##### 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, 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.)
 
 (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 þ
Non-Accelerated Filer o(Do not check if a smaller reporting company)
Smaller Reporting Company o 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 Statementsa) Condensed Consolidated Balance Sheets  March 31, 2009 (unaudited) and December 31, 2008
    
    
    2b) Condensed Consolidated Statements of Operations  Three months ended March 31, 2009 and March
31, 2008 (unaudited)
    
    
    3c) Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2009 and March
31, 2008 (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 31
    
    Section 302 CertificationExhibit 32
    
    Section 906 CertificationEX-31EX-32
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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 31,2009
    
    
    2008(Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    17
    
    
    $
    553Accounts receivable, net of allowance of $7 at March 31, 2009 and December 31, 2008
    
    
    32
    
    
    
    36Inventories
    
    
    1,299
    
    
    
    1,168Prepaid expenses and other current assets
    
    
    39
    
    
    
    58Total current assets
    
    
    1,387
    
    
    
    1,815Fixed assets, net
    
    
    2,171
    
    
    
    2,040Licenses, patents and technology, net of amortization
    
    
    92
    
    
    
    101Total assets
    
    $
    3,650
    
    
    $
    3,956Liabilities and Stockholders Equity (Deficit)Current Liabilities:Accounts payable
    
    $
    2,244
    
    
    $
    2,320Accrued payroll costs
    
    
    196
    
    
    
    127Advances payable to related parties
    
    
    578
    
    
    
    Accrued expenses
    
    
    2,056
    
    
    
    1,041Notes payable
    
    
    70
    
    
    
    70Total current liabilities
    
    
    5,144
    
    
    
    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 March 31, 2009 and December 31, 2008, respectively
(Liquidation value of all
classes of preferred stock $2,875 at March 31, 2009)
    
    
    1,492
    
    
    
    1,492Common stock, $0.001 par value; 500,000,000 shares authorized;
41,304,196 and 41,226,903 shares
issued and 41,284,987 and 41,207,694 shares outstanding at March 31,
2009 and December 31,
2008, respectively
    
    
    41
    
    
    
    41Additional paid-in-capital
    
    
    91,105
    
    
    
    91,065Treasury stock: 19,209 shares at March 31, 2009 and December 31, 2008
    
    
    (327
    )
    
    
    (327
    )Accumulated deficit
    
    
    (93,731
    )
    
    
    (91,799
    )Accumulated comprehensive lossCumulative translation adjustment
    
    
    (74
    )
    
    
    (74
    )Total stockholders equity (deficit)
    
    
    (1,494
    )
    
    
    398Total liabilities and stockholders equity (deficit)
    
    $
    3,650
    
    
    $
    3,956
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CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
 Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)Net sales
    
    $
    14
    
    
    $
    46Operating expensesCost of revenues
    
    
    6
    
    
    
    77Research and development
    
    
    113
    
    
    
    809Selling, general, and administrative
    
    
    878
    
    
    
    1,014Selling, general, and administrative  related party
    
    
    
    
    
    
    46Total operating expenses
    
    
    997
    
    
    
    1,946Operating loss
    
    
    (983
    )
    
    
    (1,900
    )Other income (expense):Interest income
    
    
    
    
    
    
    15Provision for legal settlement
    
    
    (948
    )Interest expense
    
    
    (2
    )
    
    
    (1
    )Total other income (expense)
    
    
    (950
    )
    
    
    14Net loss
    
    
    (1,933
    )
    
    
    (1,886
    )Preferred stock dividend
    
    
    
    
    
    
    (4
    )Net loss applicable to common stockholders
    
    $
    (1,933
    )
    
    $
    (1,890
    )Basic and diluted net loss per common share
    
    $
    (0.05
    )
    
    $
    (0.05
    )Basic and diluted weighed average number of common shares
outstanding
    
    
    41,244,084
    
    
    
    36,884,138
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CYTOCORE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)Operating Activities:Net loss
    
    $
    (1,933
    )
    
    $
    (1,886
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    101
    
    
    
    31Gain on settlements of indebtedness
    
    
    
    
    
    
    (19
    )Warrants issued to non-employees for services
    
    
    
    
    
    
    5Non-cash compensation expense
    
    
    
    
    
    
    43Stock issued to non-employees for services
    
    
    5
    
    
    
    Non-cash charge for legal settlement
    
    
    948
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    4
    
    
    
    (10
    )Inventories
    
    
    (131
    )
    
    
    (121
    )Prepaid expenses and other current assets
    
    
    19
    
    
    
    127Accounts payable
    
    
    (282
    )
    
    
    (364
    )Accrued expenses
    
    
    168
    
    
    
    (403
    )Net cash used in operating activities
    
    
    (1,101
    )
    
    
    (2,597
    )Investing activities:Purchase of license
    
    
    (17
    )
    
    
    Purchase of fixed assets
    
    
    
    
    
    
    (631
    )Net cash used in investing activities
    
    
    (17
    )
    
    
    (631
    )Financing activities:Proceeds from related parties
    
    
    578
    
    
    
    Proceeds from issuance of common stock and warrants
    
    
    
    
    
    
    9,100Financing costs in connection with private placement of stock
    
    
    
    
    
    
    (395
    )Proceeds from common stock subscribed
    
    
    
    
    
    
    122Proceeds from exercise of warrants
    
    
    4
    
    
    
    20Net cash provided by financing activities
    
    
    582
    
    
    
    8,847Net increase (decrease) in cash and cash equivalents
    
    
    (536
    )
    
    
    5,619Cash and cash equivalents at the beginning of period
    
    
    553
    
    
    
    316Cash and cash equivalents at end of period
    
    $
    17
    
    
    $
    5,935Supplemental disclosure of cash flow information:Non-cash transactions during the period for:Preferred stock and cumulative dividends converted into common stock
    
    $
    
    
    
    $
    22Subscriptions receivable
    
    $
    
    
    
    $
    159Payment of accrued wages with common stock
    
    $
    31
    
    
    $
    604
  4




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




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Note 3. Inventory
  March 31,
    
    
    December 31,2009
    
    
    2008(unaudited)Purchased Parts
    
    $
    271
    
    
    $
    136Finished goods
    
    
    1,028
    
    
    
    1,032Total
    
    $
    1,299
    
    
    $
    1,168
  Note 4. Fixed Assets
  March 31,
    
    
    December 31,2009
    
    
    2008(unaudited)Furniture and fixtures
    
    $
    47
    
    
    $
    47Laboratory equipment
    
    
    508
    
    
    
    508Computer and communications equipment
    
    
    261
    
    
    
    261Design and tooling
    
    
    1,625
    
    
    
    1,418Machinery and equipment
    
    
    777
    
    
    
    7773,218
    
    
    
    3,011Less accumulated depreciation and amortization
    
    
    (1,047
    )
    
    
    (971
    )Total
    
    $
    2,171
    
    
    $
    2,040
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Note 5. Licenses, Patents, and Technology
  March 31,
    
    
    December 31,2009
    
    
    2008(unaudited)Licenses
    
    $
    176
    
    
    $
    159Patent costs
    
    
    133
    
    
    
    133LabCorp Technology Agreement
    
    
    260
    
    
    
    260569
    
    
    
    552Less accumulated amortization
    
    
    (477
    )
    
    
    (451
    )Total
    
    $
    92
    
    
    $
    101
  Note 6. Accrued Expenses
  March 31,
    
    
    December 31,2009
    
    
    2008(unaudited)Accrued interest
    
    $
    358
    
    
    $
    357Provision for legal settlement
    
    
    948
    
    
    
    Accrued franchise and other taxes
    
    
    131
    
    
    
    102Accrued compensation
    
    
    276
    
    
    
    241Other accrued expenses
    
    
    343
    
    
    
    341Total
    
    $
    2,056
    
    
    $
    1,041
 Note 7. Notes Payable and Advances-related parties
  March 31,
    
    
    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
 Defaults.
 7




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Note 8. Stockholders Equity (Deficit)
 Loss per share
  March 31,
    
    March 31,2009
    
    2008(unaudited)Basic and Diluted:Net loss applicable to common stockholder (in thousands)
    
    
    ($1,933
    )
    
    
    ($1,890
    )Weighted average common shares outstanding
    
    
    41,244,084
    
    
    
    36,884,138Net loss per common share
    
    
    ($0.05
    )
    
    
    ($0.05
    )
   Preferred Stock
  March 31,
    
    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 time
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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)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2001Conversion Period:
    
    Any timeCumulative and undeclared dividends in arrears at March 31, 2009 were $304,000Series 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 March 31, 2009 were $85,000Series 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 March 31, 2009 were $1,298,000Series 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, 2009 were $317,000
 Conversion of Series E Preferred Shares for Common Shares
  Repricing of Warrants for Cash
  Issuance of Common Stock as Payment for Services
  9




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Issuance of Stock as Payment for Employee Compensation
  Application of Black-Scholes Valuation Model
  2008Expected volatility
    
    
    125
    %Expected term (years)
    
    
    1.5Risk-free interest rate
    
    
    4.25
    %Expected dividend yield
    
    
    0
    %Forfeiture rate
    
    
    0
    %Resulting weighted average grant date fair value
    
    $
    1.58
 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.
 10




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Note 11. Commitments and Contingencies
  Other claims
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
    Overview of CytoCore, Inc.
 CytoCore Solutions Ô CytoCore Solutions
 11




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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, 2009 as compared to Three Months Ended March 31, 2008
 Revenue
 12




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




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Liquidity and Capital Resources
  CytoCore
Solutions
     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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NeoMed Innovation III L.P.
  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
  Issuance of Common Stock as Payment for Services
  Issuance of Stock as Payment for Employee Compensation
  16




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Conversion of Certain Preferred Shares for Common Shares
  Exemptions
  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
    
    Description31
    
    Section 302 certification by principal executive and chief financial officer.32
    
    Section 906 certification by principal executive and chief financial officer.
 19