total operating expenses
    
    
    564
    
    
    
    997Operating loss
    
    
    (556
    )
    
    
    (983
    )Other income (expense):Provision for legal settlement
    
    
    
    
    
    
    (948
    )Benefit from derivative liability
    
    
    89
    
    
    
    Interest expense
    
    
    (2
    )
    
    
    (2
    )Total other income (expense)
    
    
    87
    
    
    
    (950
    )Net loss applicable to common stockholders
    
    $
    (469
    )
    
    $
    (1,933
    )Basic and diluted net loss per common share
    
    $
    (0.01
    )
    
    $
    (0.05
    )Basic and diluted weighed average number of common shares
outstanding
    
    
    43,385,041
    
    
    
    41,244,084
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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 Three Months EndedMarch 31,2010
    
    
    2009Operating Activities:Net loss
    
    $
    (469
    )
    
    $
    (1,933
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    124
    
    
    
    101Stock issued to non-employees for services
    
    
    6
    
    
    
    5Benefit from derivative liability
    
    
    (89
    )
    
    
    Non-cash charge for legal settlement
    
    
    
    
    
    
    948Changes in assets and liabilities:Checks issued in excess of amounts on deposit
    
    
    (5
    )
    
    
    Accounts receivable
    
    
    6
    
    
    
    4Inventories
    
    
    1
    
    
    
    (131
    )Prepaid expenses and other current assets
    
    
    16
    
    
    
    19Accounts payable
    
    
    47
    
    
    
    (282
    )Accrued expenses
    
    
    191
    
    
    
    168Net cash used in operating activities
    
    
    (172
    )
    
    
    (1,101
    )Investing activities:Purchase of license
    
    
    
    
    
    
    (17
    )Net cash used in investing
activities
    
    
    
    
    
    
    (17
    )Financing activities:Proceeds from related parties
    
    
    115
    
    
    
    578Proceeds from issuance of convertible note
    
    
    75
    
    
    
    Proceeds from exercise of warrants
    
    
    
    
    
    
    4Net cash provided by financing activities
    
    
    190
    
    
    
    582Net increase (decrease) in cash and cash equivalents
    
    
    18
    
    
    
    (536
    )Cash and cash equivalents at the beginning of period
    
    
    
    
    
    
    553Cash and cash equivalents at end of period
    
    $
    18
    
    
    $
    17Supplemental 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
    
    
    
    
  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
   Note 3. Inventory




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March 31,
    
    
    December 31,2010
    
    
    2009(unaudited)Purchased parts
    
    $
    272
    
    
    $
    272Finished goods
    
    
    626
    
    
    
    627Total inventory
    
    
    898
    
    
    
    899Less: inventory non-current
    
    
    325
    
    
    
    325Total inventory current
    
    $
    573
    
    
    $
    574
  Note 4. Fixed Assets
  March 31,
    
    
    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
    
    
    (1,448
    )
    
    
    (1,350
    )Total
    
    $
    1,748
    
    
    $
    1,846
   Note 5. Licenses, Patents, and Technology
  March 31,
    
    
    December 31,2010
    
    
    2009(unaudited)Licenses
    
    $
    220
    
    
    $
    220Patent costs
    
    
    133
    
    
    
    133LabCorp Technology Agreement
    
    
    260
    
    
    
    260613
    
    
    
    613Less accumulated amortization
    
    
    (577
    )
    
    
    (551
    )Total
    
    $
    36
    
    
    $
    62
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Note 6. Accrued Expenses
  March 31,
    
    
    December 31,2010
    
    
    2009(unaudited)Accrued interest
    
    $
    49
    
    
    $
    363Provision for legal settlement
    
    
    
    
    
    
    220Accrued franchise and other taxes
    
    
    214
    
    
    
    214Accrued compensation
    
    
    45
    
    
    
    40Other accrued expenses
    
    
    352
    
    
    
    388Total
    
    $
    660
    
    
    $
    1,225
 Note 7. Notes Payable and Advances-related parties
  March 31,
    
    
    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
    
    
    (55
    )
    
    
    $
    90
    
    
    $
    70
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Note 8. Stockholders Equity (Deficit)
 Loss per share
  March 31,
    
    
    March 31,2010
    
    
    2009(unaudited)Basic and Diluted:Net loss applicable to common stockholder (in thousands)
    
    
    ($469
    )
    
    
    ($1,933
    )Weighted average common shares outstanding
    
    
    43,385,041
    
    
    
    41,244,084Net loss per common share
    
    
    ($0.01
    )
    
    
    ($0.05
    )
   Preferred Stock
  March 31,
    
    
    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 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 share
 8




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Conversion 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 March 31, 2010 were $341,000
 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, 2010 were $97,000
 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, 2010 were $1,473,000
 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, 2010 were $359,000
 Issuance of Common Stock and Warrants as Payment for Legal Settlement
  Issuance of Common Stock as Payment for Services
  Application of Black-Scholes Valuation Model
  9




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2010
    
    
    2009Expected volatility
    
    
    250
    %
    
    
    125
    %Expected term (years)
    
    
    1.5
    
    
    
    1.5Risk-free interest rate
    
    
    1.00
    %
    
    
    4.25
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Forfeiture rate
    
    
    0
    %
    
    
    0
    %Resulting weighted average grant date fair value
    
    $
    0.15
    
    
    $
    1.58
 Note 9. Derivative Liability
  Note
10. Legal Proceedings and Contingencies
 Legal Proceedings
 MedPlast Elkhorn, Inc.
 Wildman, Harrold, Allen &
Dixon LLP.
 Patricia H. Gue
 Silicon Engines, Ltd.
 10




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Securities and Exchange Commission Subpoenas
  Other claims
  Contingencies
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
    Overview of CytoCore, Inc.
  11




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CytoCore Solutions Ô CytoCore Solutions CytoCore Solutions CytoCore Solutions
 ® Ô Ô Ô
   Critical Accounting Policies and Changes to Accounting Policies
   Results of Operations
  Three Months Ended March 31, 2010 as compared to Three Months Ended March 31, 2009
 12




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Revenue
  Costs and Expenses
 Cost of Revenues
  Research and Development
   Selling, General and Administrative
  Other Income (Expense)
    Net Loss
   Liquidity and Capital Resources
  13




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CytoCore
Solutions
    Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risks
    
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  14




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Changes in Internal Control over Financial Reporting
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
 Legal
Proceedings
 MedPlast Elkhorn, Inc.
 Wildman,
Harrold, Allen & Dixon LLP.
 Patricia
H. Gue
 Silicon Engines, Ltd.
 Securities and Exchange Commission Subpoenas
  15




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Other claims
  Contingencies
  
 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 as Payment for Legal Settlement
  Issuance
of Common Stock as Payment for Services
  Exemptions
  Company Repurchases of Securities
  
 Item 3. Defaults upon Senior Securities
 16




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Item 4. Reserved
 
 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
 Exhibit Number
    
    Description31
    
    Section 302 certification by principal executive and chief financial officer.32
    
    Section 906 certification by principal executive and chief financial officer.10.1
    
    Convertible promissory note to Asher Enterprises, Inc.
 19