10-Q 1 v240335_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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		(I.R.S. Employer
Incorporation or Organization)		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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No ¨ (not required)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rue 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ¨ Accelerated Filer ¨

Non-Accelerated Filer ¨ Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

COMMON STOCK, $0.001 PAR VALUE, AT NOVEMBER 10, 2011: 65,397,639

CYTOCORE, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page
PART I. – FINANCIAL INFORMATION

Item 1.	Financial Statements

a) Condensed Consolidated Balance Sheets – September 30, 2011(unaudited) and December 31, 2010		2

b) Condensed Consolidated Statements of Operations – Nine and three months ended September 30, 2011 and September 30, 2010 (unaudited)		3

c) Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2011 and September 30, 2010 (unaudited)		4

d) Notes to Unaudited Condensed Consolidated Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition andResults of Operations	12

Item 4.	Controls and Procedures	16

PART II. –OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17

Item 3.	Defaults upon Senior Securities	18

Item 6.	Exhibits	18

SIGNATURES		19

EXHIBIT INDEX		20

Exhibit 31.1 Section 302 Certification

Exhibit 32.1 Section 906 Certification

PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

CYTOCORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	September 30,			December 31,
	2011				2010*
	(unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	1		$	13
Accounts receivable		5			9
Inventories		108			108
Prepaid expenses and other current assets		10			25
Total current assets		124			155

Fixed assets, net		766			1,055
Licenses, patents and technology, net of amortization		—			62
Inventories, non-current		785			785
Total assets	$	1,675		$	2,057

Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable		1,641			1,765
Accrued payroll costs		1,829			1,395
Advances payable to related parties		2,321			1,766
Accrued expenses		708			597
Derivative liability		—			99
Notes payable		83			175
Total current liabilities		6,582			5,797

Stockholders’ Deficit:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 373,555 shares issued and outstanding at September 30, 2011 and December 31, 2010 (Liquidation value of all classes of preferred stock $2,876 at September 30, 2011)		1,492			1,492
Common stock, $0.001 par value; 500,000,000 shares authorized; 65,416,848 and 48,379,042 shares Issued or issuable and 65,397,639 and 48,359,833 shares outstanding at September 30, 2011 and December 31, 2010, respectively		65			48
Additional paid-in-capital		92,939			92,572
Treasury stock: 19,209 shares at September 30, 2011 and December 31, 2010		(327	)		(327	)
Accumulated deficit		(98,998	)		(97,448	)
Accumulated comprehensive loss—
Cumulative translation adjustment		(78	)		(77	)
Total stockholders’ deficit		(4,907	)		(3,740	)
Total liabilities and stockholders’ deficit	$	1,675		$	2,057

* Derived from audited information

See accompanying notes to these condensed consolidated financial statements.

CYTOCORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

	Nine months ended						Three months ended
	September 30,						September 30,
	2011			2010			2011			2010
	(Unaudited)						(Unaudited)

Net revenues	$	19		$	24		$	5		$	8

Operating expenses

Cost of revenues		—			1			—			1
Research and development, net of settlement of trade debt of $15 for the nine months ended September 30, 2011		171			213			56			83
Selling, general and administrative, (net of settlement of trade debt of $71 for the nine and three months ended September, 30 2010)		1,294			1,297			460			495

Total operating expenses		1,465			1,511			516			579

Operating loss		(1,446	)		(1,487	)		(511	)		(571	)

Other income (expense)

Benefit from derivative liability		30			238			—			56
Interest expense – related party		(124	)		—			(45	)		—
Interest expense		(10	)		(52	)		(4	)		(23	)
Total other income (expense)		(104	)		186			(49	)		33

Net loss		(1,550	)		(1,301	)		(560	)		(538	)

Preferred stock dividend		(199	)		(199	)		(67	)		(67	)

Net loss applicable to common stockholders	$	(1,749	)	$	(1,500	)	$	(627	)	$	(605	)

Basic and diluted net loss per common share	$	(0.03	)	$	(0.03	)	$	(0.01	)	$	(0.01	)

Basic and diluted weighted average number of common shares outstanding		55,644,245			47,141,033			59,759,909			46,608,865

See accompanying notes to these condensed consolidated financial statements.

CYTOCORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended
	September 30,
	2011			2010

Operating Activities:
Net loss	$	(1,550	)	$	(1,301	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		351			370
Amortization of discount		—			41
Common stock issued to non-employees for services		—			6
Common stock issued for compensation expense		39			15
Non-cash compensation expense		—			1
Benefit from derivative liability		(30	)		(238	)
Interest expense imputed on related party advances		124			—
Common stock to be issued for services		93			—
Gain on settlement of trade indebtedness		(15	)		(71	)
Changes in assets and liabilities:
Checks issued in excess of amounts on deposit		—			(5	)
Accounts receivable		4			5
Inventories		—			5
Prepaid expenses and other current assets		15			34
Accounts payable		(109	)		(142	)
Accrued expenses		548			399

Net cash used in operating activities		(530	)		(881	)

Investing activities:
Purchase of license		—			(36	)

Net cash used in investing activities		—			(36	)

Financing activities:
Proceeds from related parties		555			798
Proceeds from issuance of convertible note		—			75
Proceeds from sale of common stock		—			50
Repayment of notes		(37	)		—

Net cash provided by financing activities		518			923

Net increase (decrease) in cash and cash equivalents		(12	)		6

Cash and cash equivalents at the beginning of period		13			—

Cash and cash equivalents at end of period	$	1		$	6

Supplemental disclosure of cash flow information:

Non-cash transactions during the period for:
Issuance of common stock and warrants in settlement of a lawsuit	$	—		$	538
Stock issuable for liability		—			46
Note payable issued in payment of accounts payable resulting in a gain of approximately $71,000		—			69
The Company recorded a derivative liability resulting from potential excess shares and a reduction in additional paid in capital		—			345
Intangible cost included in accounts payable		—			80
Conversion of debt and accrued interest to common stock		59			—
Reclassification of liability (relating to variable conversion feature) to additional paid-in- capital upon conversion of debt		55			—
Reclassification of excess share derivative liability to additional paid-in capital		14			—

See accompanying notes to these condensed consolidated financial statements.

CYTOCORE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular data in thousands, except per share amounts)

(Unaudited)

Note 1. Organization

CytoCore, Inc. was incorporated in Delaware in December 1998. Except where the context otherwise requires, “CCI,” the “Company,” “we,” “our” and “us” refers to CytoCore, Inc. and our subsidiaries and predecessors.

Currently, the Company has one product for sale – its SoftPap collector. The Company is developing, and plans to sell an integrated family of cost-effective products for the detection, diagnosis and treatment of cancer under the trade name of CytoCore Solutions®. CytoCore Solutions products are intended to address sample collection, specimen preparation, specimen evaluation (including detection/screening and diagnosis), treatment and patient monitoring within vertical markets related to specific cancers. Current CytoCore Solutions products are focused upon cervical cancer. The Company plans that this focus will later be expanded to include other gynecological cancers as well as bladder, lung, and breast cancers, among others. Within each of these markets the Company anticipates that the CytoCore Solutions products will be sold as individual value-added drop-in replacements for existing products and as integrated systems that improve the efficiency and effectiveness of clinical and laboratory operations.

The Company has incurred significant operating losses since its inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement the Company’s business plan and develop, manufacture and market its products. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. Implementation of the Company’s plans and its ability to continue as a going concern will depend upon the Company’s ability to increase sales of its products, develop new products, and raise additional capital. At September 30, 2011, the Company had approximately $1,000 of cash to fund its operations.

If the Company is unable to obtain adequate additional financing or generate sufficient sales revenues, it will be unable to continue its product development efforts and other activities and will be forced to curtail or cease operations. The consolidated financial statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.

Note 2. Basis of Presentation

The consolidated financial statements for the periods ended September 30, 2011 and 2010 included herein are unaudited. Such consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature except for those related to the derivative liability described in note 9. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2011 or for any other period. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the interim information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the SEC.

The Company’s comprehensive net loss is as follows:

	Nine months ended
	September 30,
	2011			2010
	(Unaudited)

Net loss applicable to common stockholders	$	(1,550	)	$	(1,301	)
Foreign currency adjustment		(1	)		—
Comprehensive net loss applicable to common stockholders	$	(1,551	)	$	(1,301	)
Basic and diluted comprehensive net loss per common share	$	(0.03	)	$	(0.03	)
Basic and diluted weighted average number of common shares outstanding		55,644,245			47,141,033

Note 3. Inventory

Inventory consists of the following:

	September 30,		December 31,
	2011		2010
	(unaudited)

Purchased parts	$	269	$	269
Finished goods		624		624
Total inventory		893		893
Less: inventory non-current.		785		785
Total inventory current	$	108	$	108

Inventory is valued at the lower of cost or market, using the first in, first out method. Due to the uncertainty as to the timing of sales, the Company has classified $785,000 of inventory as non-current. Additionally, as required by FASB ACS 330-10-30-7 relating to inventory costs, items such as idle facility expense, excessive spoilage, freight, handling costs and re-handling costs are recognized as current period charges. The allocation of fixed production overheads to the costs of conversion are based upon the normal capacity of the production facility. Fixed overhead costs associated with idle capacity are expensed as incurred.

Note 4.

Fixed Assets

Fixed assets consist of the following:

	September 30,			December 31,
	2011			2010
	(unaudited)

Furniture and fixtures	$	47		$	47
Laboratory equipment		508			508
Computer and communications equipment		261			261
Design and tooling		1,204			1,204
Machinery and equipment		777			777
		2,797			2,797
Less accumulated depreciation and amortization		(2,031	)		(1,742	)
Total	$	766		$	1,055

For the nine months ended September 30, 2011 and 2010, depreciation expense was $289,000 and $295,000, respectively. The Company did not allocate any of the depreciation expense of the machinery and equipment or the design and tooling into inventory since the Company has suspended manufacturing. This depreciation was included as a selling, general and administrative (“SG&A”) expense as excess idle time.

During 2009, a supplier filed suit against the Company alleging that it owes the supplier approximately $377,000. This supplier had previously placed a lien on all of the Company’s machinery and equipment. See Note 10 -Legal Proceedings for additional information regarding this claim.

Note 5. Licenses, Patents, and Technology

Licenses, patents, and technology include the following:

	September 30,			December 31,
	2011			2010
	(unaudited)

Licenses	$	320		$	320
Patent costs		133			133
LabCorp Technology Agreement		260			260
		713			713
Less accumulated amortization		(713	)		(651	)
Total	$	—		$	62

During 2008, the Company purchased a license for certain technology for an initial total of $200,000. In addition, the Company is obligated to make future payments totaling $100,000 upon obtaining certain milestones under the agreement. As of September 30, 2011, the Company owed $64,000 under this agreement. The Company amortized the initial license over its estimated useful life of two years, and amortized the additional payments over one year. All patent costs and technology have been fully amortized.

Note 6. Accrued Expenses

Accrued expenses include the following:

	September 30,		December 31,
	2011		2010
	(unaudited)

Accrued interest	$	58	$	60
Accrued franchise and other taxes		349		268
Accrued compensation		135		90
Other accrued expenses		166		179
Total	$	708	$	597

Note 7. Notes Payable and Advances-Related Parties

Notes payable to unrelated parties consist of:

	September 30,		December 31,
	2011		2010
	(Unaudited)

Asher Enterprises, Inc., $75,000 Convertible Promissory Note issued March 9, 2010; interest rate 8% per annum, due December 10, 2010	$	—	$	56

White, White & Van Etten PC, $68,750 non-interest bearing Promissory Note issued September 30, 2010; payable in eleven equal payments of $6,250; interest imputed at 5% per annum, due August 24, 2011		13		49

Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate 9% per annum, due December 20, 2001		. 15		15
Ventana 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		21

Xillix 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
	$	83	$	175

In March 2010, the Company received $75,000 in exchange for a Convertible Promissory Note payable to Asher Enterprises, which is convertible into unregistered, restricted common stock at any time. The conversion price is variable and was determined as 58% of the average of the lowest three trading prices during the ten trading day period prior to the conversion notice. In accordance with Financial Accounting Standards Board (“FASB”) guidance related to convertible debt issued with a variable conversion feature, the Company has recorded a discount and derivative liability in the amount of $55,000 equal to the fixed monetary amount known at inception for the conversion option. The discount was amortized over the term of the note using the effective interest method. Upon issuance of the shares to settle the liability, equity will be increased by the amount of the liability and no gain or loss will be recognized on any difference between the fixed monetary amount known at inception and the ending market price. As of June 30, 2011, the Company had reduced the liability and increased equity by approximately $55,000 due to conversions of the entire principal into common stock.

The Company has failed to make principal and interest payments when due and is in breach of certain warranties and representations under the notes included above. Such notes require the holder to notify CCI in writing of a declaration of default at which time a cure period, as specified in each individual note, would commence. CCI has not received any written declarations of default from holders of its remaining outstanding notes payable.

During the nine months ended September 30, 2011, the Company was advanced $555,000 from related parties. These advances are non-interest bearing and are due on demand. However, using an 8% annual interest rate, the Company has recorded a non-cash interest expense totaling approximately $124,000 on the outstanding balance for the nine months ended September 30, 2011. Additional paid-in-capital was increased by the amount of the non-cash interest expense.

Note 8. Stockholders’ Equity (Deficit)

Loss per share

A reconciliation of the numerator and the denominator used in the calculation of loss per share is as follows:

	Nine months ended						Three months ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
	(unaudited)						(unaudited)

Basic and Diluted:
Net loss applicable to common stockholder	$	(1,550	)	$	(1,301	)	$	(560	)	$	(538	)
Weighted average common shares outstanding		55,644,245			47,141,033			59,759,909			46,608,865
Net loss per common share	$	(0.03	)	$	(0.03	)	$	(0.01	)	$	(0.01	)

For the periods ended September 30, 2011 and September 30, 2010, there were 1,205,762 and 3,807,935 stock options and warrants to purchase common shares, and preferred stock convertible into 571,754 and 543,315 common shares, respectively. These shares were not included in the computation of diluted loss per share applicable to common stockholders as they are anti-dilutive as a result of net losses for the respective periods.

Preferred Stock

A summary of the Company’s preferred stock is as follows:

	September 30,		December 31,
	2011		2010
	Shares Issued &		Shares Issued &
Offering	Outstanding		Outstanding
	(unaudited)

Series A convertible		47,250		47,250
Series B convertible, 10% cumulative dividend		93,750		93,750
Series C convertible, 10% cumulative dividend		38,333		38,333
Series D convertible, 10% cumulative dividend		175,000		175,000
Series E convertible, 10% cumulative dividend		19,222		19,222
Total Preferred Stock		373,555		373,555

As of September 30, 2011 and 2010, the Company had cumulative preferred undeclared and unpaid dividends. In accordance with ASC 260-10-45-11, “Earnings per Share”, these dividends were added to the net loss in the net loss per share calculation.

Summary of Preferred Stock Terms

Series A Convertible Preferred Stock
Liquidation Value:	$4.50 per share, $212,625
Conversion Price:	$103.034 per share
Conversion Rate:	0.04367—Liquidation Value divided by Conversion Price ($4.50/$103.034)
Voting Rights:	None
Dividends:	None
Conversion Period:	Any time

Series B Convertible Preferred Stock
Liquidation Value:	$4.00 per share, $375,000
Conversion Price:	$10.00 per share
Conversion Rate:	0.40—Liquidation Value divided by Conversion Price ($4.00/$10.00)
Voting Rights:	None
Dividends:	10%—Quarterly—Commencing March 31, 2001
Conversion Period:	Any time

Cumulative and undeclared dividends in arrears at September 30, 2011 were $398,000

Series C Convertible Preferred Stock
Liquidation Value:	$3.00 per share, $115,000
Conversion Price:	$6.00 per share
Conversion Rate:	0.50—Liquidation Value divided by Conversion Price ($3.00/$6.00)
Voting Rights:	None
Dividends:	10%—Quarterly—Commencing March 31, 2002
Conversion Period:	Any time

Cumulative and undeclared dividends in arrears at September 30, 2011 were $114,000

Series D Convertible Preferred Stock

Liquidation Value:	$10.00 per share, $1,750,000
Conversion Price:	$10.00 per share
Conversion Rate:	1.00—Liquidation Value divided by Conversion Price ($10.00/$10.00)
Voting Rights:	None
Dividends:	10%—Quarterly—Commencing April 30, 2002
Conversion Period:	Any time

Cumulative and undeclared dividends in arrears at September 30, 2011 were $1,736,000

Series E Convertible Preferred Stock

Liquidation Value:	$22.00 per share, $422,888
Conversion Price:	$8.00 per share
Conversion Rate:	2.75—Liquidation Value divided by Conversion Price ($22.00/$8.00)
Voting Rights:	Equal in all respects to holders of common shares
Dividends:	10%—Quarterly—Commencing May 31, 2002
Conversion Period:	Any time

Cumulative and undeclared dividends in arrears at September 30, 2011 were $422,000

Issuance of Common Stock for Conversion of Debt

For the nine months ended September 30, 2011, the Asher Enterprises converted a total of $55,500 of principal and $3,000 of accrued interest into 7,306,588 shares of common stock at an average fair price of $0.01 per share.

Issuance of Common Stock as Payment for Services

As of September 30, 2011, we are contractually obligated to issue 700,000 shares of restricted, unregistered common stock to a financial consultant as payment for services. We recorded a charge of $21,000 for these shares as an SG&A expense during the quarter ended March 31, 2011. The shares have not yet been issued by the transfer agent.

During the quarter ended September 30, 2011, we became contractually obligated to issue 600,000 shares of restricted, unregistered common stock to a medical consultant, and recorded $6,000 as an R&D expense. During the nine months ended September 30, 2011, we became obligated to issue a total of 1,150,000 of restricted, unregistered common stock to this consultant, and recorded $18,000 as an SG&A expense. The shares have not yet been issued. An additional 338,860 shares, that became issuable and were recorded in the prior year, also have not yet been issued.

Also during the quarter ended September 30, 2011, we were contractually obligated to issue 1,643,636 shares of common stock to an employee for compensation and recorded $15,000 as an SG&A expense. For the nine months ended September 30, 2011, we were obligated to issue a total of 2,719,494 shares of common stock to this employee for services rendered totaling $39,000. The shares have not yet been issued. An additional 450,000 shares that became issuable and were recorded in the prior year also have not yet been issued.

In addition, during the quarter ended September 30, 2011, we were contractually obligated to issue 2,380,189 shares of restricted, unregistered stock to marketing consultants and recorded $21,000 as an SG&A expense. During the nine months ended September 30, 2011, we became obligated to issue 3,135,745 of restricted, unregistered common stock to this consultant, and recorded $36,000 as an SG&A expense. The shares have not yet been issued.

As of September 30, 2011, we have a total of 9,707,293 shares of common stock issuable from the current and prior periods.

Application of Black-Scholes Valuation Model

In applying the Black-Scholes valuation model, the Company used the following assumptions for the nine months ended September 30, 2011 and 2010:

	2011			2010
Expected volatility		36%-420	%		240%-319	%
Expected term (years)		.04-2.51			1.5
Risk-free interest rate		1.00	%		1.00	%
Expected dividend yield		0	%		0	%
Forfeiture rate		0	%		0	%
Resulting weighted average grant date fair value	$	0.02		$	0.15

Note 9. Derivative Liability

As discussed in Note 7, in March 2010, the Company issued a note with a variable conversion feature. This resulted in the Company recording a derivative liability in the amount of $55,000 for the variable conversion feature in accordance with ASC 480-10. During the six months ended June 30, 2011, the entire debt was converted and the $55,000 derivative liability was reclassified to additional paid-in-capital. In addition, this also resulted in the Company having to account for an aggregate number of shares of common stock issued as well as instruments convertible or exercisable into common shares that potentially may exceed the number of the Company’s total authorized common shares. Consequently, the Company was required to record a liability for the potential excess of shares over the authorized amount. The Company is required to revalue this liability no less than every quarter. The Company determined that the excess shares were related to warrants and preferred stock issued and outstanding as of June 21, 2011 and March 31, 2010. Based upon the FASB guidance, the Company determined the fair value of these excess shares using the Black-Scholes valuation model. In March 2010, the Company measured and recorded an inception liability, and has remeasured this liability quarterly. At December 31, 2010, this liability totaled $44,000. The remaining balance of the note was converted to common stock as of June 22, 2011. As of June 21, 2011, in accordance with the FASB guidance, the Company remeasured this liability. The Company recorded an unrealized benefit of $30,000 and reclassified $14,000 to additional paid-in-capital upon conversion of the entire debt. As a result, there was no derivative liability as of September 30, 2011.

Note 10. Legal Proceedings

The Company is a party to a pending legal proceeding which is described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The Company also settled a legal proceeding during the first quarter of 2011. To the Company’s knowledge, there have been no cases initiated by or against the Company, nor any cases resolved, since the date of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 was filed with the SEC except as described herein. A summary of the pending and settled cases is as follows:

MedPlast Elkhorn, Inc. In May 2009, MedPlast Elkhorn, Inc. (“MedPlast”) filed suit against the Company in the Circuit Court, Walworth County, Wisconsin (Case No. 09 CV00721). MedPlast alleges that the Company has failed to pay for certain tools and materials used in the manufacturing of the Company’s products. MedPlast is seeking payment of $377,000. The Company believes that it has made adequate provision for any obligation to MedPlast.

SEC Civil Action. In January 2011, the Securities and Exchange Commission (“SEC”) filed a civil injunction action against the Company, Daniel J. Burns, the former Chairman of the Board of Directors of the Company, and Robert F. McCullough, Jr., Chairman of the Board, Chief Executive Officer and Chief Financial Officer of the Company, in the United States District Court sitting in the Northern District of Illinois. The SEC alleged that between 2003 and 2008, the Company paid compensation to unregistered broker/dealers and failed to accurately report the beneficial ownership of certain of its officers and directors in our SEC filings. In February, 2011, the Company consented to the entry of a final judgment which permanently restrains and enjoins the Company from violating Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Section 15(a) of the Exchange Act, and from aiding and abetting others in such violations. In connection with the foregoing settlement, the Company agreed that for a period of at least two years it will establish and comply with internal policies and procedures designed to prevent it from future violations of certain federal securities laws.

As a result of the SEC complaint, the Company learned that false billing for expenses had been submitted to it by a former board member noted in the complaint.

Other claims

CCI has been a party to a number of other proceedings, informal demands, or debt for services brought by former unsecured creditors to collect past due amounts for services. CCI is attempting to settle these demands and unfilled claims. CCI does not consider any of these claims to be material.

During the quarter ended March 31, 2011, the Company entered into a settlement with a vendor to pay $32,000. As a result, the vendor forgave $15,000 of debt. The settlement was recorded as a reduction in Research and Development expense.

Contingencies

The Company has not filed its franchise returns for 2010 and 2009 or paid its franchise tax for those years. The Company believes that it has made adequate provision for the liability including penalties and interest.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included or incorporated by reference in this quarterly report on Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expects," "intends," "plans," "projects," "estimates," "anticipates," or "believes" or the negative thereof or any variation there on or similar terminology or expressions.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from results proposed in such statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to: our ability to raise capital; our ability to retain key employees; our ability to engage third party distributors to sell our products; economic conditions; technological advances in the medical field; demand and market acceptance risks for new and existing products, technologies, and healthcare services; the impact of competitive products and pricing; U.S. and international regulatory, trade, and tax policies; product development risks, including technological difficulties; our ability to enforce patents; foreseeable and unforeseeable foreign regulatory and commercialization factors; our ability to develop new products and respond to technological changes in the markets in which we compete; our ability to obtain government approvals of our products; our ability to market our products; changes in third-party reimbursement procedures and statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission.

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.

Overview of CytoCore, Inc.

CytoCore, Inc. (“CCI,” the “Company,” “we” or “us”) is developing an integrated family of cost-effective products for the detection, diagnosis and treatment of cancer under the trade name of CytoCore Solutions®. Currently, we have one product for sale – our SoftPap collector. We are developing, and plan to sell an integrated family of cost-effective products for the detection, diagnosis and treatment of cancer under the trade name of CytoCore Solutions®. Our products are intended to address sample collection, specimen preparation, specimen evaluation (including detection/screening and diagnosis), and patient treatment and monitoring within vertical markets related to specific cancers. Current CytoCore Solutions products are focused upon cervical cancer. We plan to expand our focus to include other gynecological cancers as well as bladder, lung and breast cancers, among others. Within each of these markets, we anticipate that the CytoCore Solutions products will be sold as individual value-added drop-in replacements for existing products and as integrated systems that improve the efficiency and effectiveness of clinical and laboratory operations.

The science of medical diagnostics has advanced significantly during the past decade. Much of this advance has come as a result of new knowledge of the human genome and related proteins, which form the foundation of cell biology and the functioning of the human body. Our goal is to utilize this research as a base to develop screening and diagnostic testing products for cancer and cancer-related diseases. We believe that the success of these products will improve patient care through more accurate test performance, wider product availability and more cost-effective service delivery. We have developed the SoftPAP®, a sample collection device approved by the U.S. Food and Drug Administration, and are licensed to sell the PadKitÔ collection device and GluCyteÔ cell preservative. We are focusing on the development and testing of cocktail assay markers and stains for use with the Company’s Automated Image Proteomic System (AIPSÔ) to screen for various cancers.

Our strategy is to develop products through internal development processes, strategic partnerships, licenses and acquisitions. This strategy has required and will continue to require additional capital. As a result, we will incur substantial operating losses until we are able to successfully market our products.

Outlook

We have incurred significant losses since inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement our business plan and develop, manufacture and market our products. Implementation of our plans and our ability to continue as a going concern will depend upon our ability to increase sales of our products, develop new products, and raise substantial additional capital. During the year ended December 31, 2010, we raised approximately $1.2 million through the sale of common stock ($100,000), proceeds from the issuance of convertible debt ($75,000), and advances from related parties ($1,013,000). During the nine months ended September 30, 2011, we raised approximately $555,000 through advances from related parties. We repaid $37,000 of notes during the same period.

In order to successfully implement our business plan, we will have to obtain additional capital. If we are unable to obtain additional capital or generate profitable sales revenues, we may be required to curtail product development and other activities and in the extreme case, cease operations. No assurances can be given about our ability to obtain capital. The consolidated financial statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies and Changes to Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Management believes that it is reasonably possible that the following material estimates affecting the financial statements could significantly change in the coming year: (1) estimates concerning the method of depreciation or the useful life of the equipment used in the production of SoftPAP collection kits, (2) estimates as to the valuation allowance for the amounts recorded and held as inventory of goods and property and equipment and, (3) estimates of possible litigation losses.

Other than an accounting policy requiring written approval of our controller prior to entering into any agreement to pay fees to any entity for the sale of our equity securities, which we adopted during the quarter ended June 30, 2011, there have been no material changes in our critical accounting policies or critical accounting estimates since December 31, 2010, nor have we adopted any accounting policy that has or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, including the notes to our consolidated financial statements included therewith, as filed with the SEC.

Results of Operations

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements presented in Part I, Item 1 of this Quarterly Report and the notes thereto, and our audited consolidated financial statements and notes thereto, as well as our Management’s Discussion and Analysis, contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

Three Months Ended September 30, 2011 as compared to Three Months Ended September 30, 2010

Revenue

Revenues for the three months ended September 30, 2011 decreased $3,000, or 38%, to $5,000 from $8,000 during the three months ended September 30, 2010. This decrease is the result of a reduction in revenue from the licensing fees for our slide-based installed systems.

Costs and Expenses

Cost of Revenues

There was no cost of revenues for the three months ended September 30, 2011 since we had no sales of our SoftPAP product during the quarter. Cost of revenues was $1,000 for the three months ended September 30, 2010.Research and Development

Research and development (“R&D”) expenses primarily consist of costs related to specific development programs with scientists and researchers and expenses incurred by engineers and researchers at our Chicago facility. For the three months ended September 30, 2011, our R&D expenses were $56,000, a $27,000, or 33%, decrease from R&D expenses of $83,000 for the corresponding period in 2010. This decrease is primarily attributable to a $20,000 decrease in personnel costs, a $5,000 decrease in consultant fees to medical advisors and a $1,000 decrease in other expense.

Selling, General and Administrative

For the three months ended September 30, 2011, selling, general and administrative (“SG&A”) expenses were $460,000, a decrease of $35,000 or 7%, from $495,000 for the corresponding period in 2010. Of this decrease, professional fees decreased by $39,000, printing costs decreased by $17,000, depreciation and amortization expense decreased by $16,000 and insurance expense decreased by $7,000. These decreases were partially offset by increases in consultant expenses of $18,000, administrative salary expenses of $12,000, travel expenses of $7,000 and other expenses of $7,000.

Other income (Expense)

Interest expense increased by $26,000 to $49,000 for the three months ended September 30, 2011 from $23,000 for the three months ended September 30, 2010. Of this increase, $45,000 relates to the non-cash charge for related party advances, offset by a reduction of $19,000 in other interest expense.

During the quarter ended September 30, 2010, we recorded a non-cash benefit from the derivative liability of $56,000. This reduction resulted from the remeasurement of the derivative liability as described in Note 9 to the financial statements contained elsewhere in this report. There was no derivative liability or benefit for the three months ended September 30, 2011.

Net Loss

The net loss from operations for the three months ended September 30, 2011 was $560,000, as compared to $538,000 for the corresponding period in 2010, an increase of $22,000, or 4%. Of this increase, $56,000 is due to a reduction in the non-cash benefit from derivative liability and a $26,000 increase in interest expense. These increases were offset by net reductions in revenue, SG&A expenses and R&D expenses of $60,000.

The net loss applicable to common stockholders, which reflects the unpaid and undeclared preferred stock dividends from the period, increased to $627,000 for the quarter ended September 30, 2011 from $604,000 for the quarter ended September 30, 2010, an increase of $23,000 or 4%. The net loss per common share for each of the three month periods ended September 30, 2011 and September 30, 2010 was $0.01 per share on 59,759,909 and 46,608,865 weighted average common shares outstanding, respectively.

Nine Months Ended September 30, 2011 as compared to Nine Months Ended September 30, 2010

Revenue

Revenues for the nine months ended September 30, 2011 decreased $5,000, or 21%, to $19,000 from $24,000 during the nine months ended September 30, 2010. This decrease is attributable to a reduction in revenue from the licensing fees for our slide-based installed systems.

Costs and Expenses

Cost of Revenues

There was no cost of revenues for the nine months ended September 30, 2011 since we had no sales of our SoftPAP product during the quarter. Cost of revenues was $1,000 for the nine months ended September 30, 2010.

Research and Development

For the nine months ended September 30, 2011, our R&D expenses were $171,000, a $42,000, or 20%, decrease from R&D expenses of $213,000 for the corresponding period in 2010. Of this decrease, $15,000 related to a settlement with a vendor, $24,000 related to a reduction in payroll expense and $3,000 related to other costs.

Selling, General and Administrative

For the nine months ended September 30, 2011, SG&A expenses were $1,294,000, a decrease of $3,000, from $1,297,000 for the corresponding period in 2010. Of this decrease, professional fees decreased $150,000, insurance expense decreased $37,000, marketing expenses decreased $15,000, printing expenses decreased $18,000, computer support costs decreased $5,000 and depreciation and amortization expense decreased $19,000. These decreases were partially offset by an increase in franchise and other taxes totaling $64,000, transfer agent fees increased by $20,000, administrative salary expense increased by $91,000 (due in part to the correction of an accrual of $125,000 reversed in 2010), consultant expenses increased by $34,000, directors’ fees increases by $10,000, financing costs increased by $10,000, travel expenses increased $8,000 and rent expense increased $4,000.

Other Income (Expense)

Interest expense increased $82,000 to $134,000 for the nine months ended September 30, 2011 from $52,000 for the nine months ended September 30, 2010. Of this increase, $124,000 relates to the non-cash charge for related party advances, offset by a reduction of other interest expense totaling $42,000.

During the nine months ended September 30, 2011, we recorded a non-cash benefit from the derivative liability of $30,000 which represented a decrease of $208,000, or 87%, from the $238,000 in the nine months ended September 30, 2010. This reduction resulted from the remeasurement of the derivative liability as described in Note 9to the financial statements contained elsewhere in this report.

Net Loss

The net loss from operations for the nine months ended September 30, 2011 was $1,550,000, as compared to $1,301,000 for the corresponding period in 2010, an increase of $249,000, or 19%. Of this increase, $208,000 resulted from a reduction in the non-cash benefit from derivative liability and an $82,000 increase in interest expense. These increases were offset by net reductions in revenue, SG&A and R&D expenses of $41,000.

The net loss applicable to common stockholders, which reflects the unpaid and undeclared preferred stock dividends from the period, increased to $1,749,000 for the nine months ended September 30, 2011 from $1,500,000 for the nine months ended September 30, 2010, an increase of $249,000, or 17%. The net loss per common share for each of the nine month periods ended September 30, 2011 and September 30, 2010 was $0.03 per share on 55,644,245 and 47,141,033 weighted average common shares outstanding, respectively.

Liquidity and Capital Resources

We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution. To date, our capital resources and liquidity needs have been met from advances to us by related parties, and sales of our debt and equity securities to individual and institutional investors.

Research and development, clinical trials and other studies of the components of our CytoCore Solutions System, conversions from designs and prototypes into products and product manufacturing, sales and marketing efforts, medical consultants and advisors, and research, administrative and executive personnel are and will continue to be the principal basis for our cash requirements. We have obtained operating funds for the business since inception through private offerings of debt and equity securities to U.S. accredited and foreign investors. We will be required to make additional offerings in the future to support our operations until we are able to generate sufficient income from the sale of our products. We used $530,000 in cash for operating activities during the nine months ended September 30, 2011. During this period, approximately $171,000 was incurred for R&D and approximately $1,294,000 of expenses were incurred for SG&A functions.

We did not engage any investing activity during the nine months ended September 30, 2011. At this time, we have no other material commitments for capital expenditures during the remainder of the 2011 fiscal year.

As of September 30, 2011, we had minimal cash resources. During the nine month period ended September 30, 2011, we raised $555,000 through advances from our Chief Executive Officer. The proceeds were used to develop our products and satisfy certain present and past obligations. We repaid $37,000 of promissory notes during the same period. We estimate that we will need approximately $1.2 million of additional financing to continue to conduct operations during the next 12 months. We continue to meet with qualified investors and although no assurance can be given, we believe will be able to raise capital to fund operations in the immediate future until we can be self-sufficient through operations.

Our operations have been, and will continue to be, dependent upon management’s ability to raise operating capital through the issuance and sale of debt and equity securities and advances from related parties. We have incurred significant operating losses since inception of the business. We expect that significant on-going operating expenditures will be necessary to successfully implement our business plan and develop, manufacture and market our products. If we are unable to obtain adequate additional financing or generate profitable sales revenue, or negotiate a favorable settlement plan with creditors, we may be unable to continue our product development and other activities and may be forced to cease operations. The consolidated financial statements presented do not include any adjustments that might result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

As of September 30, 2011, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer, who also serves as our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer has concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

Also during the quarter ended September 30, 2011, we were contractually obligated to issue 1,643,636 shares of common stock to an employee for compensation and recorded $15,000 as an SG&A expense. For the nine months ended September 30, 2011, we were obligated to issue a total of 2,719,494 shares of common stock to this employee for services rendered totaling $39,000. The shares have not yet been issued. An additional 450,000 shares, that became issuable and were recorded in the prior year, also have not yet been issued.

In addition, during the quarter ended September 30, 2011, we were contractually obligated to issue 2,380,189 shares of restricted, unregistered stock to marketing consultants and recorded $21,000 as an SG&A expense. During the nine months ended September 30, 2011, we became obligated to issue a total of 3,135,745 of restricted, unregistered common stock to this consultant, and recorded $36,000 as an SG&A expense. The shares have not yet been issued.

As of September 30, 2011, we have a total of 9,707,293 shares of common stock issuable from the current and prior periods.

We intend to issue the foregoing securities in reliance on the safe harbor and exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended, for sales to a limited number of accredited investors, employees, service providers, or creditors with whom we had prior relationships, without engaging in any general solicitation, and without payment of underwriter discounts or commissions to any person. Transfer of the shares has been restricted in accordance with applicable law and we have made independent determinations that investors were accredited or sophisticated, that they were capable of analyzing the merits and risks of their investment, that they understood the speculative nature of their investment, and that they had access to our SEC filings.

Item 3. Defaults upon Senior Securities

As of September 30, 2011, we failed to make the required principal and interest payments, constituting events of default, on the $21,000 Ventana Medical Systems, Inc. promissory note. The note requires the holder to notify us in writing of a declaration of default at which time a cure period, as specified in the note, would commence. There is no guarantee that we will be able to cure any event of default if, or when, the holder provides the required written notice.

Item 6. Exhibits

Exhibit
Number		Description

31.1		Section 302 certification by chief executive officer and chief financial officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adoptedpursuant to Section 302 of the Sarbanes Oxley Act of 2002.

32.1		Section 906 certification by chief executive officer and chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CytoCore, Inc.

	/s/ Robert F. McCullough, Jr.
	Robert F. McCullough, Jr.
	Chief Executive Officer and
	Chief Financial Officer

Date: November 18, 2011

EXHIBIT INDEX

Exhibit
Number		Description

31.1		Section 302 certification by chief executive officer and chief financial officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

32.1		Section 906 certification by chief executive officer and chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.