XOTC:CYOE CytoCore Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

(Mark One)

 

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

For the quarterly period ended March 31, 2012

 

¨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 May 11, 2012: 67,921,684

 

 

 
 

 

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 – March 31, 2012(unaudited) and December 31, 2011 2
   
b) Condensed Consolidated Statements of Operations — Three months ended March 31, 2012 and March 31, 2011 (unaudited) 3
   
c) Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2012 and March 31, 2011 (unaudited) 4
   
d) Notes to Unaudited Condensed Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 9
     
Item 4. Controls and Procedures 13
     
Part II. — Other Information  
   
Item 1. Legal Proceedings
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
     
Item 3. Defaults upon Senior Securities 14
     
Item 6. Exhibits 14
     
SIGNATURES 15
   
EXHIBIT INDEX 16
   
Exhibit 31.1    Section 302 Certification  
Exhibit 32.1    Section 906 Certification  
   

1
 

 

 

Part I. — Financial Information

 

Item 1. Financial Statements

 

CYTOCORE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

   March 31,   December 31, 
   2012   2011* 
   (unaudited)     
Assets          
Current Assets:          
Cash and cash equivalents  $3   $15 
Accounts receivable   94    5 
Prepaid expenses and other current assets   10    10 
Total current assets   107    30 
           
Fixed assets, net   235    362 
Licenses, patents and technology, net of amortization        
Total assets  $342   $392 
           
Liabilities and Stockholders’ Deficit          
Current Liabilities:          
Accounts payable   1,150    1,187 
Accrued payroll costs   2,196    2,010 
Advances payable to related parties   2,768    2,537 
Accrued expenses   793    760 
Notes payable   70    70 
Total current liabilities   6,977    6,564 
           
Stockholders’ Deficit:          
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 373,355 and shares issued and outstanding at March 31, 2012 and December 31, 2011 (Liquidation value of all classes of preferred stock $2,871 at March 31, 2012)   1,487    1,487 
Common stock, $0.001 par value; 500,000,000 shares authorized; 69,812,062 and 66,408,694 shares issued and issuable and 69,792,853 and 66,389,485 shares outstanding at March 31, 2012 and December 31, 2011, respectively   70    66 
Additional paid-in-capital   93,118    93,004 
Treasury stock: 19,209 shares at March 31, 2012 and December 31, 2011   (327)   (327)
Accumulated deficit   (100,905)   (100,324)
Accumulated comprehensive loss—          
Cumulative translation adjustment   (78)   (78)
Total stockholders’ deficit   (6,635)   (6,172)
Total liabilities and stockholders’ deficit  $342   $392 

 

* Derived from audited information

 

See accompanying notes to these condensed consolidated financial statements.

 

2
 

 

CYTOCORE, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except per share amounts)

 

   Three Months Ended 
   March 31, 
   2012   2011 
         
Net sales  $24   $7 
           
Operating expenses          
Cost of revenues   16     
Research and development, (net of settlement of trade debt of $15 for the three months ended March 31, 2011   73    51 
Selling, general, and administrative   459    422 
Total operating expenses   548    473 
           
Operating loss   (524)   (466)
           
Other income (expense):          
           
Benefit from derivative liability       13 
Interest expense – related party   (54)   (38)
Interest expense   (3)   (7)
Total other income (expense)   (57)   (32)
Net loss   (581)   (498)
           
Preferred stock dividend   (66)   (65)
           
Net loss applicable to common stockholders  $(647)  $(563)
           
Basic and diluted net loss per common share  $(0.01)  $(0.01)
           
Weighed average number of common shares outstanding   67,163,767    49,436,617 

 

See accompanying notes to these condensed consolidated financial statements.

 

3
 

 

CYTOCORE, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

   Three Months Ended 
   March 31, 
   2012   2011 
         
Operating Activities:          
Net loss  $(581)  $(498)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   57    122 
Common stock issued for compensation   15     
Benefit from derivative liability       (13)
Interest expense imputed on related party advances   53    38 
Common stock issued for services   50    21 
Gain on settlement of trade indebtedness       (15)
Changes in assets and liabilities:          
Checks issued in excess of amounts on deposit       12 
Accounts receivable   (19)   1 
Prepaid expenses and other current assets       5 
Accounts payable   (36)   (55)
Accrued expenses   218    146 
           
Net cash used in operating activities   (243)   (236)
           
Investing activities:        
Net cash used in investing activities.          
           
Financing activities:          
Proceeds from related parties   231    235 
Repayment of notes       (12)
           
Net cash provided by financing activities   231    223 
           
Net increase (decrease) in cash and cash equivalents   (12)   (13)
           
Cash and cash equivalents at the beginning of period   15    13 
           
Cash and cash equivalents at end of period  $3   $ 
           
Supplemental disclosure of cash flow information:          
           
Non-cash transactions during the period for:          
Reduction of derivative liability       36 

 

See accompanying notes to these condensed consolidated financial statements.

 

4
 

 

CYTOCORE, INC.

 

Notes to Consolidated Financial Statements

(Tabular data in thousands, except per share amounts)

(Unaudited)

 

Note 1.Organization

 

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

 

Currently, CCI has one product of its own for sale – its SoftPap collector. CCI 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. CCI 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 CCI 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 also began marketing and selling a companion product which is designed to detect breast cancer. This product is manufactured by a third party.

 

The Company has incurred significant operating losses since its inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement CCI’s business plan and develop, manufacture and market its products. These circumstances raise substantial doubt about CCI’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 March 31, 2012, the Company had $3,000 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 March 31, 2012 and 2011 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. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2012 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, 2011, as filed with the Securities and Exchange Commission (“SEC”).

 

The Company’s comprehensive income (loss) is extremely immaterial and therefore the Company has not presented a separate statement of comprehensive income (loss) with its financial statements.

 

5
 

 

The Company’s comprehensive net loss is as follows:

 

   Three months ended 
   March 31, 
   2012   2011 
   (Unaudited) 
         
Net loss applicable to common stockholders  $(647)  $(563)
Foreign currency adjustment       (1)
Comprehensive net loss applicable to common stockholders  $(647)  $(564)
           
Basic and diluted comprehensive net loss per common share  $(0.01)  $(0.01)
Basic and diluted weighted average number of common shares outstanding   67,163,767    49,436,617 

 

Note 3.Fixed Assets

 

Fixed assets consist of the following:

 

   March 31,   December 31, 
   2012   2011 
   (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       167 
   2,020    2,187 
Less accumulated depreciation and amortization   (1,785)   (1,825)
Total  $235   $362 

 

For the quarters ended March 31, 2012 and 2011, depreciation expense was $57,000 and $122,000, 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 expense as excess idle time.

 

During the quarter, the Company sold its remaining machine for the net carrying value of $70,000. Since the Company had not collected the sales price as of March 31, 2012 the amount is recorded under accounts receivable. This sale will not be reflected in the statement of cash flows until the cash is received.

  

Note 4.Licenses, Patents, and Technology

 

Licenses, patents, and technology include the following:

 

   March 31,   December 31, 
   2012   2011 
   (unaudited)     
         
Licenses  $320   $320 
Patent costs   133    133 
LabCorp Technology Agreement   260    260 
    713    713 
Less accumulated amortization   (713)   (713)
Total  $   $ 

 

During 2008, the Company purchased a license for certain technology for an initial total of $200,000. In addition, CCI is obligated to make future payments totaling $100,000 upon obtaining certain milestones under the agreement. As of March 31, 2012, CCI owed $64,000 on this liability. All licenses, patent costs and technology have been fully amortized.

 

6
 

 

Note 5.Accrued Expenses

 

Accrued expenses include the following:

 

   March 31,   December 31, 
   2012   2011 
   (unaudited)     
         
Accrued interest  $60   $59 
Accrued franchise and other taxes   403    376 
Accrued compensation   160    150 
Other accrued expenses   170    175 
Total  $793   $760 

 

Note 6.Notes Payable and Advances-related parties

 

Notes payable to unrelated parties consist of:

 

 

   March 31,   December 31, 
   2012   2011 
   (Unaudited)     
         
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 
   $70   $70 

 

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 three months ended March 31, 2012, the Company was advanced $231,000 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 $53,000 on the outstanding balance for the quarter.

 

Note 7.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:

 

   March 31,   March 31, 
   2012   2011 
   (unaudited)     
Basic and Diluted:          
Net loss applicable to common stockholder (in thousands)  $(647)  $(563)
Weighted average common shares outstanding   67,163,767    49,436,617 
Net loss per common share  $(0.01)  $(0.01)

 

7
 

 

Warrants to purchase 922,667 and stock options and warrants to purchase 2,507,362 common shares and preferred stock convertible into 584,891 and 557,496 common 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 periods ended March 31, 2012 and March 31, 2011, respectively.

 

Preferred Stock

 

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

 

   March 31,   December 31, 
   2012   2011 
   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   19,022    19,022 
Total Preferred Stock   373,355    373,355 

 

As of March 31, 2012 and 2011, the Company had cumulative preferred undeclared and unpaid dividends. In accordance with Accounting Standards Codification 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 March 31, 2012 were $416,000

 

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 March 31, 2012 were $120,000

 

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

 

8
 

 

Cumulative and undeclared dividends in arrears at March 31, 2012 were $1,824,000

 

Series E Convertible Preferred Stock

Liquidation Value: $22.00 per share, $418,488
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 March 31, 2012 were $438,000

 

Issuance of Common Stock as Payment for Services

 

During the quarter ended March 31, 2012, the Company issued 2,529,891 shares of restricted, unregistered common stock to consultants for services rendered, and recorded $50,000 as a selling, general and administrative expense.

 

Issuance of Common Stock as Payment for Employee Compensation

 

Also during the quarter ended March 31, 2012, the Company issued 773,629 shares of restricted, unregistered common stock to an employee and recorded $15,000 as a selling, general and administrative expense.

 

Note 8.Legal Proceedings

 

There are no pending legal proceedings against the Company. 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, 2011 was filed with the SEC.

 

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 2011, 2010 and 2009 or paid its franchise tax for those years. CCI 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.

 

9
 

 

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; ability to enforce patents; and 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, 2011 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. (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 of our own products 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.

 

The Company has also began marketing and selling a companion product which is designed to detect breast cancer. This product is manufactured by a third party.

 

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, 2011, we raised approximately $771,000 through advances from related parties. During the three months ended March 31, 2012, we raised approximately $231,000 through advances from related parties.

 

10
 

 

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, and (2) estimates as to the valuation allowance for the amounts recorded and held as property and equipment.

 

There have been no material changes in our critical accounting policies or critical accounting estimates since December 31, 2011, 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 critical accounting policies, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, 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, 2011.

 

Three Months Ended March 31, 2012 as compared to Three Months Ended March 31, 2011

 

Revenue

 

Revenues for the three months ended March 31, 2012 increased $17,000, or 243%, to $24,000 from $7,000 for the three months ended March 31, 2011. This increase was the result of a sale of a collection system relating to the detection of breast cancer, which we are selling on behalf of another company. Licensing revenue remained unchanged.

 

Costs and Expenses

 

Cost of Revenues

 

Cost of revenues was $16,000 for the quarter ended March 31, 2012. There was no cost of revenues for the quarter ended March 31, 2011 since we had no sales during the quarter.

 

Research and Development

 

For the three months ended March 31, 2012, our research and development (“R&D”) expenses were $73,000, a $22,000, or 43%, increase from R&D expenses of $51,000 for the corresponding period in 2011. Of this $22,000 increase, $15,000 related to a reversal of a previously recorded expense due to a settlement with a vendor in 2011 and $8,000 related to an increase in project expenses, which was partially offset by a decrease of $1,000 in other costs.

 

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R&D expenses consist primarily of costs related to specific development programs with scientists and researchers and expenses incurred by engineers and researchers at our Chicago facility.

 

Selling, General and Administrative

 

For the three months ended March 31, 2012, selling, general and administrative expenses (“SG&A”) were $459,000,an increase of $37,000, or 9%, from $422,000 for the corresponding period in 2011. Of this $37,000 increase, administrative salary expenses increased $51,000, marketing costs increased $74,000, professional fees increased $15,000, travel expenses increased $8,000, insurance expense increased $4,000 and other costs increased $5,000. These increases were partially offset by decreases of $65,000 in depreciation and amortization expense, $9,000 in franchise taxes, $21,000 in financing costs, $5,000 in director fees, and $20,000 in transfer agent fees.

 

Other Income (Expense)

 

Interest expense increased $12,000 to $57,000 for the three month period ended March 31, 2012 from interest expense of $45,000 for the three month period quarter ended March 31, 2011. Of this increase, $16,000 relates to the non-cash charge for related party advances offset by a reduction of other interest expense.

 

During the quarter ended March 31, 2011, we recorded a non-cash benefit from the derivative liability of $13,000. There was no benefit from the derivative liability for the quarter ended March 31, 2012.

 

Net Loss

 

The net loss from operations for the three-month period ended March 31, 2012 was $581,000, as compared to $498,000 for the corresponding period in 2011, an increase of $83,000, or 17%. Of this increase, $13,000 resulted from a non-cash reduction in the benefit from derivative liability and a $12,000 increase in interest expense and increases in R&D and SG&A expenses, partially offset by an increase in revenues.

 

The net loss applicable to common stockholders, which reflects the unpaid and undeclared preferred stock dividends from the period, increased to $647,000 for the quarter ended March 31, 2012 from $563,000 for the quarter ended March 31, 2011, an increase of $84,000, or 15%. The net loss per common share for each of the three month periods ended March 31, 2012 and March 31, 2011 was $0.01 per share on 67,163,767 and 49,436,617 weighted average common shares outstanding, respectively.

 

Liquidity and Capital Resources

 

To date, our capital resources and liquidity needs have been met from advances from 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 $243,000 for operating activities during the three months ended March 31, 2012 compared to $236,000 during the three months ended March 31, 2011. During the quarter ending March 31, 2012, approximately $73,000 was incurred for R&D and approximately $459,000 was incurred for SG&A functions.

 

We did not engage any investing activity during the quarter ended March 31, 2012. At this time, we have no other material commitments for capital expenditures during the remainder of the 2012 fiscal year.

 

We were able to raise proceeds of $231,000 through advances from related parties during the three months ended March 31, 2012. The proceeds were used to develop our products and satisfy certain present and past obligations. At March 31, 2012, we had $3,000 of cash on hand. We are currently in discussions with Robert McCullough, Jr., our chief executive officer, regarding the conversion of his outstanding loan to us into common stock. There can be no assurances that such conversion will take place. 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.

 

12
 

 

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 March 31, 2012, 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 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 March 31, 2012 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

 

During the quarter ended March 31, 2012, we issued: (i) 2,529,891 shares of restricted, unregistered common stock to consultants for services rendered, and recorded $50,000 as a selling, general and administrative expense; and (ii) 773,629 shares of restricted, unregistered common stock to an employee and recorded $15,000 as a selling, general and administrative expense.

 

We issued 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.

 

13
 

 

Item 3.   Defaults upon Senior Securities

 

As of March 31, 2012, 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 principal executive 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 principal executive 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.

 

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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: May 17, 2012

 

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EXHIBIT INDEX

 

Exhibit     
Number   Description
     
31.1   Section 302 certification by principal executive 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 principal executive 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.

 

16

 

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