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EX-31.1 - EX-31.1 - Medite Cancer Diagnostics, Inc.c58222exv31w1.htm
EX-23.1 - EX-23.1 - Medite Cancer Diagnostics, Inc.c58222exv23w1.htm
EX-32.1 - EX-32.1 - Medite Cancer Diagnostics, Inc.c58222exv32w1.htm
EX-10.28 - EX-10.28 - Medite Cancer Diagnostics, Inc.c58222exv10w28.htm
EX-10.27 - EX-10.27 - Medite Cancer Diagnostics, Inc.c58222exv10w27.htm
EX-10.25 - EX-10.25 - Medite Cancer Diagnostics, Inc.c58222exv10w25.htm
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
 
Commission file number 0-935
 
 
CYTOCORE, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  36-4296006
(I.R.S. Employer
Identification No.)
     
414 N. Orleans St., Suite 510, Chicago, IL
(Address of principal executive offices)
  60654
(Zip Code)
 
(312) 222-9550
(Registrant’s Telephone Number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
None
  Not Applicable
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $0.001 par value
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  o
 
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 þ     No o
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o (not required)
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
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 Rule 12b-2 of the Exchange Act. (Check one.)
 
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the common stock held by non-affiliates of the Company was $8,790,113, based upon the closing price of shares of the Company’s common stock, $0.001 par value per share, of $0.28 as reported on the Over-the-Counter Bulletin Board on June 30, 2009.
 
The number of shares of common stock outstanding as of May 7, 2010 was 45,317,610.
 


Table of Contents

 
CYTOCORE, INC.

Annual Report on Form 10-K
December 31, 2009

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PART IV
       
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Index to Financial Statements
       
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PART I
 
Item 1.   Business
 
Overview
 
CytoCore, Inc. (“CCI”, “Cytocore” or the “Company”), formerly Molecular Diagnostics, Inc., develops, manufactures 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.
 
Currently, CCI’s only product is the SoftPAP® cell collection device that is intended to replace the spatula and brush currently used to collect cervical cytology samples. SoftPAP constitutes one of the cell collection components of the Company’s CytoCore Solutions System. The Company is also licensed to sell the PadKit®, another sample collection device directed at ensuring female reproductive tract health, and a cell preservative developed for cytological applications by Cell Solutions LLC. CCI intends to market and sell the SoftPAP and PadKit devices along with this preservative. The other components of the CytoCore Solutions System include certain biochemical assays and slide-based tests, the Company’s next generation specialized system for computer-assisted cytology — the Automated Image Proteomic Systems or AIPStm — and a drug delivery system.
 
The Company believes the CytoCore Solutions System will provide better detection and diagnosis of cancer and cancer-related diseases through improved specimen quality and accuracy of test results, both in terms of a lower incidence of false negatives and fewer inadequate collections of samples. CytoCore also believes the system will expand the number of women who can be tested, thereby increasing detection and diagnosis rates.
 
CCI was incorporated in Delaware in December 1998 as the successor to Bell National Corporation, a company incorporated in California in 1958. In December 1998, Bell National, which was then a shell corporation without any business activity, acquired InPath, LLC, a development stage company engaged in the design and development of products used in screening for cervical and other types of cancer. For accounting purposes, the acquisition was treated as if InPath had acquired Bell National. However, Bell National continued as the legal entity and the registrant for Securities and Exchange Commission filing purposes. Bell National merged into Ampersand Medical Corporation, its wholly-owned subsidiary, in May 1999 in order to change the state of incorporation of the company to Delaware.
 
In September 2001, we acquired 100% of the outstanding stock of AccuMed International, Inc. by means of a merger of AccuMed into a wholly-owned subsidiary of the Company. Shortly after the AccuMed merger we changed our corporate name to Molecular Diagnostics, Inc. The name change was effected by the merger of our wholly-owned subsidiary, Molecular Diagnostics, Inc., with and into Ampersand. In 2006, our shareholders approved a proposal to change the Company’s corporate name from Molecular Diagnostics, Inc. to CytoCore, Inc., which change was effected in Delaware in June 2006. Except where the context requires or as otherwise noted, “CCI,” the “Company,” “we” and “our” refers to CytoCore, Inc. and our subsidiaries and predecessors.
 
Recent Developments
 
During 2009 and 2010 to date, our operations were severely restricted by our lack of working capital. We have maintained minimal operations. Due to this restriction, we have not been able to hire marketing and sales personnel or accelerate our research and development activities. If we are unable to raise additional capital, we may be forced to cease operations.


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CCI is currently conducting an offering, begun in the first quarter of 2009, of its Series F Convertible Preferred Stock. Proceeds of that offering will be used for working capital and general corporate purposes. To date we have not raised any capital from this offering.
 
Information About Industry Segments
 
We operate in one industry segment involving medical screening devices, diagnostics, and supplies. All of our operations during the reporting period were conducted and managed within this segment, with a single management team that reports directly to our Chief Executive Officer. For information on revenues, profit or loss, total assets and other financial data attributable to the Company’s operations, see the consolidated financial statements included herewith.
 
Description of Business
 
CCI develops, manufactures 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.
 
Total revenue for the years ended December 31, 2009 and 2008 was $44,000 and $125,000, respectively. Of this total revenue, license fees accounted for $40,000, or 91%, of our revenue in 2009 and $66,000, or 53%, of our revenue in 2008. Sales of our current product SoftPap® accounted for revenue of $4,000, or 10%, of our revenue in 2009 and $59,000, or 47%, of our revenue in 2008.
 
Products
 
Cell Collection Devices
 
The clinical diagnostics laboratory analyzes or otherwise evaluates samples obtained from the human body for the purpose of detecting the presence of disease, characterizing it as to type and extent, and/or monitoring the efficacy of treatment. The starting point in any clinical diagnostic test is the collection of a sample that contains the analyte of interest. To a very large extent, the characteristics of the sample collected determine the quality of the results of any tests performed on the sample. The sensitivity and/or accuracy of a test is, for example, likely to be reduced if the sample collection device or method does not capture a sufficient amount of the target analyte, alters the analyte of interest, or collects significant quantities of substances that interfere with the analysis. For this reason, sample collection is a major focus of CytoCore.
 
SoftPAP®
 
CCI currently manufactures and sells the SoftPAP® device for the collection of cervical cell samples that are used in the detection of cervical dysplasia, cancer and human papillomavirus (“HPV”) infections. CCI believes that SoftPAP, which has been cleared by the Food and Drug Administration (“FDA”) for sale in the United States and which is CE Marked for international distribution, is positioned as a premium value-added alternative to the spatula, broom and brush-style devices that have traditionally been used for these purposes. Unlike these traditional devices, SoftPAP collects only exfoliated cells and does not scrape, cut or abrade the cervix. This unique sample collection method has been shown in clinical trials to reduce the frequency of false negative and false positive results when the sample is evaluated by cytological methods to detect the presence of dysplasia and cancer. A reduction in the false negative rate means that a greater percentage of patients who have cervical dysplasia, cancer or similar abnormalities are detected during cervical cancer screening (Pap testing) and can, therefore, be treated. A reduced false positive rate means that fewer patients are falsely identified as having cervical dysplasia or cancer, thus sparing these patients the unnecessary stress, discomfort and expense of the additional testing needed to verify that


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dysplasia or cancer is actually present. In addition, women have reported that having a cervical sample taken using SoftPAP is more comfortable than when a traditional device is used. Variants of SoftPAP are also being designed for the collection of exfoliated cell samples from tissues other than the cervix.
 
PadKit®
 
PadKit® is a low cost device that captures a sample that can be evaluated to provide an assessment of the health of the entire female genital tract. CCI has obtained an exclusive license to sell PadKit for the collection of cellular samples that can be screened for a variety of gynecological cancers (including cervical, endometrial, and ovarian), and for the collection of gynecological samples to be tested for the presence of HPV. In the future, CCI may obtain licenses to sell PadKit for additional indications such as the collection of samples for sexually transmitted disease (“STD”) testing. PadKit addresses a number of market niches and segments that are not addressed effectively by SoftPAP or traditional gynecological sampling devices. CCI believes that PadKit thus complements SoftPAP in the CytoCore Solutions family of products. PadKit is designed to eliminate the need for assistance from a medical professional when collecting gynecological samples for many screening applications. CCI believes that this feature, in addition to the range of tests that can be performed on a PadKit sample and PadKit’s low cost, makes PadKit particularly attractive for use in large scale public health screening programs. CCI is also evaluating the use of PadKit in an internet-based fee-for-service testing program outside of the United States. Additional uses, such as providing a simple and rapid means of monitoring patients who have had an abnormal Pap test or who are undergoing treatment for a gynecological cancer, are also being explored.
 
Specimen Preparation
 
Cervical cytology specimens are traditionally prepared as “smears” where the cells on the collecting device are literally wiped or smeared onto a microscope slide. In the mid-1990s an alternative method, variously called a “monolayer” or “liquid-based” preparation (“LBP”), was introduced. In this method, cells are washed off of the collection device into a preservative solution to form a cell suspension. A portion of this cell suspension is then transferred to a microscope slide. LBPs presently account for about 80% of the cervical cytology slides prepared in the United States, but despite the technical benefits of LBPs, only about 20% of the cervical cytology slides in the European Union and much lower percentages in the rest of the world are prepared in this manner. The primary limitations to greater adoption of LBPs outside of the United States are the high equipment and ancillary supply costs associated with the two predominant LBP methods.
 
Cell Preservative
 
CCI has reached an agreement with Synermed Select Partners, Inc. (“Synermed”) under which CCI will package and market their GluCytetm cell preservative with CCI’s SoftPAP and PadKit cell collection devices. CCI selected this preservative for inclusion in convenience kits due to both its technical performance and because it can be performed manually, thus avoiding the high equipment and supply costs incurred when using competing methods. CCI believes that this methodology provides a cost effective means for laboratories to transition from smears to high quality LBPs. CCI intends to introduce the manual version of convenience kits containing the SoftPAP and the preservative in the European Union to address the demand for LBPs in that part of the world. CCI expects that distribution of such manual kits will then be expanded by region. In parallel, CCI plans to collaborate with Cell Solutions, an affiliate of Synermed, on selling the Cell Solutions automated slide preparation system to high volume laboratories in these countries. Unlike the rest of the world, where this preservative is already approved for use, it is approved only as a general cytology preservative in the United States and requires additional FDA approval before it can be sold for use in specific applications such as cervical cytology. CCI and Cell Solutions have agreed to collaborate on obtaining the necessary FDA approval. CCI is also working with the manufacturer of PadKit to validate the preservative for this application, where CCI believes its superior ability to process bloody samples is of particular relevance. An independent clinical trial of PadKit in combination with the preservative has recently been initiated by the UCLA School of Nursing.


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Stains and Reagents
 
Once a cytology specimen has been deposited onto a microscope slide, it is stained in order to assist the cytologist in detecting and identifying the various features of the deposited cells that are relevant to determining whether the cells are normal, dysplastic or cancerous. CCI is developing several proprietary stains for use in cervical cytology and other screening applications. These stains are designed for automated evaluation using the AIPS Imager (see below), but some may also be evaluated visually or using a flow cytometer. CCI believes that an added benefit of the CCI proprietary stains is that after the specimen has been evaluated using these stains, it can be counterstained with Pap stain for conventional confirmation and archiving.
 
Specimen Evaluation
 
When “reading” a cytology specimen, a cytologist traditionally examines the specimen by eye through a conventional optical microscope to detect, classify, record, mark, and report abnormal cells. While performing this examination, the cytologist is also referring to the patient’s medical history, assessing specimen adequacy, and capturing a variety of metrics and other information needed for regulatory compliance and operational purposes. Despite the widespread deployment of computers in the laboratory, many of these operations are still largely paper-based. Even in laboratories where medical histories are available to the cytologists in electronic form and reports are prepared on a computer, it is not uncommon for the data, and sometimes even draft reports, to be initially captured on paper and then transcribed.
 
In 1994 AccuMed, a corporate predecessor to CytoCore, introduced the AcCelltm computer-assisted cytology workstation. AcCell provided a means to assist the cytologist by automatically capturing the information relevant to screening cytology specimens in electronic form, managing the captured information, and automatically generating the necessary specimen, regulatory and operational reports. The benefits of this approach were clearly demonstrated in several cytology laboratories where installation of the AcCell system reduced operating costs, eliminated transcription errors, and reduced the time needed to generate a reportable result.
 
AIPStm Workstation
 
The AIPStm Workstation is an updated and improved version of the AcCell device. Like the AcCell, the AIPS Workstation is intended to reduce operating costs and improve operating efficiency in the cytology laboratory. Among the improvements and new features incorporated in the AIPS Workstation are a more efficient user interface, improved data management, workflow management and communications capabilities, and new features such as image capture, audio dictation, a “consult” mode, and support for continuing education and proficiency testing. In keeping with the AcCell tradition, patented context-sensitive software allows these capabilities to be provided in an unobtrusive manner that permits the cytologist to concentrate on evaluating specimens rather than on operating the instrument.
 
CCI believes that the AIPS Workstation hardware also incorporates several major advances over the AcCell, competing “computerized microscope” systems, and conventional cytology microscopes. “Fly-by-wire” technology, for example, allows the user to switch seamlessly between manual and computer-controlled specimen positioning and focusing and makes possible many of the improvements in system ergonomics. This is important as it has been documented that the poor ergonomics of conventional cytology microscopes are responsible for causing many cytologists to leave the field due to carpal tunnel syndrome and related medical problems. The AIPS Workstation is expressly designed to address the root causes of many of these ergonomic problems and is therefore expected to improve the retention of trained cytologists, who are in increasingly short supply, by the laboratory. Unlike the AcCell and other computerized microscopes, the AIPS Workstation does not require an external PC for operation. Instead, all necessary computing power is embedded within the workstation frame. This provides multiple benefits ranging from eliminating a considerable quantity of equipment from a cytologist’s typically cramped work area to facilitating the periodic equipment validations that laboratories are required to perform.
 
In addition to use as part of a cytology screening system, the AIPS Workstation can also be used in conjunction with the AIPS Imager for automated cytological analysis, and in many other applications in which a conventional microscope is used such as pathology and hematology in a clinical laboratory, and applications outside of the clinical laboratory that range from drug discovery and quality control to metallurgy.


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AIPStm Imager
 
The intent of a medical screening program is to differentiate between patients who show no evidence of the target disease state (“normals”) and those who do (“abnormals”). Patients who have abnormal screening results are offered follow-up testing to confirm the presence of the disease, diagnosis to classify the disease state and determine its extent and, where appropriate, treatment for the disease. Patients who have a normal screening result are not offered these services. In order to allow scarce medical resources to be focused upon those patients having the greatest need, screening programs are structured to differentiate between normal and abnormal patients as accurately, rapidly, reliably and cost effectively as possible.
 
Although the evaluation of cervical cytology specimens by automated image analysis can be traced back to the 1940s and a number of capable systems have been developed, the FDA has not to date approved any automated image analysis system to “diagnose”, or classify as normal or abnormal, cervical cytology specimens without human intervention. The FDA has, however, approved several systems including the AccuMed TracCelltm for use in “mapping” or “location-guided screening”. In these systems, image analysis is used to identify potentially abnormal cells which are then presented to a cytologist for classification. This approach, which has been shown to reduce the time required to differentiate between normal and abnormal specimens, is starting to be adopted by high volume laboratories, but is presently too expensive for most laboratories. We believe that our imager will be marketable at a price that will be affordable for most laboratories.
 
The AIPStm Imager is an advanced version of the AccuMed TracCell location-guided cytology screening system that has been optimized for use with the proprietary CCI stains described above. As these stains are designed to be more effective in highlighting the cellular abnormalities associated with cancer and precancerous conditions than the traditional Pap stain used in conjunction with other automated cytology screening instruments, the AIPS Imager is expected to deliver superior performance when used in cytological screening applications. The AIPS Imager is intended to work in conjunction with the AIPS Workstation. When a specimen slide is evaluated by the AIPS Imager, the locations on the slide of any potentially abnormal cells are recorded to a data file. The slide is then moved to an AIPS Workstation where the data file guides the workstation to present each of the potentially abnormal cells detected to the cytologist for classification.
 
CCI plans several additional software modules that will expand the capabilities of the AIPS Imager. These modules may include those for the analysis of specimens stained with new CytoCore stains, bulk image capture and archiving, generation of time-optimized routing plans to maximize the efficiency of specimen review on an AIPS Workstation, and a “preview” module that assists the cytologist in evaluating difficult specimens. CCI hopes that this product family will also be expanded by the addition of application kits consisting of the stains and associated software that are needed for the automated screening of other types of cytology specimens.
 
OmniDROPtm
 
The screening of cytology specimens is a communications-intensive activity. Physicians, for example, send test requisitions and medical histories to the lab, receive test results in return, and communicate these results to their patients. Requisitions, data, reports and other information are all communicated back and forth between multiple operational centers within the laboratory and in some cases to other laboratories. As private patient information may be included in many of these communications, most countries impose privacy and security requirements on the communication systems used to transport this traffic. CCI has entered into an agreement with Zycom Touch, LLC under which CCI will sell OmniDROPtm Communicator software as a component of its AIPS systems and as a standalone product for laboratories, hospitals and health maintenance organizations. OmniDROP is a flexible and secure communications package that complies with privacy and other regulations contained in the Health Insurance Portability and Accountability Act (“HIPAA”) in the United States and corresponding privacy regulations worldwide. OmniDROP also includes features such as message receipts and tracking that ensure that messages are received by the intended recipient in a timely manner. OmniDROP is provided as a “software-as-a-service” product where physicians pay only a nominal annual subscription fee while labs pay a small service fee per test.


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Therapeutics
 
CCI is developing a derivative of the SoftPAP cell collection device that can be used to apply a patch containing a therapeutic agent to the cervix. CCI is planning to develop and market this applicator, as well as patches containing established therapeutic agents, at some future date in collaboration with a pharmaceutical or transdermal patch manufacturer.
 
Product Development
 
Our core product development strategy is to develop the CytoCore Solutions System and its component products, enhance such products, and develop new and innovative diagnostic and screening devices for the early detection of various types of cancer. To implement this strategy, we have and will continue to utilize internal resources, sponsored and collaborative agreements with medical institutions, strategic partnerships with commercial entities, and licenses and acquisitions of intellectual property.
 
In the future, CytoCore anticipates expanding its portfolio to include other cytological assays and tests, tests for STDs, including HPV, and other markers of vaginal health, and medicinal products related to the treatment of diseases of the female reproductive system. The CytoCore product pipeline for 2011 calls for the introduction of an workstation for computer assisted cytology and an improved cytology preservative for use with SoftPAP. In 2013 CytoCore expects to introduce an automated imaging system with assay reagents for the location-guided screening of cervical cancer specimens and the PadKit sample collection device. Reagents for use in the automated screening for additional conditions such as endometrial and bladder cancer are expected to be introduced in late 2014.
 
Markets and Marketing Objectives
 
Diagnostic Focus
 
Our immediate chief objective is to achieve broad market acceptance of the SoftPAP collection device and the CytoCore Solutions System as a new screening and diagnostic tool for cervical cancer screening, offering an alternative to the current Pap test methods. It is estimated that there are approximately 60 million annual Pap tests given in the United States. Worldwide, approximately 180 million tests are given and approximately 1.5 to 1.8 billion women require annual Pap testing. Many studies have shown that between 70 and 80% of a person’s entire healthcare expenditures over their whole life occur in the last four to six months of life. As a result, more and more attention is being given to the early detection of a disease or condition. Bio-molecular screening, diagnostic, and treatment products consequently are being developed to detect disease states early so they can be dealt with before they become life threatening and expensive to treat. CytoCore is designing and developing its products to satisfy this paradigm shift and focus more on diagnostic methods and tools for early detection.
 
Point of Care for All Populations
 
We also believe we are well positioned to capitalize on trends affecting the world’s population. The female population of the world is approximately 3 billion, of which 2 billion fall in the range where reproductive healthcare monitoring is necessary and effective. This group falls into two sub-groups: (1) females in the United States and other countries where healthcare is available to most, and where healthcare is more or less effective (estimated at between 300 and 400 million women), and (2) the remainder of the female world population, where healthcare is limited or non-existent. CytoCore believes its products can address the needs of both of these groups, since the principal requirements for both groups — minimal cost, near point-of-care delivery, ease of use, and reduced reliance on highly-trained and skilled professionals — are the same. CytoCore is developing its initial products to serve the needs of females in developed nations and economies, but anticipates subsequent deployment of such products to less well-developed countries.


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Within both developed and developing economies, there are macro trend drivers that are not specific to female healthcare needs, including:
 
  •  Increasing life spans, driving the demand for healthcare services up and increasing the emphasis on developing screening tests for the early detection of diseases;
 
  •  Limited infrastructure and the fact that a significant portion of the world population lives in locations where the infrastructure does not support the classical laboratory-based model of healthcare delivery, putting a premium on point-of-care diagnostic testing;
 
  •  An increasingly mobile population, which has increased the pressure to minimize the time between when a patient is tested and when the test result is available and delivered;
 
  •  Increasing worldwide shortage of physicians and laboratory professionals who have the skills and training needed to perform and interpret screening and diagnostic tests, increasing the need for tests that can be performed and interpreted by technicians and para-professionals; and
 
  •  Constrained funds available for healthcare, driving the need to reduce healthcare costs.
 
These trends are set against the major advances that are occurring in many areas related to healthcare. These advances range from a better and more nuanced understanding of disease states to the movement of genomics, proteomics and bioinformatics out of the research laboratory and into routine medical practice. These are supported by rapid advances in information, optical and software technology. This combination is making it possible to perform increasing numbers of screening and diagnostic tests at or near the point of care. CytoCore is focused upon utilizing these advances to provide products that address the needs of these worldwide markets.
 
Sales and Distribution
 
The SoftPAP has initially been targeted to the premium segment of the cervical cytology sampling market. This premium segment comprises almost the entire cervical sampling market except for public health programs and research hospitals. The Company expects that the SoftPAP will be primarily delivered to these customers through local and regional distributors who specialize in the value-added OB/GYN market. During the last quarter of fiscal 2007, the Company entered into three distribution agreements with distributors in Italy, Spain and Portugal. Each of these distributors agreed to act as the Company’s exclusive distributor in their respective territories. In 2008, the Company also entered into an international distribution agreement for sales into Switzerland. However, the Company only realized minimal sales over the last few years. In 2009, the company shipped product to a distributor in Turkey.
 
In 2010 the Company engaged the services of Dr. Mauro Scimia as a sales representative. Dr. Scimia will be focusing upon developing markets for Company products in the European Union and surrounding regions and providing support to our distributors.
 
The AIPS Workstation will be marketed to small and medium-sized hospitals and reference laboratories. The compact, low cost design of the workstation is intended to facilitate its deployment at or in proximity to the point of care. Once the AIPS Workstation has been successfully established in the laboratory market, our strategy is to form alliances with these laboratories and other medical products distribution companies and utilize their sales forces to broaden sales of the system to other markets, including hospitals, clinics, managed care organizations and office-based physician groups. Our marketing strategy to these organizations will vary depending upon the applicable cancer screening test.
 
CCI will be selling cell preservatives in combination with the SoftPap product only. The corresponding PadKit marketing strategy is being developed, but it is currently anticipated to be based upon convenience kits containing PadKit and the preservative. OmniDrop will be sold as an incidental component of the AIPS Workstation and may also be sold as an independent product.
 
Government Regulation, Clinical Studies and Regulatory Strategy
 
The development, manufacture, sale, and distribution of medical devices intended for commercial use are subject to extensive governmental regulation in the United States by the FDA and comparable authorities in certain


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states and foreign countries. In the United States, the Food, Drug and Cosmetic Act (the “FD&C Act”) and related regulations apply to some of our products. These products cannot be shipped in interstate commerce without prior authorization from the FDA.
 
Medical devices may be authorized by the FDA for marketing in the United States either pursuant to a pre-market notification under Section 510(k) of the FD&C Act, commonly referred to as a “510(k) notification,” or a pre-market approval application or “PMA”. The process of obtaining FDA marketing clearance and approval from other applicable regulatory authorities is both lengthy and costly and there can be no guarantee that the process will be successful. The 510(k) notifications and PMAs typically require preliminary internal studies, field studies, and/or clinical trials, in addition to the submission of other design and manufacturing documentation. In addition, a PMA supplement or clearance of a new 510(k) may be required for certain changes to a product if they affect the safety, efficacy or substantial equivalence of the product. We manage the regulatory process through the use of consultants and clinical research organizations.
 
A 510(k) notification, among other things, requires an applicant to show that its products are “substantially equivalent” in terms of safety and effectiveness to an existing FDA-cleared predicate product. An applicant may only market a product submitted through a 510(k) notification after the FDA has issued a written notification determining the product has been found to be substantially equivalent. The predecessor to the SoftPAP collector, the e2 Collector, was cleared for marketing by the FDA on May 31, 2002 under the 510(k) notification process. The SoftPAP collection device received FDA clearance under the 501(k) notification process in February 2008.
 
To obtain PMA approval for a device, an applicant must demonstrate, independent of other similar devices, that the device in question is safe and effective for its intended uses. A PMA must be supported by extensive data, including pre-clinical and clinical trial data, as well as extensive literature and design and manufacturing documentation to prove the safety and effectiveness of the device. The PMA process is substantially longer than the 510(k) notification process. During the review period, the FDA may conduct in-depth reviews of clinical trial center documentation and manufacturing facilities and processes or those of strategic partners. In addition, the FDA may request additional information and clarifications and convene a medical advisory panel to assist in its determination.
 
To date all CCI products have been cleared via the 510(k) process, but it is expected that some future products will require approval via the PMA process.
 
The FD&C Act generally bars advertising, promoting, or other marketing of medical devices that the FDA has not approved or cleared. Moreover, FDA enforcement policy strictly prohibits the promotion of known or approved medical devices for non-approved or “off-label” uses. In addition, the FDA may withdraw product clearances or approvals for failure to comply with regulatory standards.
 
Our prospective foreign operations are also subject to government regulation, which varies from country to country. Many countries, directly or indirectly through reimbursement limitations, control the price of most healthcare products. Developing countries put restrictions on the importation of finished products, which may delay such importation. European Directives establish the requirements for medical devices in the European Union. The specific directives applicable to our current products are the Medical Device Directive and the In-Vitro Diagnostics Device Directive. Some future products may also be required to comply with additional directives. The International Organization for Standardization (“ISO”) establishes standards for compliance with these directives, particularly for quality system requirements. The Company announced in August 2007 that it had completed the process of demonstrating the conformity of the cell collection device to the requirements of the Medical Device Directive for sales into the European Union.
 
The FDA has adopted regulations governing the design and manufacture of medical devices that are, for the most part, harmonized with the good manufacturing practices and ISO quality system standards for medical devices. The FDA’s adoption of the ISO’s approach to regulation and other changes to the manner in which the FDA regulates medical devices will increase the cost of compliance with those regulations. Other countries impose similar but not identical regulations that will further increase compliance costs.
 
We may be subject to certain registration, record-keeping and medical device reporting requirements of the FDA. Our manufacturing facilities, or those of our strategic partners, may be obligated to follow the FDA’s Quality


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System Regulation and be subject to periodic FDA inspections. Any failure to comply with the FDA’s Quality System Regulation or any other FDA or other government regulations could have a material adverse effect on our future operations. In addition, separate state and local laws relating to such matters as safe working conditions, manufacturing practices and environmental protection may apply, which may impose additional costs and risks.
 
Various federal and state laws pertaining to healthcare fraud and abuse, including federal and state anti-kickback laws and the federal Foreign Corrupt Practices Act, make it illegal for an entity to solicit, offer, receive or pay remuneration or anything of value in exchange for, or to induce, the referral of business or the purchasing, leasing or ordering of any item or service paid for by Medicare, Medicaid or certain other federal healthcare programs. These statutes have been broadly defined to prohibit a wide array of practices, and our activities may subject the company and its partners to scrutiny under such laws. Violations may be punishable by criminal and/or civil sanctions, including fines, as well as the exclusion from participation in government-funded healthcare programs.
 
The CytoCore Solutions System also may be subject to regulation in the United States under the Clinical Laboratory Improvement Act (“CLIA”). CLIA establishes quality standards for laboratories conducting testing to ensure the accuracy, reliability and timeliness of patient test results, regardless of where the test is performed. The requirements for laboratories vary depending on the complexity of the tests performed. Thus, the more complicated the test, the more stringent the requirement. Tests are categorized as high complexity, moderate complexity (including the category of provider-performed microscopy) and waived tests. CLIA specifies quality standards for laboratory proficiency testing, patient test management, quality control, personnel qualifications and quality assurance, as applicable.
 
The FDA is responsible for the categorization of commercially-marketed laboratory tests and manufacturers are notified of the assigned complexity through routine FDA correspondence. Categorization is effective as of the date of the written notification to the manufacturer.
 
We are developing the CytoCore Solutions System, and in particular the AIPS Workstation, to be user-friendly, require minimum operator training, and have safety and operating checks built into the functionality of the instruments. We believe that our efforts may result in receiving the lowest possible classification for the system. If, however, these products are classified into a higher category, it may have a significant impact on our ability to market the products in the United States.
 
We received FDA clearance to market the SoftPAP collector in February 2008 and a follow-up clinical trial for the device was completed in 2008. The results of this trial have been published on www.clinicaltrials.gov. Clinicaltrials.gov is a component of the FDA that is responsible for the registration of clinical trials and the reporting of data from these trials. The Company continues to refine the device and develop and optimize its assays and the AIPS Workstation and platform. Our overall strategy involves the continuing study of the CytoCore Solutions System and its components. This research will determine whether the CytoCore Solutions System is able to eliminate true negative samples from further review for cervical cancer. We believe the system could also become a primary screening device for cervical, endometrial and bladder cancer. We will also submit the data to foreign regulatory authorities that have jurisdiction over these products. Subsequently, we will continue to collect and submit data for the CytoCore Solutions System point-of-care test. We plan to pursue regulatory approval of the CytoCore Solutions System products through a series of submissions and, in some cases, using data from a single clinical study. This tiered approach is designed to accelerate revenue opportunities for the CytoCore Solutions System in the short term and to drive adoption of our innovative products over the long term, while minimizing the expense and time involved in undertaking the appropriate study. If the submissions for the various CytoCore Solutions System products are cleared by the FDA for sale in the U.S. market or approved for sale by foreign regulatory agencies, we intend to sell the cleared products in their respective clinical markets.
 
Cost and Reimbursement
 
In the United States, laboratory customers bill most insurers (including Medicare) for screening and diagnostic tests such as the Pap test. Insurers, such a private healthcare insurance or managed care payers, in addition to Medicare, reimburse for the testing, with a majority of these insurers using the annually-set Medicare reimbursement amounts as a benchmark in setting their reimbursement policies and rates. Other private payers do not follow


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the Medicare rates and may reimburse for only a portion of the testing or not at all. Outside of the United States, healthcare providers and/or facilities are generally reimbursed through numerous payment systems designed by governmental agencies, such as the National Health Service in the United Kingdom, the Servicio Sanitaris Nazionale in Italy and the Spanish National Health System, as well as private insurance companies and managed care programs. The manner and level of reimbursement will depend on the procedures performed, the final diagnosis, the devices and/or drugs utilized, or any combination of these factors, with coverage and payment levels determined in the payer’s discretion.
 
Our ability to successfully commercialize the CytoCore Solutions System and future products will depend, in part, on the extent to which coverage and reimbursement for such products will be available from third-party payers in the United States such as Medicare, Medicaid, health maintenance organizations and health insurers, and other public and private payers in foreign jurisdictions. The coverage policies and reimbursement levels of these third-party payers may impact the decisions of healthcare providers and facilities regarding which medical products they purchase and the prices they are willing to pay for those products. If we succeed in bringing products to the market, we cannot be assured that third-party payers will pay for such products or establish and maintain price levels sufficient for realization of an appropriate return on our investment in product development. Additionally, we expect many payers to continue to explore cost-containment strategies (e.g., competitive bidding for clinical laboratory services within the Medicare program, so-called “pay-for-performance” programs implemented by various public and private payers, etc.) that could potentially impact coverage and/or payment levels for current or future CytoCore products.
 
Competition
 
Historically, competition in the healthcare industry has been characterized by the search for technological innovations and efforts to market such innovations, and technological advances have accelerated the pace of change in recent years. The cost of healthcare delivery has always been a significant factor in markets outside of the United States. In recent years, the U.S. market has also become much more cost conscious. We believe technological innovations incorporated into certain of our products offer cost-effective benefits that address this particular market opportunity.
 
Competitors may introduce new products that compete with ours, or those that we are developing. We believe the portion of our research and development efforts devoted to continued refinement and cost reduction of our products will permit us to remain or become competitive in the markets in which we presently distribute or intend to distribute our products.
 
The market for our cancer screening and diagnostic product line is significant, but highly competitive. We are currently not aware of any other company that is duplicating our efforts to develop a fully-automated, objective analysis and diagnostic system for female reproductive-tract cancer screening that can be used at the point of care. Nonetheless, we compete with several large and well-established medical device companies, including companies with financial, marketing, and research and development resources substantially greater than ours. There can be no assurance that our technological innovations will provide us with a competitive advantage.
 
There are several companies that produce automated and quantitative microscopy instruments. In the past, the market for these instruments has been primarily limited to research applications. However, as a result of recent advances in the area of molecular diagnostics, we believe the market for such instruments and applications will increase over the next several years. We believe our instruments are the most versatile and cost-effective platforms available in the current market whether as an outright purchase or a fee-for-use application.
 
In general, we believe that our products must compete primarily on the basis of clinical performance, accuracy, functionality, quality, product features and effectiveness of the product in standard medical applications. We also believe that cost control and cost effectiveness are additional key factors in achieving or maintaining a competitive advantage. We focus a significant amount of product development effort on producing systems and tests that will not add to overall healthcare cost.
 
Specifically, there are several companies whose technologies are similar, adjunctive to, or may overlap with that of CCI. These include manufacturers of liquid-based Pap tests and screening and diagnostic systems such as


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Cytyc (a Hologic, Inc. company) and Becton, Dickinson and Company (which acquired Tripath Imaging Inc. in 2006).; Qiagen, which manufactures the leading HPV test; Ventana Medical Systems, Inc., an instrument and reagent manufacturer; and Dako Group, Clarient, Inc. and Genetix LTD., which provide cancer and genetic diagnostic and screening products and services, respectively. However, as noted above, we do not believe any of these companies have developed the fully-integrated solution necessary to deliver a fully-automated, proteomic-based solution. Certain of the competitors listed have chosen to focus on the histology market that, although closely related to cytology, is separate and distinct. To develop fully-automated solutions, companies must have technologies that fully integrate microscopy instruments, imaging software and cancer-detecting biochemistry. It is difficult to assess our competitive position in the market since we are not sufficiently aware of the development stages of any of competitors’ products.
 
Operations
 
We conduct research and development work for the CytoCore Solutions System using a combination of our full-time and part-time employees and independent consultants in our Chicago, Illinois location and contracted researchers.
 
We do not intend to invest capital to develop our own distribution and sales organizations, or construct and maintain a medical-products manufacturing facility and all its related quality systems requirements. Our strategy is to utilize the operations, quality systems and facilities of a contract manufacturer specializing in medical products manufacturing to meet our current and future needs in the United States and abroad. This strategy covers manufacturing requirements related to the CytoCore Solutions System’s chemical components, plastic and silicone parts for the SoftPAP, and the instruments and other components of the AIPS workstation.
 
To this end, we have agreements, including for design and development work, with contract manufacturers of medical devices to supply commercial quantities of the SoftPAP sample collection device. These manufacturers began delivering commercial product to CCI in 2007 and have the capacity to handle high volume production through facilities in both the United States and several foreign countries. All of our machinery and tooling is located at our suppliers.
 
Intellectual Property
 
We rely on a combination of patents, licenses, trade names, trademarks, know-how, proprietary technology, trade secrets and policies and procedures to protect our intellectual property. We consider such security and protection a very important aspect of the successful development and marketing of our products in the U.S. and foreign markets.
 
In the United States, we follow the practice of filing a provisional patent application for an invention as soon as it has been determined that the invention meets the minimum standards for patentability. While a provisional patent application does not provide any formal rights or protections, it does establish an official priority date for the invention that carries over to any utility patent applications that are derived from the provisional application within the next 12 months. A utility patent application begins the process that can culminate in the issuance of a U.S. patent. We convert each outstanding provisional patent application into some number of utility patent applications within this 12-month period. In most cases each provisional application results in one utility filing. However, in some cases a single provisional application has generated two independent utility filings or multiple (up to five) provisional applications have been consolidated into a single utility application. During the examination of a utility application, the U.S. Patent and Trademark Office may require us to divide the application into two or more separate applications or we may file a continuation-in-part patent application that expands upon the technology disclosed in an earlier patent application and which has the potential of superseding the disclosure of the earlier application. For these reasons, estimating the number of patents that are likely to be issued based upon the number of provisional and utility applications filed is difficult.
 
Prior to filing a utility application in the United States, we review the application to determine whether obtaining patent coverage for the invention outside of the United States is necessary or desirable to support our business model. If so, a patent application is filed under the Patent Cooperation Treaty (“PCT”) at the same time that


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the U.S. filing is made. Depending upon the nature of the invention and business considerations, we typically nationalize PCT applications in three to six countries.
 
As of December 2009, we had filed 12 U.S. utility patent applications. Three of the U.S. utility applications have been issued as U.S. patents, two are pending and seven have been abandoned. One Chinese patent had been issued and one European case has been abandoned. One U.S. and five foreign patent applications are filed and pending; in order to reduce the expenses related to patent prosecution, we are currently taking only those actions needed to keep them in effect. This group of patents and patent applications covers all aspects of the CytoCore Solutions System including, but not limited to, the point of service instrument, the personal and physicians’ collectors, and the slide-based test. As a result of the acquisition of AccuMed, we acquired 33 issued U.S. patents, one U.S. patent application, and nine foreign patents, of which a combined total of 17 were transferred to a third party under a license agreement. Twenty-four additional foreign patent applications primarily covering the AcCell and AcCell Savant technology and related software were also acquired. We have recovered the AcCell-related patents and patent applications from the third party.
 
We intend to prepare additional patent applications for processes and inventions arising from our research and development process. The protections provided by a patent are determined by the claims that are allowed by the patent office that is processing the application. During the patent prosecution process it is not unusual for the claims made in the initial application to be modified or deleted or for new claims to be added to the application. For this reason, it is not possible to know the exact extent of protection provided by a patent until it issues.
 
Patent applications filed prior to November 29, 2000 in the United States are maintained in secrecy until any resulting patent is issued. As there have been examples of U.S. patent applications that have remained “in prosecution” and, therefore, secret for decades, it is not possible to know with certainty that any U.S. patent that we may own, file for or have issued to us will not be pre-empted or impaired by patents filed before ours and that subsequently are issued to others. Utility patent applications filed in the United States after November 29, 2000 are published 18 months after the earliest applicable filing date. As this revised standard takes full effect, the chances that such a “submarine” patent will impair our intellectual property portfolio are significantly reduced. Foreign patent applications are automatically published 18 months after filing. As the time required to prosecute a foreign utility patent application generally exceeds 18 months and the foreign patents use a “first to file” rather than a “first to invent” standard, we do not consider submarine patents to be a significant consideration in our patent protection outside of the United States.
 
Our products are or may be sold worldwide under trademarks that we consider to be important to our business. We own the trademarks SoftPAP, CytoCoretm, CytoCore Solutions and Cocktail-CVXtm. We may file additional U.S. and foreign trademark applications in the future.
 
Our future technology acquisition efforts will be focused toward those technologies that have strong patent or trade secret protection.
 
We cannot be sure that patents or trademarks issued or which may be issued in the future will provide us with any significant competitive advantages. We cannot be sure any of our patent applications will be granted or that their validity or enforceability will not be successfully challenged. The cost of any patent-related litigation could be substantial even if we were to prevail. In addition, we cannot be sure that someone will not independently develop similar technologies or products, duplicate our technology or design around the patented aspects of our products. The protection provided by patents depends upon a variety of factors, which may severely limit the value of the patent protection, particularly in foreign countries. We intend to protect much of our core technology as trade secrets, either because patent protection is not possible or, in our opinion, would be less effective than maintaining secrecy. However, we cannot be sure that our efforts to maintain secrecy will be successful or that third parties will not be able to develop the technology independently.
 
Research and Development Expenditures
 
Our research and development efforts are focused on introducing new products as well as enhancing our existing product line. We utilize both in-house and contracted research and development personnel, including in


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collaboration with universities, medical centers and other entities. All of our research and development activities are conducted in the United States.
 
We believe research and development is critical to the success of our business strategy. During the 2009 and 2008 fiscal years, our research and development expenditures were approximately $372,000 and $1,852,000, respectively, all of which were charged to expense in our consolidated statement of operations. Settlements to vendors related to research and development activities for less than the recorded amounts totaled $457,000 for the fiscal year 2009 and were credited to expenses.
 
Our research work in the area of chemical and biological components will continue for the foreseeable future as we seek to refine the current process and add additional capabilities to our analysis procedure, including the detection of other forms of cancer and precursors to cancer.
 
We anticipate the need to invest a substantial amount of capital in the research and development process, including the cost of clinical trials, required to complete the development and use of the CytoCore Solutions System and bring it to market.
 
Components and Raw Materials
 
Low-cost products are a key component of our business strategy. We designed the SoftPAP collection device using widely available and inexpensive silicone and plastic materials. These materials are available from numerous sources and can be fabricated into finished devices by a variety of worldwide manufacturers based on our proprietary designs. Currently, we manufacture through contract manufacturers the SoftPAP collection device in Wisconsin and China, with quality assurance occurring in our Chicago facility. These contract manufacturers are using our machinery and tooling.
 
The instrument components of the laboratory version of the CytoCore Solutions System are also available from a number of sources. Computers, cameras, automated slide-staining instruments and automated slide-preparation instruments are currently available from several large manufacturers. We currently have an adequate supply of workstations used in the CytoCore Solutions System and have contracted for the design and manufacture of the next generation of the workstation platform.
 
Due to certain regulatory requirements regarding the supply and manufacture of certain products, we may not be able to establish additional or replacement sources for certain components or materials. In the event we are unable to obtain sufficient quantities of raw materials or components on commercially reasonable terms or in a timely manner, we would not be able to manufacture our products on a timely and cost-competitive basis, which may have a material adverse effect on our business and financial condition.
 
Working Capital Practices
 
We have financed our U.S. operations and research and development efforts by raising funds through the sale of debt and equity securities. We will continue to use these methods to fund our operations until such time as we are able to generate adequate revenues and profits from the sale of some or all of our products.
 
We believe that future sales of the CytoCore Solutions System or other products into foreign markets may result in collection periods that may be longer than those expected for domestic sales of these products. Our strategy will be to use down payments, letters of credit and/or other secured forms of payment, whenever possible, in sales of products in foreign markets.
 
Employees
 
As of March 31, 2010, we employed a total of six full-time employees. We also utilize independent consultants in the United States on an as-needed basis.
 
Financial Information About Foreign and Domestic Operations and Export Sales
 
Markets outside of North America are an important factor in our business strategy. Any business that operates on a worldwide basis and conducts its business in one or more local currencies is subject to the risk of fluctuations in


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the value of those currencies against the dollar, as well as foreign economic conditions. Such businesses are also subject to changing political climates, differences in culture and the local practices of doing business, as well as North American and foreign government actions such as export and import rules, tariffs, duties, embargoes and trade sanctions. We do not regard these risks, however, as a significant deterrent to our strategy to introduce our CytoCore Solutions System to foreign markets in the future. As we begin to market and sell our CytoCore Solutions System, we will closely review our foreign operational practices. We will attempt to adopt strategies to minimize the risks of changing economic and political conditions within foreign countries.
 
During the fiscal year ended December 31, 2009, the Company did not have any foreign operations, but did have distribution agreements to sell our products in Switzerland, Italy, Spain and Portugal. As of December 31, 2009, we had product shipments to Europe, which sales accounted for 9% of our revenues for the 2009 fiscal year.
 
Available Information
 
The Company’s website can be found at www.cytocoreinc.com. CCI makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such periodic and current reports. The contents on our website are not incorporated in our Form 10-K. Copies can be requested in writing to CytoCore, Inc., 414 N. Orleans St., Suite 510, Chicago, Illinois 60654, Attn: Chief Financial Officer.
 
Item 1A.   Risk Factors
 
You should carefully consider the following risk factors that affect our business. Such risk factors could cause our actual results to differ materially from those that are expressed or implied by forward-looking statements contained herein. Some of the risks described relate principally to our business and the industry in which we operate. Others relate principally to the securities market and ownership of our capital stock. The risks and uncertainties described below are not the only ones we face. Additional risks are described elsewhere in this report under the Item 1 — Business and Item 3 — Legal Proceedings sections, among others. Other risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks, and the trading price of our common stock could decline. The discussion of our risk factors should be read in conjunction with the financial statements and notes thereto included herein.
 
Risks Related to Our Business
 
We have a history of operating losses and there are doubts as to our ability to continue as a going concern.
 
Our expenses have exceeded our revenues since our inception, and our accumulated deficit at December 31, 2009 was $95,351,000. We have sold only a very limited amount of our CytoCore Solutions System products to date and cannot be certain as to when sales of the Company’s products might occur in the future. We estimate that we have sufficient cash on hand to fund our operations only until June 2010.
 
Our losses have resulted from research and development costs, sales and marketing expenses and other general operating expenses. We expect to continue to devote resources to marketing, product development and other research and development activities, including expenses associated with additional and larger clinical trials for our product candidates. Although we expect to generate revenue in the future from the sale of the SoftPAP collection device and other components of the CytoCore Solutions System, we cannot predict when revenues will be sufficient to fund our operations. We therefore expect to continue to incur significant losses in the near future.
 
Due to the substantial losses we have incurred and our current limited financial resources, our independent registered public accounting firm has noted in its report on our financial statements that these conditions raise substantial doubt as to our ability to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that may result from the outcome of this uncertainty. Moreover, the going concern explanatory paragraph may make obtaining additional financing more difficult or costly.


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We have limited financial resources and we are not certain we will be able to obtain additional financing to maintain operations and fund the development of future products.
 
Our ability to continue operations depends upon our raising additional funds during 2010, since we estimate that we have sufficient cash on hand to fund operations only until May 2010. Until such time as our products achieve market acceptance and generate sufficient revenues, we will continue raising funds for operating purposes primarily from the sale of securities of the Company. Lack of funding may affect our overall ability to operate our business, including the ability to employ adequate staff and conduct ongoing studies and clinical trials of our products. Failure to raise adequate capital to meet our business needs could materially jeopardize CCI and our ability to conduct business. There can be no assurance that we will be able to secure necessary funds.
 
We currently depend on the sale of a single product and product line.
 
CCI has sold only a very limited amount of our CytoCore Solutions System products to date and cannot be certain as to when sales of the Company’s products might occur in the future. Only one shipment of product was made in 2009. In the foreseeable future we will derive most of our revenues from the sale of the SoftPAP cell collection device, and the other components of the CytoCore Solutions System. Our net sales and earnings will therefore be heavily dependent on the sale of these products. If we are unable to successfully develop and commercialize such products as well as other new or improved products, our business, sales and profits will be materially impaired.
 
Our future success will depend on our ability to develop new products and respond to technological changes in the markets in which we compete.
 
Our long-term ability to generate product-related revenue will depend in part on our ability to identify products and product candidates that may utilize the different components of the CytoCore Solutions System, including our drug delivery system and slide-based tests. If internal efforts do not generate sufficient product candidates, we will need to identify third parties that wish to collaborate with the Company to develop new products and applications. Our ability to successfully pursue third-party relationships will depend in part on our ability to negotiate acceptable license and related agreements. Even if we are successful in establishing collaborative arrangements, they may never result in the successful development or commercialization of any product candidate or the generation of any sales or royalty revenues.
 
In addition, the markets for CytoCore’s products and services are characterized by rapid technological developments and innovations. Our success will depend in large part on our ability to correctly identify emerging trends, enhance capabilities, and develop and manufacture new products quickly, in a cost-effective manner, and at competitive prices. The development of new and enhanced products is a complex and costly process. We may need to make substantial capital expenditures and incur significant research and development costs to develop and introduce such new products and enhancements. Our choices for developing products may prove incorrect if customers do not adopt the products we develop or if the products ultimately prove to be medically or commercially unviable. Development schedules also may be adversely affected as the result of the discovery of performance problems. If we fail to timely develop and introduce competitive new products, our business, financial condition and results of operations would be adversely affected.
 
Our products are subject to government regulation and they may not receive necessary government approvals.
 
The development, manufacture, sale and use of our products in the United States is subject to extensive regulation, by the FDA as well as other governmental agencies at both the federal and state level. We must meet significant FDA requirements before we receive clearance to market our products. Included in these FDA requirements may be the performance of lengthy and expensive clinical trials to prove the safety and efficacy of the products. We have limited experience in conducting and maintaining the preclinical and clinical trials necessary for regulatory approval, and face the risk that results in later trials may be inconsistent with results from earlier trials. A number of companies have suffered significant setbacks in advanced clinical trials, even after promising early trial results.


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Delays in receiving governmental approvals can be costly in terms of lost sales opportunities and increased clinical trial costs. The speed with which we complete such trials and receive approval will depend on several factors, many of which are beyond our control, including but not limited to the rate of patient enrollment and retention, negative tests results, analysis of data obtained from testing activities and changes in regulatory policies. At the time of this writing the FDA is in the early stages of a system level review that is widely expected to result in significant changes in the way that medical devices are regulated in the United States. Similarly, the European Union is in the later stages of revising the directives that apply to the regulation of medical devices in the EU, and other countries, particularly in Asia, are undertaking similar efforts.
 
In 2008 CytoCore successfully completed a clinical trial for the SoftPAP collector and received both FDA clearance to market this device in the United States and the CE Mark that is required to market SoftPAP in the European Union. Future CytoCore products will require additional clinical trials and filings for regulatory approval to market in the United States, European Union, and other jurisdictions. We cannot be certain that the results of these future trials will result in regulatory approval to market these products, or that approval, if granted, will not be limited to specific indications for use or product claims. Obtaining regulatory approval is expensive, time-consuming and uncertain, and is expected to become even more so as a consequence of legislative and regulatory changes and initiatives that have recently been initiated in the United States, European Union and other jurisdictions.
 
Sales of medical devices and diagnostic tests outside the United States are subject to foreign regulatory requirements that vary from country to country. The time required to obtain regulatory clearance in a foreign country may be longer or shorter than that required for FDA marketing clearance. Export sales of certain devices that have not received FDA marketing clearance may be subject to regulations and permits, which may restrict our ability to export the products to foreign markets. If we are unable to obtain FDA clearance for our products, we may need to seek foreign manufacturing agreements to be able to produce and deliver our products to foreign markets. We cannot be certain that we will be able to secure such foreign manufacturing agreements on acceptable terms, if at all.
 
Once a product gains regulatory approval, whether in the United States and/or abroad, the product remains subject to regulatory requirements, including adverse event reporting. Failure to comply with post-approval requirements can, among other things, result in warning letters, recalls, fines, injunctions and suspensions or revocations of marketing licenses. Any enforcement action, even if unsuccessful, would be time-consuming, expensive, and potentially damaging to our reputation.
 
Finally, we may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, if any unknown problems arise with respect to the product, its use or manufacture. With the widespread use of any product or device, serious adverse events may occur. Any safety issues could cause us to suspend or cease marketing our approved products, possibly subject us to substantial liabilities, and adversely affect our ability to generate revenues.
 
Changes in third-party reimbursement may negatively affect us.
 
Widespread adoption and commercial acceptance of our SoftPAP device and the CytoCore Solutions System in the United States and other countries is in part dependent upon the ability of healthcare providers and laboratories to secure adequate reimbursement from third-party payers such as private insurance plans, managed care organizations, Medicare and Medicaid, and foreign governmental healthcare agencies. We cannot guarantee that third parties will add our products to the coverage and that reimbursement will in fact be provided, that it will continue to be available, or that reimbursement levels will be adequate to enable healthcare providers and laboratories in the United States and other countries to use our products instead of conventional methods or existing therapies.
 
Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance. There can be no assurance that foreign third-party payers will provide or continue to provide coverage, which third-party reimbursement will be made available at adequate levels, if at all, for our products under any such foreign reimbursement system or that healthcare providers or clinical laboratories will use our products in lieu of other methods. We also will be required to secure adequate reimbursement for any new products we develop or acquire, and we may not be able to do so successfully.


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Our international operations expose us to additional risks.
 
The Company expects that international sales will account for a significant portion of our revenues for the foreseeable future, and we believe international sales are a key element to our future success. As a result, we may be subject to the risks of doing business internationally, including:
 
  •  imposition of tariffs or embargoes,
 
  •  trade barriers and disputes,
 
  •  regulations related to customs and export/import matters,
 
  •  fluctuations in foreign economies and currency exchange rates,
 
  •  longer payment cycles and difficulties in collecting accounts receivable,
 
  •  the complexity and necessity of using foreign representatives and consultants,
 
  •  tax uncertainties and unanticipated tax costs due to foreign taxing regimes,
 
  •  the difficulty of managing and operating an enterprise spanning several countries, including difficulties in maintaining effective communications with employees and customers due to distance, language and cultural barriers,
 
  •  the uncertainty of protection for intellectual property rights and differing legal systems generally,
 
  •  compliance with a variety of laws, and
 
  •  economic and geopolitical developments and conditions, including international hostilities, armed conflicts, acts of terrorism and governmental reactions, inflation, trade relationships and military and political alliances.
 
We may not be able to compete with companies that are larger and have more resources.
 
We compete in the highly competitive medical device and diagnostics marketplace and have several U.S. and foreign competitors, both publicly-traded and privately-held. Most of these companies have substantially greater financial, technical and research and development resources, established sales and marketing organizations and distribution networks, greater name recognition and longer-standing relationships with customers. Competitors with greater financial resources can be more aggressive in marketing campaigns, can survive sustained price reductions in order to gain market share, and can devote greater resources to support existing products and develop new products. Any period of sustained price reductions for our products would have a material adverse effect on the Company’s financial condition and results of operations. CytoCore may not be able to compete successfully in the future and competitive pressures may result in price reductions, loss of market share or otherwise have a material adverse effect on the Company’s financial condition and results of operations.
 
It is also possible that competing products will emerge that may be superior in quality, effectiveness and performance and/or less expensive than those of the Company, or that similar technologies may render CCI’s products obsolete or uncompetitive and prevent the Company from achieving or sustaining profitable operations. In addition, many of our competitors have significantly greater experience in conducting preclinical testing and clinical trials of products and obtaining regulatory approvals to market such products. Accordingly, our competitors may succeed in obtaining FDA approval for products more rapidly, which may give them an advantage in achieving market acceptance of their products.
 
We may not be able to market our products.
 
Our success and growth depend on the market acceptance of the SoftPAP collection device and the CytoCore Solutions System. We do not intend to maintain a direct sales force to market and sell our products. Therefore, in order to successfully market and sell our products, we must be able to negotiate profitable distribution, marketing and sales agreements with organizations that have direct sales forces calling on domestic and foreign market participants that may use our products. If we are not able to successfully negotiate such agreements, we may be


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forced to market our products through our own sales force. We cannot be certain that we will be successful in developing and training such a sales force, should one be required, or that we will have the financial resources to carry out such development and training.
 
The accuracy, performance and cost of our products are critical to our business and reputation, and we are subject to product liability.
 
As noted above, we are dependent on the sale of the SoftPAP collection device and the CytoCore Solutions System. Due in part to increased competitive pressures in the healthcare industry to reduce costs, our ability to gain market acceptance of our products will depend on our ability to keep product costs low and/or demonstrate that any increased cost of using our products is offset by the increased accuracy and performance achieved by using them. In particular, we need to convince healthcare providers, insurance companies and other third-party payers, as well as clinical laboratories, of the clinical benefits and cost-effectiveness of our products.
 
In addition, the sale and use of our products entail a risk of product failure, product liability or other claims. Coverage is becoming increasingly expensive, however, and we may not be able to obtain adequate coverage at an acceptable cost in the future. Any product liability claims and related litigation would likely be time-consuming and expensive, may not be adequately covered by our insurance coverage, and may delay or terminate research and development efforts, regulatory approvals and commercialization activities.
 
Occasionally, some of our products may have quality issues resulting from the design or manufacture of the product or, in the case of the AIPS platform, the hardware and software used in the product. Often these issues can be discovered prior to shipment and may result in shipping delays or even cancellation of orders by customers. Other times problems could be discovered after the products have shipped, which would require us to resolve issues in a manner that is timely and least disruptive to our customers. Such pre-shipment and post-shipment problems would have ramifications for CytoCore, including cancellation of orders, product returns, increased costs associated with product repair or replacement, and a negative impact on our goodwill and reputation.
 
We may not be able to adequately protect our intellectual property.
 
Our success in large part depends on our ability to maintain the proprietary nature of our technologies, trade secrets and other proprietary information. To protect our intellectual property and proprietary information, we rely primarily on patent, copyright, trademark and trade secret laws, as well as internal procedures and contractual provisions.
 
We hold a variety of patents and trademarks and have applied for a number of additional patents and trademarks with the U.S. Patent and Trademark Office and foreign patent authorities. We intend to file additional patent and trademark applications as dictated by our research and development projects and business interests. We cannot be certain that any of the currently pending patent or trademark applications, or any of those which may be filed in the future, will be granted or that they will provide any meaningful protection for our products or technologies or any competitive advantage. In order to provide protection, patents and trademarks must be enforced, which is costly and time-consuming, and trade secret and copyright laws afford only limited protection.
 
In addition, the laws and enforcement mechanisms of some foreign countries may not offer the same level of protection as do the laws of the United States. Legal protections of our rights may be ineffective in such countries, and technologies developed in such countries may not be protected in jurisdictions where protection is ordinarily available. Our inability to protect our intellectual property both in the United States and abroad would have a material adverse effect on our financial condition and results of operations.
 
We protect much of our core technology as trade secrets because our management believes that patent protection would not be possible or would be less effective than maintaining secrecy, and we have in place certain internal procedures and contractual provisions designed to maintain such secrecy. Despite our efforts to safeguard and maintain our proprietary rights, we may not be successful in doing so. The steps taken by us may be inadequate to deter unauthorized parties from misappropriating our technologies or prevent them from obtaining and using our proprietary information, products and technologies. Moreover, our competitors may independently develop similar technologies or design around patents issued to us.


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If we fail to protect, defend and maintain the intellectual property rights associated with our products or if we are subject to a third-party claim of infringement, the competitive position of our products could be impaired. We may be required to obtain licenses from third parties to avoid infringing third-party patents or other proprietary rights, yet there can be no assurance that such licenses would be available to us on acceptable terms, if at all. If we are unable to obtain required third-party licenses, we may be delayed in or prohibited from developing, manufacturing or selling products that require such licenses. In addition, infringement, interference and other intellectual property claims and proceedings, with or without merit, are expensive and time-consuming to litigate, divert resources, and could adversely affect our business, financial condition and operating results.
 
We may not be able to maintain effective product distribution channels.
 
We currently rely primarily on third-party distributors for the sale and distribution of our products. Our relationships with these distributors, therefore, must remain positive. We have a limited a history of working with these companies and have only limited control over their performance. We cannot predict the success of these relationships or the efforts of these companies in marketing the SoftPAP and our other products. Our sales and marketing efforts, including those of our distributors, may not be sufficient to successfully compete against more extensive and well-funded operations of certain of our competitors. None of our existing distributors purchased any product from us in 2009. In addition, we must manage sales and marketing personnel in numerous countries around the world with the concomitant difficulties in maintaining effective communications due to distance, language and cultural barriers.
 
Our quarterly operating results may fluctuate and our future revenues and profitability are uncertain.
 
We anticipate substantial fluctuations in our future operating results. A number of factors contribute to such fluctuations, including but not limited to:
 
  •  introduction and market acceptance of new products and product enhancements by both CytoCore and our competitors,
 
  •  timing and execution of distribution and sale contracts,
 
  •  competitive conditions in the medical device and diagnostic markets,
 
  •  product development, sales and marketing expenses,
 
  •  third-party reimbursement levels, and
 
  •  changes in general economic conditions.
 
The loss of existing key management and technical personnel or the inability to attract new hires could have a detrimental effect on the Company.
 
Our success depends on identifying, hiring, training, and retaining qualified professionals. Competition for qualified employees in our industry is intense and we expect this to remain so for the foreseeable future. If we were unable to attract and hire a sufficient number of employees, or if a significant number of our current employees or any of our senior managers resign, we may be unable to complete or maintain existing projects or develop and implement new projects of similar scope and revenue. The Company’s success is particularly dependent on the retention of existing management and technical personnel, including Robert F. McCullough, Jr., the Company’s Chief Executive Officer and Chief Financial Officer, and Richard A. Domanik, Ph.D., the Company’s Chief Operating Officer. The loss or unavailability of the services of these executives could impede our ability to effectively manage our operations.
 
We may need to expand our operations and we may not effectively manage any future growth.
 
As of December 31, 2009, we employed six full-time persons. In the event our products and services obtain greater market acceptance, we may be required to expand our management team and hire and train additional technical and skilled personnel. We may need to scale up our operations in order to service our customers, which may strain our resources, and we may be unable to manage our growth effectively. If our systems, procedures, and


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controls are inadequate to support our operations, growth could be delayed or halted, and we could lose our opportunity to gain significant market share. In order to achieve and manage growth effectively, we must continue to improve and expand our operational and financial management capabilities. Any inability to manage growth effectively could have a material adverse effect on our business, results of operations, and financial condition.
 
Risks Related to Our Common Stock
 
There is a limited market for “penny stocks” such as our common stock.
 
Our common stock is considered a “penny stock” because, among other things, its trading price is below $5.00 per share. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares. In addition, since our common stock is currently traded on the Over-the-Counter Bulletin Board, investors may find it difficult to obtain accurate quotations of our common stock and may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price. Being a penny stock also could limit the liquidity of our common stock and limit the coverage of our stock by analysts.
 
The historically volatile market price of our common stock may affect the value of our stockholders’ investments.
 
The market price of our common stock, like that of many other life science and biotechnology companies, has in the past been highly volatile. In fiscal year 2009, the price of our common stock traded in a range of $0.08 to $0.75. This volatility is likely to continue for the foreseeable future. Factors affecting potential volatility include:
 
  •  announcements of new products or technology by us or our competitors;
 
  •  announcements of the FDA relating to products and product approvals;
 
  •  announcements of private or public sales of securities;
 
  •  ability to finance our operations;
 
  •  announcements of mergers, acquisitions, licenses and strategic agreements;
 
  •  fluctuations in operating results; and
 
  •  general economic and other external market factors.
 
In addition, the occurrence of any of the risks described in this Risk Factors section could have a material adverse impact on the price of our common stock.
 
Our common stock is unlikely to produce dividend income for the foreseeable future.
 
We have never declared or paid a cash dividend or distribution on our common stock and we do not anticipate doing so for the foreseeable future; our ability to declare dividends on our common stock is further limited by the terms of certain of the Company’s other securities, including several series of its preferred stock. We intend to reinvest any funds that might otherwise be available for the payment of dividends in the further development of our business.
 
We are authorized to issue up to 10,000,000 shares of preferred stock. As of December 31, 2009, we had 47,250 shares of Series A convertible preferred stock outstanding, which convert into approximately 2,064 shares of our common stock; 93,750 shares of Series B convertible preferred stock outstanding, which convert into approximately 37,500 shares of our common stock; 38,333 shares of Series C convertible preferred stock outstanding, which convert into approximately 19,167 shares of our common stock; 175,000 shares of Series D convertible preferred stock outstanding, which convert into approximately 175,000 shares of our common stock; and 19,222 shares of Series E convertible preferred stock outstanding, which convert into approximately 52,861 shares of our common stock. There are cumulative dividends due on the Series B, Series C, Series D,


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and Series E convertible preferred stock, which may be paid in kind in shares of our common stock. Our Certificate of Incorporation (as amended to date) gives our Board of Directors authority to issue the remaining 5,143,137 undesignated shares of preferred stock with such voting rights, if any, designations, rights, preferences and limitations as the Board may determine. Any such sale of Company securities would have a dilutive effect on the holdings of our stockholders and the value of our common stock. We cannot be certain what level of dilution, if any, may occur or if we will be able to complete any such sales of common stock or other securities in the future.
 
At December 31, 2009, we had outstanding warrants to purchase an aggregate 3,461,197 shares of our common stock and outstanding options to purchase 10,000 shares of our common stock.
 
The issuance of shares of our common stock upon the conversion of our preferred stock, or upon exercise of outstanding options and warrants, would cause dilution of existing stockholders’ percentage ownership of the Company. Holders of our common stock do not have preemptive rights, meaning that current stockholders do not have the right to purchase any new shares in order to maintain their proportionate ownership in the Company. Such stock issuances and the resulting dilution could also adversely affect the price of our common stock.
 
Investors may find it difficult to trade or obtain quotations for our common stock.
 
Although our common stock is quoted on the OTCBB, trading of our common stock is limited. There can be no assurance a more active market for our common stock will develop. Accordingly, investors must bear the economic risk of an investment in our common stock for an indefinite period of time. Even if an active market develops, Rule 144 promulgated under the Securities Act of 1933, as amended, which provides for an exemption from the registration requirements under such Act under certain conditions, requires, among other conditions, a holding period prior to the resale (in limited amounts) of securities acquired in a non-public offering without having to satisfy the registration requirements under the Act. We may not be able to fulfill our reporting requirements in the future under, or disseminate to the public any current financial or other information concerning us, as is required by Rule 144 as part of the conditions of its availability.
 
Our authorized share capital may be used as an anti-takeover device.
 
The Company currently has authorized for issuance 500 million shares of its common stock. The Board of Directors has the authority to issue a significant number of shares of our common stock without further stockholder approval. This may have an anti-takeover effect of delaying or preventing a change of control without further action by our stockholders.
 
If we are late in our filings with the SEC again our stock may be de-listed from the OTCBB and would be traded on the Pink Sheets.
 
If our shares become quoted on the Pink Sheets an investment in our common stock may be illiquid and investors may not be able to liquidate their investment readily or at all when they desire to sell. Many institutional investors have investment policies which prohibit them from trading in stocks on the Pink Sheets. As a result, shares quoted on the Pink Sheets generally have limited trading volume and exhibit a wide spread between the bid/ask quotations than stock traded on national exchanges. Quotation of our securities on the Pink Sheets may limit the liquidity and price of our securities more than if our securities were quoted or listed on the OTC Bulletin Board, the Nasdaq Stock Market or a national exchange. These factors may have an adverse impact on the trading and price of our Common Stock.
 
The accounting for stock-based compensation has reduced and may continue to reduce our reported earnings, which could result in a decline in our stock price.
 
As part of our compensation to employees, directors and consultants, we issue equity awards, primarily in the form of stock options and warrants. Many of the companies within our industry and with whom we compete for skilled employees use stock-based compensation as a means to attract personnel, although not all do and many do not issue the same level of awards. In particular, during the periods when the Company faces severe cash constraints, it uses equity awards in lieu of salary to compensate employees and others. In addition, if we unexpectedly hire additional employees the impact of the accounting standards on stock based compensation may be more significant for us. To the extent investors believe the costs incurred for stock-based compensation by CCI are higher than those incurred by other companies, our stock price could be negatively impacted.


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Item 1B.   Unresolved Staff Comments
 
Not applicable.
 
Item 2.   Properties
 
We occupy approximately 5,627 square feet of leased space at 414 N. Orleans St., Suites 503 and 510, Chicago, Illinois 60654, under a five-year lease that expires in October 2013. This space houses our executive offices, research laboratory, and engineering development facilities. We consider our facilities to be well utilized, well maintained, and in good operating condition. Further, we consider the facilities to be suitable for their intended purposes and to have capacities adequate to meet current and projected needs for our operations.
 
Item 3.   Legal Proceedings
 
Legal Proceedings
 
Settled in 2009
 
NeoMed Innovation III L.P.  In October 2007, NeoMed Innovation III L.P. (“NeoMed”) filed suit against the Company in the United State District Court, Eastern District of Illinois (Case No. 07C 5721). NeoMed alleged that the Company breached a contract with NeoMed. The alleged contract provided among other things that the Company would exchange two existing notes for a new note in the principal amount of $1,110,000 with an interest rate of 12%, payable on July 31, 2003 at the option of the holder in the form of common stock valued at $1.50 (adjusted for stock splits and equity raised at lower valuations). In 2006, the Company paid to NeoMed $1,060,000 and accrued interest calculated at 7% totaling $318,913. Despite accepting this payment, NeoMed demanded that the Company honor the alleged contract.
 
In April 2009, the Company entered into a tentative settlement agreement with NeoMed. The terms of the agreement provided that the Company would issue to NeoMed 2,658,800 shares of restricted, unregistered common stock and a warrant to purchase 217,000 shares of restricted unregistered common stock at an exercise price of $0.50 per share. As a result of the tentative settlement, the Company made an additional provision totaling $948,000, which was charged to other expense in the first quarter of 2009. In February 2010, the settlement agreement was approved by the court and CCI issued 2,658,800 shares of restricted unregistered common stock and a warrant to purchase 217,000 shares of restricted unregistered common stock to NeoMed. The warrant has a term of three years and is exercisable immediately. As a result of the settlement becoming final, CCI reduced the $948,000 provision to $222,000 in the fourth quarter of fiscal 2009. The $726,000 credit was applied to other expense.
 
Pending as of December 31, 2009
 
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 asking for payment of $377,000. The Company believes that it has made adequate provision for any obligation to MedPlast.
 
Wildman, Harrold, Allen & Dixon LLP.  In November 2009, Wildman, Harrold, Allen & Dixon (“Wildman”) filed suit against the Company in the Circuit Court of Cook County Illinois (Case No. 2009-L-013902). Wildman alleged that the Company failed to pay for legal services in the amount of $41,407.03. In January 2010, the Company entered into a Confession of Judgment and a payment plan with Wildman. The payment plan provides for an initial payment of $5,000 in January 2010, two payments of $1,500 each in February and March 2010, two payments of $2,500 each in April and May 2010, two payments of $4,000 each in June and July 2010, one payment of $10,203 in August 2010 and a final payment of $10,203 in September 2010. The Company has made all of the required payments to date.
 
Securities and Exchange Commission Subpoenas
 
SEC action.  The Company received subpoenas dated June 29, 2009, July 24, 2009 and March 2, 2010 (the “Subpoenas”) from the Securities and Exchange Commission (the “Commission”). The Subpoenas request documents pertinent to the Company’s procedures to raise equity in 2008 and 2009, as well as personal information including trading records of insiders and certain other documents relating to the Company’s operations. CCI has


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submitted to the Commission the requested documents. The Company does not know what, if any, action the Commission intends to take at this time.
 
Other claims
 
Other Creditors.  CCI was 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.
 
In 2009, a vendor entered into a non-cash settlement releasing the Company from an obligation totaling $457,000. The settlement was recorded as a reduction in research and development expense in the fourth quarter.
 
PART II
 
Item 4.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our common stock was quoted on the Over-the-Counter Bulletin Board under the symbol “CYOE.OB”; since April 16, 2010 it has been quoted under the symbol “CYOEE.OB”. The following table lists the high and low bid information for our common stock for the periods indicated, as reported on the Over-the-Counter Bulletin Board. These quotations reflect inter-dealer prices, may not include retail mark-ups, mark-downs, or commissions, and may not reflect actual transactions.
 
                 
    Range of Common
    Stock
    High   Low
 
Year Ended December 31, 2009
               
1st Quarter
  $ 0.84     $ 0.34  
2nd Quarter
  $ 0.47     $ 0.25  
3rd Quarter
  $ 0.33     $ 0.08  
4th Quarter
  $ 0.30     $ 0.05  
Year Ended December 31, 2008
               
1st Quarter
  $ 4.08     $ 1.75  
2nd Quarter
  $ 3.10     $ 1.90  
3rd Quarter
  $ 2.15     $ 0.55  
4th Quarter
  $ 0.79     $ 0.15  
 
Holders
 
As of May 7, 2010, we had approximately 382 record holders of shares of our common stock. This number does not include other persons who may hold only a beneficial interest, and not an interest of record, in our common stock.
 
Dividends
 
We have not paid a cash dividend on shares of our common stock, and the Board of Directors is not contemplating paying dividends at any time in the foreseeable future. The terms of certain of the Company’s securities, including its Series B, C, D and E preferred stock, provide that so long as such security is outstanding the Company shall not declare any dividends on its common stock (or any other stock junior to such security) except for dividends payable in shares of stock of the Company of any class junior to such security, or redeem or purchase or permit any subsidiary to purchase any shares of common stock or such junior stock, or make any distributions of cash or property among the holders of the common stock or any junior stock by the reduction of capital stock or otherwise, if any dividends on the security are then in arrears.


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We paid non-cash dividends, in the form of newly issued shares of our common stock, amounting to $7.00 and $58,000 during 2009 and 2008, respectively, to holders of shares of our preferred stock who elected to convert their preferred stock and cumulative dividends thereon into shares of our common stock. We have a contingent obligation to pay cumulative dividends on various series of our convertible preferred stock in the aggregate amount of approximately $2,205,000 at December 31, 2009, which we intend to pay through the issuance of shares of our common stock, if and when the holders of the preferred shares elect to convert their shares into common stock.
 
Stock Transfer Agent
 
Our stock transfer agent is BNY Mellon Investor Services, 480 Washington Boulevard, Jersey City, NJ 07310 and its telephone number is (800) 522-6645.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The following table presents information about the equity compensation plans of the Company as of the fiscal-year ended December 31, 2009. See also Note 7 — Stockholders’ Equity and Note 8 — Equity Incentive Plan and Employee Stock Purchase Plan in the Notes to our Consolidated Financial Statements for further information.
 
Equity Compensation Plan Information
 
                         
                Number of Securities
 
    Number of Securities
          Remaining Available for Future
 
    to be Issued upon
    Weighted-Average
    Issuance Under Equity
 
    Exercise of Outstanding
    Exercise Price of
    Compensation Plans
 
    Options, Warrants and
    Outstanding Options,
    (Excluding Securities Reflected
 
    Rights
    Warrants and Rights
    in Column (a))
 
Plan Category
  (a)     (b)     (c)  
 
Equity Compensation Plans Approved by Security Holders
                       
1999 Equity Incentive Plan (as amended) — Terminated in 2009
    10,000     $ 2.97        
Equity Compensation Plans Not Approved by Security Holders
                       
Warrants issued with debt and equity(1)
    2,173,930     $ 1.93        
Warrants issued for financial and IR services(2)
    283,266     $ 2.25        
Warrants issued for officer, director and employee compensation(3)
    802,000     $ 2.05        
Warrants issued in forgiveness of debt and other services(4)
    202,001     $ 1.63        
                         
Total
    3,471,197     $ 1.96        
                         
 
 
1) CCI has issued warrants in conjunction with the issuance of debt and equity. The issuance of warrants significantly reduces the cash costs that would otherwise be associated with raising capital.
 
2) CCI has included warrants in agreements for providers of investor relations and/or public relations services. Warrants were also issued to financial advisors as remuneration for the procurement of equity, debt and preferred stock convertible into equity. This practice significantly reduces the cash costs to CCI to obtain these services.
 
3) CCI has issued warrants in lieu of cash payment for employment services, for achieving certain goals or for other corporate reasons. During fiscal year 2009, a non-executive employee was issued 13,000 warrants.


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4) CCI has issued warrants to settle debt and pay for services rendered. The issuance of warrants significantly reduces the cash costs that would otherwise be associated with the settlement of such debt or payment for such services.
 
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
 
Issuance of Securities
 
Common Stock
 
During fiscal 2009, CCI offered capital stock to foreign and accredited investors for cash and to directors, employees and consultants as payment for services rendered in lieu of cash payments.
 
On March 23, 2009, the Company offered to all holders of warrants to purchase shares of the Company’s common stock the option to exercise their warrants at a reduced exercise price of $0.25 per share. The original offer expired on April 23, 2009 and was subsequently extended until May 23, 2009. During the year ended December 31, 2009, the Company received gross proceeds of $214,000 from the exercise of warrants for an aggregate 854,371 shares of unregistered, restricted common stock in connection with its offer. In addition, our former Chairman of the Board of Directors and our Chief Executive Officer exercised warrants to purchase an aggregate 670,000 share of unregistered restricted common stock through the reduction of $168,000 of debt. CCI recorded a charge of $21,000 related to this warrant modification and recorded the amount as interest expense. In addition, holders of warrants to purchase 28,292 exercised their warrants at the original exercise price. CCI received approximately $56,000 from these exercises.
 
For the year ended December 31, 2009, CCI received proceeds totaling $270,000 and reduced its debt by $168,000 from the exercise of warrants to purchase an aggregate 1,552,663 shares of unregistered, restricted common stock. As of December 31, 2009, 683,049 shares were not yet issued by the transfer agent.
 
In the first quarter of the 2009 fiscal year, as described in Note 8 in the Notes to the Consolidated Financial Statements included herewith, the Company issued to two of its executive officers an aggregate 61,144 shares of restricted, unregistered common stock valued at $0.50 per share as compensation for services rendered in 2008. The shares were valued at $31,000, and such amount was recorded as compensation in 2008.
 
During the year ended December 31, 2009, Board of Directors voted to accept, in lieu of payment for $311,000 due to them, 778,194 shares of restricted, unregistered common stock. The common stock was valued at $0.40 per share. The shares were not issued by the transfer agent.
 
CCI issued 16,129 shares of restricted, unregistered common stock valued at $0.31 per share to a consultant as payment for services rendered. The Company recorded the value of the common stock at $5,000 and recorded the amount as a selling, general and administrative expense.
 
Also during 2009, the Board of Directors granted each director a bonus of 100,000 shares of restricted, unregistered common stock for services rendered. The shares granted totaled 700,000 and were valued at $0.40 per share. The Company recorded a charge of $280,000 as a selling, general and administrative expense. These shares have not been issued.
 
Warrants
 
During the three months ended December 31, 2009, the Company issued warrants to purchase 2,000 shares of common stock with an exercise price of $0.04 per share to an employee. During the year ended December 31, 2009, the Company issued warrants to purchase 13,000 shares of common stock with a weighted average exercise price of $0.16 per share to an employee. CCI valued the warrants at $2,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation expense. These warrants have a term of three years and are immediately exercisable.


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Conversions of Preferred Stock
 
During the year ended December 31, 2009, a holder of four shares of Series E Convertible Preferred Stock of CCI elected to convert such preferred shares and accrued and unpaid dividends thereon into 20 unregistered shares of the Company’s common stock. Dividends on these preferred shares were $7.00.
 
Please refer to Note 7 — Stockholders’ Equity in the Notes to our Consolidated Financial Statements for more information on the Company’s preferred stock.
 
Exemptions
 
CCI issued such securities in reliance on the safe harbor and exemptions from registration provided under Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended, and Regulation S for sales to foreign investors. No advertising or general solicitation was employed in offering the securities. The offerings and sales or issuances were made to a limited number of persons, all of whom were accredited and/or foreign investors, and transfer was restricted by the Company in accordance with the requirements of applicable law. In addition to representations by the above-referenced persons, the Company made independent determinations such that it reasonably believed that all of the investors were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, these investors were provided with access to CCI’s filings with the Securities and Exchange Commission.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
Not applicable.
 
Item 5.   Selected Financial Data
 
The information below was derived from the audited consolidated financial statements included in this report and in previous annual reports filed with the Commission. This information should be read together with the consolidated financial statements and the notes thereto included in such reports. Historical results are not necessarily indicative of the results to be expected in the future.
 
                                         
    2009     2008     2007     2006     2005  
    Dollars in thousands  
 
Net Sales
  $ 44     $ 125     $ 83     $ 94     $ 117  
Operating Expenses
                                       
Cost of revenues
    (3 )     (81 )     (30 )     (19 )     (21 )
Provision for inventory valuations
    400                          
Research and development
    85       (1,852 )     (2,599 )     (854 )     100  
Selling, general and administrative
    (3,022 )     (4,301 )     (5,060 )     (3,967 )     (1,306 )
Selling, general and administrative — related parties
          (263 )     (239 )            
                                         
Total cost and expenses
    (3,340 )     (6,497 )     (7,928 )     (4,840 )     (1,267 )
                                         
Operating Loss
  $ (3,296 )   $ (6,372 )   $ (7,845 )   $ (4,746 )   $ (1,150 )
                                         
Basic and fully diluted net loss per common share(1)
  $ (0.07 )   $ (0.16 )   $ (0.24 )   $ (0.30 )   $ (0.40 )
 
 
(1) Reflects the one-for-ten reverse stock split effected on November 27, 2007. Prior periods have been restated to reflect the reverse stock split.
 
Item 6.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
 
Certain statements contained in this discussion and analysis that are not related to historical results are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.


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Statements that are predictive, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “hopes,” or similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, or possible future actions by us are also forward-looking statements.
 
These forward-looking statements are based on beliefs of our management as well as current expectations, projections and information currently available to the Company and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated or implied by such forward-looking statements. These risks are described more fully under the caption “Risk Factors” herein and include our ability to raise capital; our ability to settle litigation; our ability to retain key employees; 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.
 
Should one or more of such risks or uncertainties materialize or should underlying expectations, projections or assumptions prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult to predict accurately and many are beyond our control. We believe that our expectations with regard to forward-looking statements are based upon reasonable assumptions within the bounds of our current business and operational knowledge, but we cannot be sure that our actual results or performance will conform to any future results or performance expressed or implied by any forward-looking statements. We assume no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of these statements except as specifically required by law. Accordingly, past results and trends should not be used to anticipate future results or trends.
 
Overview
 
CCI is developing 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 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 an FDA-cleared sample collection device and are developing and testing stains and reagents for use with the AIPS system 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 some, or all, of our products.
 
We launched sales of our current product SoftPAP® cervical cell collector in the fourth quarter of fiscal 2007. We believe the revenues from this device along with additional capital will allow us to complete the development of the other components of the CytoCore Solutions System, including the AIPStm Workstation, AIPS Imagertm, and genetic biological markers used for the development of the various protein antibodies that allow for the detection of abnormal cervical, uterine, endometrial and bladder cancer cells.


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The Company has incurred significant operating losses since its inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement its business plan and to develop, manufacture and market its products. Implementation of the Company’s plans will be contingent upon it securing substantial additional financing. During the year ended December 31, 2009, CCI raised approximately $1.2 million through the exercise of stock warrants and advances from related parties. For CCI to successfully implement its business plan, CCI will have to obtain additional capital. If the Company is unable to obtain additional capital or generate profitable sales revenues, it may be required to curtail product development and other activities and may have to cease operations. No assurances can be given about the Company’s 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 Significant Judgments and Estimates
 
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.
 
We believe that the following critical accounting policies affect our more significant estimates and judgments used in the preparation of our consolidated financial statements:
 
Revenue Recognition.  CCI recognizes revenue from product sales when the following criteria are met: shipment of a product or license to customers has occurred and there are no remaining Company obligations or contingencies; persuasive evidence of an arrangement exists; sufficient vendor-specific, objective evidence exists to support allocating the total fee to all elements of the arrangement; the fee is fixed or determinable; and collection is probable.
 
Share-Based Payment.  Financial Accounting Standards Board Codification 718-10, establishes accounting standards for transactions in which a company exchanges its equity instruments for goods or services. In particular, this statement requires that all share-based payments, such as employee stock options or warrants, be reflected as an expense based upon grant-date fair value of those awards. The expense is recognized over the remaining vesting period of the awards. The Company estimates the fair value of these awards using the Black-Scholes model. This model requires management to make certain estimates in the assumptions used in this model, including the expected term the award will be held, volatility of the underlying common stock, discount rate and forfeiture rate. We develop our assumptions based on our past historical trends and consider changes for future expectations.
 
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.
 
Results of Operations
 
Fiscal Year Ended December 31, 2009 as compared to Fiscal Year Ended December 31, 2008
 
Revenue
 
Revenues of $44,000 for the fiscal year ended December 31, 2009 represented a decrease of $81,000, or 65%, from revenues of $125,000 in fiscal 2008. The decrease was a result of decreased sales of our SoftPAP cervical cell collector totaling $56,000, a reduction in service revenue of $1,000, and a reduction in licensing fees of $24,000.


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Costs and Expenses
 
Cost of Revenues
 
For the year ended December 31, 2009, cost of revenues totaled $3,000, a decrease of $78,000 or 96% over cost of revenues of $81,000 for the year ended December 31, 2008. Cost of revenues represents the cost of the product sold, freight, and other costs of selling our products.
 
Also, CCI recorded a provision for inventory adjustment to market of its finished goods inventory totaling $400,000 for the year ended December 31, 2009.
 
Research and Development
 
For the 2009 fiscal year, research and development expenses were $372,000 before a reduction of $457,000 from a non-cash settlement with a vendor, resulting in a net credit balance of $85,000. Expenses for 2008 were $1,852,000. Of the $1,937,000 decrease in R&D expenses, $791,000 resulted from the completion of clinical trials, $457,000 resulted from the non-cash settlement with a vendor, $168,000 related to reduced fees paid to medical consultants, $110,000 related to reduced personnel costs, $107,000 related to costs incurred for the ongoing improvement of the SoftPAP cervical collection device, $255,000 related to the development of the AIPS Workstation, $25,000 related to a reduction in licensing fees and $24,000 related to decreases in other costs.
 
Research and development expenses include industrial design and engineering covering the disposable and instrument components of CytoCore Solutions System, payments to medical and engineering consultants for advice related to the design and development of our products and their potential uses in the medical technology marketplace, and payroll-related costs for in-house engineering, scientific, laboratory, software development, and research management staff.
 
Selling, General and Administrative
 
For the year ended December 31, 2009, selling, general and administrative expenses were $3,022,000, a 34% decrease over SG&A expenses of $4,564,000 for the year ended December 31, 2008. Of this $1,542,000 decrease, $748,000 related to a reduction in employee compensation expense. Of the $748,000 reduction in compensation expense, $529,000 relates to a reduction of sales and marketing personnel and $219,000 in reductions of administrative employees. The remaining $794,000 included reductions of $299,000 in professional fees for legal and accounting services, $239,000 in consultant expenses, $255,000 in investor and public relations expenses, $154,000 in temporary help, $160,000 relating to a reduction in marketing costs, $117,000 in travel expenses, $29,000 in insurance expense, $15,000 in office supplies, $23,000 in trade shows, $13,000 in employee recruitment and training costs, $12,000 in filing costs, $7,000 in bad debt expense, and $58,000 in other costs. These reductions were partially offset by increases including a $293,000 increase in directors’ fees, a $154,000 increase in depreciation expense of equipment and tooling, $54,000 in franchise taxes, $42,000 for amortization of a license, $38,000 in rent expense, and $6,000 in information technology costs.
 
Other Income (Expense)
 
There was no interest income for the year ended December 31, 2009. Interest income was $53,000 for the year ended December 31, 2008.
 
Interest expense increased by $24,000 to $34,000 for the year ended December 31, 2009. This increase resulted from a non-cash charge related to the Company’s warrant price modification.
 
The Company recorded a non-cash charge of $222,000 for the year ended December 31, 2009 resulting from a preliminary legal settlement as described in Item 3 herein.
 
Net Loss
 
The net loss for the year ended December 31, 2009, before preferred dividends, totaled $3,552,000, as compared to $6,328,000 for 2008, a decrease of $2,776,000 or 44%. Of this decrease, $1,937,000 related to reduced R&D costs, $1,542,000 related to decreases in SG&A expenses and $3,000 represented a decrease from cost of


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revenues exceeding revenues. These decreases were partially offset by an increase of $222,000 resulting from the cost of a legal settlement, a provision for inventory valuation totaling $400,000, interest expense and a reduction of interest income.
 
The net loss applicable to common stockholders decreased to $3,552,000 for the year ended December 31, 2009 from $6,386,000 for the year ended December 31, 2008, a decrease of $2,834,000 or 44%. In addition to the changes reported above, cumulative dividends on the Company’s outstanding Series B and Series E convertible preferred stock converted into common stock totaled $58,000 for the year ended December 31, 2008 compared with $7.00 in 2009. The net loss per common share for each of the years ended December 31, 2009 and December 31, 2008 was $0.08 and $0.16, respectively, on 41,874,890 and 39,984,394 weighted average common shares outstanding, respectively.
 
Liquidity and Capital Resources
 
The Company’s capital resources and liquidity are generated primarily from investments by 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 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 provided operating funds for the business since its inception through private offerings of debt and equity securities to limited numbers of U.S. and foreign investors. We will be required to make additional offerings in the future to support the operations of the business until we are able to generate sufficient income from the sale of our products. We used $1,637,000 and $7,118,000 during 2009 and 2008, respectively, to fund our operating activities. We also used $71,000 and $1,683,000 in 2009 and 2008, respectively, for the purchase of a license and of tooling and equipment.
 
At December 31, 2009, we had checks issued in excess of cash on hand totaling $5,000 as compared to $553,000 cash on hand at the beginning of the period. We were able to raise $1,155,000 through the exercise of warrants and proceeds of advances from related parties during the fiscal year ended December 31, 2009. This cash was used to fund operations, including research and development activities, and the purchase of a license. We currently have enough cash on hand to fund operations into June, 2010. We continue to meet with qualified investors and believe we will be able to raise capital through the issuance of a new Series F Convertible Preferred Stock to fund operations in the immediate future until we can be self-sufficient through profitable operations, although no assurance can be given about the Company’s ability to obtain such capital. We did not have any material commitments for capital expenditures as of December 31, 2009.
 
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. 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 the Company is unable to obtain adequate additional financing or generate profitable sales revenue, or negotiate a favorable settlement plan with creditors, it may be unable to continue its 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
 
The Company does not have any off-balance sheet arrangements.
 
Item 6A.   Quantitative and Qualitative Disclosures about Market Risk
 
The Company is exposed to market risk in the normal course of its business operations, including the risk of loss arising from adverse changes in interest rates and foreign exchange rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes, or engage in any hedging activities.


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We are headquartered in the United States where we conduct the majority of our business activities, although we do have distribution agreements with several distributors in Europe. We have not to date had any material exposure to foreign currency rate fluctuations. Nevertheless, because a portion of the Company’s revenues may be generated outside of the United States in currencies other than the United States dollar, the Company’s operations may be subject to changes in foreign exchange rates and changes in the value of the United States dollar against other currencies, which changes could affect the Company’s net earnings.
 
As of December 31, 2009, we had total debt of $70,000, of which $36,000 bears interest at fixed interest rates and $34,000 bears interest at a variable rate. As of December 31, 2009, we did not have any cash, cash equivalents and short-term investments. Due to our lack of material long-term debt and anticipated capital expenditures, we do not believe that we currently face any material interest risk exposure.
 
Item 7.   Financial Statements and Supplementary Data
 
Our consolidated financial statements for the years ended December 31, 2009 and 2008, together with the report of L J Soldinger Associates LLC dated May 14, 2010, and the notes thereto, are filed as part of this Annual Report on Form 10-K commencing on page F-1 and are incorporated herein by reference.
 
Item 8.   Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
None.
 
Item 8A.   Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our chief executive and financial officer, we evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, our chief executive and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act”), is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.
 
Management’s Annual Report on Internal Control Over Financial Reporting
 
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and disclosure controls and procedures. Internal controls over financial reporting are designed to provide reasonable assurance that the Company’s books and records reflect the transactions of the Company and that established policies and procedures are carefully followed. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Exchange Act is appropriately recorded, processed, summarized and reported within the specified time periods. An important feature of the Company’s system of internal control over financial reporting and disclosure controls is that both are continually reviewed for effectiveness and are augmented by written policies and guidelines.
 
Management has conducted an evaluation of the Company’s internal control over financial reporting using the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as a basis to evaluate effectiveness and determined that internal control over financial reporting was effective as of the end of the fiscal year ended December 31, 2009.
 
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.


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Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting during the fourth fiscal quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 8B.   Other Information
 
None.
 
PART III
 
Item 9.   Directors, Executive Officers, and Corporate Governance
 
The Board of Directors and Executive Officers
 
                     
            Director
Name
 
Age
 
Positions and Offices, if any, Held with the Company
 
Since
 
Current Directors
                   
Robert F. McCullough, Jr. 
    55     Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors     2005  
John H. Abeles, M.D. 
    65     Director     1999  
Alexander M. Milley
    57     Director     1989  
Clinton H. Severson
    62     Director     2006  
Current Executive Officer
                   
Richard A. Domanik, Ph.D. 
    63     Chief Operating Officer      
 
Directors
 
Robert F. McCullough, Jr. was elected Chief Financial Officer and director of the Company in September 2005 and Chief Executive Officer of the Company in October 2007. Mr. McCullough was appointed to serve as Chairman of the Board of Directors on April 21, 2009 to fill the vacancy created by the resignation of Daniel J. Burns as such on that date. In addition, Mr. McCullough currently serves as President and as a Portfolio Manager of Summitcrest Capital, Inc., a money management firm and registered investment adviser, a position he has held since October 2003. From April 1999 to July 2003, Mr. McCullough served as a Portfolio Manager at Presidio Management, a money management firm. Prior thereto, Mr. McCullough served as a manager with the accounting firm of Ernst & Whinney (now Ernst & Young) and also served as a financial analyst, a portfolio manager and a Chief Financial Officer of several private companies. Mr. McCullough has an Masters of Business Administration in finance and is a Certified Public Accountant. Mr. McCullough’s financial and accounting education and experience contributed to his nomination as a director and appointment as CFO, and his leadership and finance experience supported his appointment as CEO of the Company. Mr. McCullogh’s qualifications as a director and executive officer of the Company include his management experience, business acumen and investment expertise.
 
John H. Abeles, M.D. has been a director of the Company since May 1999. Dr. Abeles is President of MedVest, Inc., a venture capital and consulting firm he founded in 1980. He is also General Partner of Northlea Partners, Ltd., a family investment partnership. Dr. Abeles was a senior medical executive at Sterling Drug Company, Pfizer, Inc. and Revlon Healthcare, Inc. and subsequently was a medical analyst at Kidder, Peabody & Co. Dr. Abeles is a director of a number of companies operating in the medical device and healthcare fields, including publicly-traded companies DUSA Pharmaceuticals, Inc. and CombiMatrix Corp. Dr. Abeles has also served as a director of I-Flow Corporation (now a subsidiary of Kimberly Clark Corporation) and Oryx Technology Corp. The Company believes that Dr. Abeles’ medical education, venture capital and finance experience, and industry work experience with several leading medical and pharmaceutical companies make him qualified to serve as a director of the Company.
 
Alexander M. Milley has been a director of the Company (including its predecessors) since 1989. Mr. Milley is currently President, Chief Executive Officer and Chairman of the Board of ELXSI Corp., a publicly-held holding company with subsidiaries operating in the restaurant and environmental inspection equipment industries.


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Mr. Milley has served as Chairman and CEO of ELXSI since September 1989, and was elected President of that company in August 1990. He is also President and Chairman of the Board of Azimuth Corporation, a holding company with subsidiaries operating in the trade show exhibit, retail environment design, and electrical components and fastener distribution industries. Mr. Milley was Chairman of the Board and Chief Executive Officer of Bell National Corporation, a predecessor of the Company, until December 1998 and was President of Bell National from August 1990 until December 1998. Mr. Milley is the founder, President, sole director and majority stockholder of Milley Management, Inc., a private investment and management-consulting firm. Mr. Milley is also the President and a director of Cadmus Corporation, a private investment and management consulting firm, and a director and executive officer of Winchester National, Inc. Mr. Milley has had over 20 years experience with the Company and its predecessors and has extensive finance, management, marketing, and leadership experience with multiple companies across a broad variety of industries, including a publicly-traded company serving several different markets, all of which make him qualified to serve as a director of the Company.
 
Clinton H. Severson was elected to the Board of Directors in November 2006. Mr. Severson has served as President, Chief Executive Officer and a director of the Board of Directors of Abaxis, Inc., a northern California-based provider of portable technology, tools and services used for medical diagnostics sold to customers and distributors worldwide, since 1996. Prior to his assuming the CEO position of Abaxis, where he was appointed Chairman of the Board in 1998, Mr. Severson served as President and CEO for over seven years at MAST Immunosystems, Inc., a privately-held medical diagnostic company. The Board believes that Mr. Severson’s industry and work experience, coupled with his global, leadership and finance experience as the chief executive of both publicly-traded and privately-held companies, make him qualified to serve as a director of the Company.
 
Executive Officer
 
Richard A. Domanik, Ph.D. was appointed President of the Company in May 2007 and served in that capacity until August 2008. He was appointed Chief Operating Officer in October 2007 and continues to serve in that capacity. Since 2001, Dr. Domanik has been the principal at R. Domanik Consulting, Inc., a consulting firm specializing in the development and manufacture of medical and clinical diagnostic devices and instruments and intellectual property management. Between 2002 and 2006, Dr. Domanik served as Director of Technology Development of ZelleRX Corporation, a biotechnology start-up in the field of cellular therapeutics for the treatment of cancer. Dr. Domanik also served as Director of Technology of Xomix, Ltd., a biotechnology consulting company, between 2001 and 2007. From 1999 to 2001, Dr. Domanik was Chief Technology Officer and Vice President-Technology of the Company. He also served as CTO and Vice President of AccuMed International, which the Company acquired in 2001, from 1994 to 1999. Prior to his work with CytoCore and its subsidiaries, Dr. Domanik worked for over 15 years at Abbott Laboratories where he held several positions, including Laboratory Manager and Senior Systems Engineer. Dr. Domanik is intimately familiar with both the products offered by CCI as well as its industry. Dr. Domanik has a long history of working with the Company and also has provided consulting services to assist other entities with the design, development and manufacture of medical devices. He also has extensive technology and intellectual property experience, all of which contribute to his effective management of the Company as its Chief Operating Officer.
 
Family Relationships; Involvement in Certain Legal Proceedings
 
There are no family relationships among any of the directors or executive officers of CytoCore, and no arrangements or understandings exist between any director, executive officer and any other person pursuant to which such director or officer was or is to be selected as a director or officer of the Company. Contempo Design, Inc., of which Mr. Milley was both a director and a Vice President, filed a petition under Chapter 11 of the federal Bankruptcy Code in 2004.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Exchange Act requires the Company’s executive officers and directors, and holders of more than 10% of the outstanding shares of the Company’s common stock, to file initial reports of ownership and reports of changes in ownership with the Commission.


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Based solely on the Company’s review of copies of such reports (and any amendments thereto) it has been furnished and/or any written representations that no other reports were required with respect to 2009, the Company believes that all reports with respect to transactions occurring during fiscal year 2009 were timely filed, except that Messrs Burns, Severson, Milley and Danielsen and Drs. Abeles, Hall and Weissberg have not yet filed a Form 4 to report the stock awards of 100,000 shares of common stock which was awarded in 2009, but which shares have not yet been issued. Mr. McCullough filed his Form 4 late with respect to purchases of an aggregate 270,300 shares of common stock on the open market by Mr. McCullough and an affiliate, the exercise of warrants to purchase 485,000 shares of common stock and the receipt of 39,459 shares in lieu of cash compensation.
 
Code of Ethics
 
The Company has adopted its Code of Ethics and Business Conduct for Officers, Directors and Employees that applies to all officers, directors and employees of the Company, including the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Company filed its code as an exhibit to its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003 as filed with the Commission on April 14, 2004. The Code of Ethics is also available on the Company’s website at www.cytocoreinc.com.
 
Board of Directors and Committee Information
 
The Board has determined that each of current directors Dr. Abeles, Mr. Milley and Mr. Severson is “independent” as set forth in the rules and regulations of The Nasdaq Stock Market, including Rule 5605, and Rule 10A-3 of the Exchange Act. The Company does not utilize any other definition or criteria for determining the independence of a director or nominee, and no other transactions, relationships, or other arrangements exist to the Board’s knowledge or were considered by the Board, other than as may be discussed herein, in determining an individual’s independence.
 
The Board of Directors currently has three standing committees — the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. The Compensation Committee and Nominating and Corporate Governance Committees were established by the Board in 2008.
 
Audit Committee
 
The Audit Committee currently consists of Mr. Milley (Chairman), Dr. Abeles and Mr. Severson, each of whom is independent under applicable independence requirements. The Board of Directors has determined that Mr. Milley also satisfies the definition of “audit committee financial expert” as promulgated by Commission.
 
The Audit Committee acts pursuant to a written charter, which charter authorizes the committee’s overview of the financial operations and management of the Company, including a required review process for all quarterly, annual, and special filings with the Commission, review of the adequacy and efficacy of the accounting and financial controls of the Company as well as the quality of accounting principles and financial disclosure practices, and communications with the Company’s independent registered public accounting firm and members of financial management. A copy of the Audit Committee’s charter was filed as an appendix to the Company’s definitive proxy statement for its annual stockholders meeting held on June 21, 2007, as filed on May 15, 2007, and is available on the Company’s website. The Audit Committee met four times in 2009.
 
Compensation Committee
 
The Board established the Compensation Committee in May 2008, which consists of Mr. Severson (Chairman) and Mr. Milley, both of whom are independent under applicable independence requirements. Previously, the Board did not have such a committee due to the limited number of persons employed by the Company in prior years and the Company’s inability at various times to provide competitive compensation. The Compensation Committee did not meet in 2009.
 
Pursuant to its charter, the Compensation Committee’s role is to assist the Board with its responsibilities relating to the compensation of the Company’s officers and directors and the development and administration of the Company’s compensation plans. The Compensation Committee has overall responsibility for evaluating and


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providing recommendations with respect to the compensation plans, policies and benefit programs for the Company, as well as the individual salary and benefits of the chief executive officer and other officers and senior executives of the Company. A copy of the Compensation Committee’s charter was filed as an appendix to the Company’s definitive proxy statement for its annual stockholders meeting held on July 17, 2008, as filed on June 6, 2008, and is available on the Company’s website. For more information on the compensation of directors and officers of the Company, see the “Compensation” section below.
 
Nominating and Corporate Governance Committee
 
The Nominating and Corporate Governance Committee of the Board (the “Nominating Committee”) currently consists of Mr. Milley, who is independent under applicable independence requirements. The goal of the Nominating Committee, which acts pursuant to a written charter adopted in May 2008, is to contribute to the effective representation of the Company’s stockholders and play a leadership role in shaping the Company’s corporate governance. The authority and responsibilities of the Nominating Committee include evaluating the appropriate size of the Board, recommending any changes in the structure and composition of members of the Board, considering criteria for Board membership, identifying and evaluating prospective candidates, making recommendations to the Board as to the nominees for directors, and proposing the slate of directors to be elected at each annual meeting of stockholders. The Nominating Committee will also assist the Board by developing and recommending corporate governance policies and practices applicable to the Company, monitoring compliance with the Company’s Code of Ethics, and handling such other matters as the Board or Nominating Committee deems appropriate. A copy of the Nominating Committee’s charter was filed as an appendix to the Company’s definitive proxy statement for its annual stockholders meeting held on July 17, 2008, as filed on June 6, 2008, and is available on the Company’s website. The Nominating Committee did not meet in 2009.
 
Stockholder Nominations
 
The Board will accept for consideration any candidate properly recommended by a stockholder; acceptance of a recommendation for consideration does not imply the Board will nominate the proposed candidate.
 
Stockholders who wish to nominate qualified candidates to serve as directors of the Company may do so in accordance with the procedures set forth in the Company’s By-laws. The By-laws provide that nominations of persons for election to the Board at a meeting of stockholders may be made (i) by or at the direction of the Board, or (ii) by any stockholder of the Company entitled to vote in the election of directors at the meeting and who complies with certain notice procedures.
 
Such nominations, other than those made by or at the direction of the Board, must be made pursuant to timely notice in writing to the Secretary of the Company. In order to be considered timely, a stockholder’s notice must be delivered to, or mailed and received by, the Secretary of the Company at the principal executive offices of the Company not less than 60 days prior to the first anniversary of the date of the mailing of the notice of the previous year’s annual meeting of stockholders.
 
However, if no annual meeting of stockholders was held in the previous year or if the date of the annual meeting is advanced by more than 30 days prior to, or delayed by more than 60 days after, such anniversary date, to be timely a stockholder’s notice must be delivered, or mailed and received, not later than the close of business on the later of (i) the 60th day prior to such annual meeting or (ii) the 10th day following the day on which the date of such meeting has been first “publicly disclosed” by the Company. For purposes of the nomination procedures, “publicly disclosed” or “public disclosure” means disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service, or in a document publicly filed by the Company with the SEC.
 
Any stockholder’s notice must include the following information:
 
  •  as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise required under applicable securities laws (including Regulation 14A under the Exchange Act), and such person’s written consent to being named in the proxy statement as a nominee and to serve as a director if elected; and


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  •  as to the stockholder giving notice, the name and address, as they appear on the Company’s books, of such stockholder and the class and number of shares of the Company which such stockholder beneficially owns.
 
At the request of the Board, any person nominated by the Board for election as a director must furnish to the Company’s Secretary the same information required to be set forth in a stockholder’s notice of nomination which pertains to the nominee.
 
The Company may require any proposed nominee to furnish such other information as may reasonably be required to determine the eligibility of the nominee to serve as a director, as well as a consent to be interviewed by the Board if the Board chooses to do so in its discretion and a consent to serve as a director if nominated and elected. Submissions received through this process will be forwarded to the Board for review. Only those nominees whose submissions comply with these procedures and who satisfy the qualifications determined by the Board for directors of the Company will be considered.
 
Qualifications and Candidates
 
When considering candidates, the Board strives to achieve a balance of knowledge, experience and accomplishment. While there are no set minimum requirements, a candidate should:
 
  •  be intelligent, thoughtful and analytical;
 
  •  possess superior business-related knowledge, skills and experience;
 
  •  reflect the highest integrity, ethics and character, and value such qualities in others;
 
  •  have excelled in both academic and professional settings;
 
  •  demonstrate achievement in his or her chosen field;
 
  •  be free of actual or potential conflicts of interest;
 
  •  be familiar with regulatory and governance matters;
 
  •  have the ability to devote sufficient time to the business and affairs of the Company; and
 
  •  demonstrate the capacity and desire to represent, fairly and equally, the best interests of the Company’s stockholders as a whole.
 
In addition to the above criteria (which may be modified from time to time), the Board may consider such other factors as it deems in the best interests of the Company and its stockholders and that may enhance the effectiveness and responsiveness of the Board and its committees. Finally, the Board considers a candidate’s independence, financial sophistication and special competencies.
 
Process; Changes
 
The Board identifies potential candidates through referrals and recommendations, including by incumbent directors, management and stockholders, as well as through business and other organizational networks. The Board may retain and compensate third parties, including executive search firms, to identify or evaluate, or assist in identifying or evaluating, potential director nominees.
 
Current members of the Board with the requisite skills and experience are considered for re-nomination, balancing the value of the member’s continuity of service and familiarity with the Company with that of obtaining a new perspective, and considering each individual’s contributions, performance and level of participation, the current composition of the Board, and the Company’s needs. If any existing member does not want to continue in service or if it is decided not to re-nominate a director, new candidates are identified in accordance with those skills, experience and characteristics deemed necessary for new nominees, and are evaluated based on the qualifications set forth above. In every case, the Board meets (in person or telephonically) to discuss each candidate, and may require personal interviews before final approval.
 
The Board does not currently, and does not intend in the future, to differentiate between or alter the manner in which it evaluates candidates based on the constituency (including stockholders) that proposed the candidate.


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There were no material changes to the procedures described above by which security holders may recommend nominees to the Board during the 2009 fiscal year.
 
Item 10.   Executive Compensation
 
Named Executive Officers
 
The following tables set forth all plan and non-plan compensation awarded to, earned by or paid to (i) the individual who served as the Company’s principal executive and principal financial officer during the last completed fiscal year, and (ii) the other individual who was serving as an executive officer of the Company at the end of the 2009 fiscal year ((i) and (ii) together, the “Named Executive Officers”), for all services rendered in all capacities to the Company by such persons.
 
Summary Compensation Table
 
                                                         
                        All
   
Name
              Stock
  Option
  Other
   
and
      Salary
  Bonus
  Awards
  Awards
  Compensation
  Total
Principal Position
  Year   ($)   ($)   ($)   ($)   ($)   ($)
 
Robert F. McCullough, Jr.
    2009     $ 180,000 (1)                     $ 15,000 (2)   $ 195,000  
CEO, CFO and
    2008     $ 180,000 (3)               $ 16,163 (4)   $ 71,094 (5)   $ 267,257  
Chairman of the Board
                                                       
Richard A. Domanik, Ph.D.
    2009     $ 150,000 (6)                           $ 150,000  
COO
    2008     $ 145,000 (7)                     $ 83,094 (8)   $ 228,094  
 
 
(1) Mr. McCullough was elected Chairman of the Board of Directors in April 2009, Chief Executive Officer in October 2007 and has been Chief Financial Officer since September 2005. Mr. McCullough has deferred payment of his salary earned in 2009.
 
(2) Represents a charge for the repricing of 485,000 warrants exercised in 2009 in conjunction with the reduction of $121,500 of debt.
 
(3) Of the amount shown, $160,229 was paid in cash during 2008 and $19,771 was paid pursuant to the issuance of 39,459 shares of the Company’s common stock during the first quarter of 2009. The $19,771 paid in stock reflects an average of the closing price of the Company’s common stock as of the end of each month for which the stock was paid; the average of said closing prices was $0.50 per share.
 
(4) Represents a warrant to purchase 10,000 shares with an exercise price of $2.06 per share granted to Mr. McCullough in April 2008 pursuant to his employment agreement, which agreement expired November 30, 2008; such warrant issuance was triggered by the Company’s execution of a distribution agreement for the Company’s cervical cell collection device. The warrants were fully exercisable upon grant with a three year term. The dollar amount presented represents the aggregate fair value of such award on the date of grant. The fair value of the warrants was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of zero, expected volatility of 120%, risk-free interest rate of 2.50%, and expected life of 1.5 years. Mr. McCullough exercised such warrants in 2009 at a reduced price of $0.25 per share. This warrant modification was made available by the Company to all holders of warrants to purchase shares of the common stock of the Company.
 
(5) Represents a reimbursement in 2008 of $71,094 for taxes incurred in connection with the award of 100,000 shares of common stock made to Mr. McCullough in January 2008 for services rendered in 2007.
 
(6) Dr. Domanik was elected President in May 2007 and served until August 2008, and was elected Chief Operating Officer in October 2007. Dr. Dominick has deferred payment of his salary earned in 2009.
 
(7) Of the amount shown, $132,757 was paid in cash during 2008 and $12,243 was paid pursuant to the issuance of 21,685 shares of the Company’s common stock during the first quarter of 2009. The $12,243 paid in stock reflects an average of the closing price of the Company’s common stock as of the end of each month for which the stock was paid; the average of said closing prices was $0.50 per share.
 
(8) Represents a reimbursement in 2008 of $83,094 for the taxes incurred in connection with the award of 100,000 shares of common stock made to Dr. Domanik in January 2008 for services rendered in 2007


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Executive Officer Compensation
 
Robert F. McCullough, Jr. — Current Chairman, CEO and CFO
 
Mr. McCullough was appointed Chairman of the Board of Directors in April 2009, Chief Executive Officer of the Company in October 2007, and has served as the Company’s Chief Financial Officer since September 2005. In November 2006, the Board of Directors approved and the Company entered into an employment agreement with Mr. McCullough pursuant to which he agreed to continue to provide, on a non-exclusive basis, financial accounting, reporting and business services to the Company. The agreement provided for a term of 24 months from December 1, 2006, subject to earlier termination. Under the agreement, Mr. McCullough received a salary of $10,000 per month, which increased to $15,000 per month in April 2007 subsequent to the Company having raised $5 million in funding. It also provided that Mr. McCullough was entitled to reimbursement of out-of-pocket expenses related to the performance of his duties for the Company and certain health insurance benefits. The agreement expired according to its terms on November 30, 2008 and was not renewed, although Mr. McCullough still serves as CEO and CFO of the Company.
 
The agreement also provided for the issuance of warrants to Mr. McCullough to purchase shares of common stock of the Company upon the achievement of certain performance milestones. In April 2008, the Company granted Mr. McCullough warrants to purchase 10,000 shares of common stock at $2.06 per share following achievement of the milestone that required the Company to execute a distribution agreement for its cervical cell collection device. The warrants were immediately exercisable and had a three year term. In February 2007, the Company granted Mr. McCullough warrants to purchase 25,000 shares of common stock at $2.60 per share following achievement of the milestone that required the Company’s common stock to trade over $3.00 per share for 45 out of 60 trading days. The warrants were immediately exercisable and had a three year term. In 2006, the Company granted Mr. McCullough warrants to purchase 400,000 shares of the Company’s common stock at an exercise price of $1.28 per share. The warrants, and others held by him and an affiliate, were exercisable as of January 1, 2007 and had a three year term. Mr. McCullough exercised all of these warrants during the 2009 fiscal year in connection with the Company’s offer to all warrant holders to permit exercise of such warrants at the reduced exercise price of $0.25 per share in exchange for the reduction of $121,000 of debt owed by CCI to him. CCI recorded a charge of $15,000 related to this warrant modification. This warrant modification was made available by the Company to all holders of warrants to purchase shares of the common stock of the Company.
 
CCI has accrued a salary of $172,000 for Mr. McCullough in 2009. Mr. McCullough has elected to defer payment of his salary for 2009.
 
During 2008, the Company paid Mr. McCullough $180,000 for his services as CEO and CFO, which included $19,771 that was accrued but unpaid as of December 31, 2008; such amount was paid pursuant to the issuance of 39,459 shares of common stock during the first quarter of 2009. Mr. McCullough’s compensation for 2008 also does not include $45,000 that was accrued but unpaid as of December 31, 2007, which amount was paid in 2008. In January 2008, the Board of Directors granted Mr. McCullough a stock bonus of 100,000 shares of restricted, unregistered common stock. Such bonus, valued at $177,735, was made in recognition of Mr. McCullough’s performance during the 2007 fiscal year, including his role in reducing the Company’s debts and accounts payable, work towards achieving regulatory approval of the Company’s cervical cell collection device (which occurred in February 2008) and assistance in raising necessary capital to fund operations. During 2008, the Company reimbursed Mr. McCullough $71,094 for the taxes payable with respect to such stock bonus.
 
Richard A. Domanik, Ph.D. — Chief Operating Officer
 
Dr. Domanik became President of the Company in May 2007, serving in such capacity until August 2008, and became Chief Operating Officer in October 2007. The Company and Dr. Domanik have not entered into an employment agreement, although the basic terms of his compensation have been established. Specifically, Dr. Domanik is entitled to receive an annual salary of $150,000, standard benefits as provided to other employees, and reimbursement of reasonable business expenses. Dr. Dominick elected to defer salary totaling $131,250 for the 2009 fiscal year.


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During 2008, the Company paid Dr. Domanik $145,000 for his services as President and COO, which included $12,243 that was accrued but unpaid as of December 31, 2008; such amount was paid pursuant to the issuance of 21,645 shares of common stock of the Company during the first quarter of 2009. In January 2008, the Board of Directors granted Dr. Domanik a stock bonus of 100,000 shares of restricted, unregistered common stock, valued at $177,735, for services rendered to the Company in 2007. Such bonus was made in recognition of Dr. Domanik’s performance during the 2007 fiscal year. During 2008, the Company reimbursed Dr. Domanik $83,094 for the taxes payable with respect to such stock bonus.
 
Outstanding Equity Awards at Fiscal Year-End
 
The following table sets forth certain information regarding unexercised options, unvested stock, and equity incentive plan awards for each Named Executive Officer outstanding as of the end of the Company’s 2009 fiscal year.
 
Option / Warrant Awards
 
                                         
            Equity
       
            Incentive
       
    Number of
  Number of
  Plan Awards:
       
    Securities
  Securities
  Number
       
    Underlying
  Underlying
  of Securities
       
    Unexercised
  Unexercised
  Underlying
  Option
   
    Options
  Options
  Unexercised
  Exercise
   
    (#)
  (#)
  Unearned Options
  Price
  Option
Name
  Exercisable   Unexercisable   (#)   ($)   Expiration Date
 
Robert F. McCullough, Jr. 
                    $        
Richard A. Domanik, Ph.D. 
    30,000 (1)               $ 2.67       6/29/10  
      5,000 (2)               $ 1.89       12/18/10  
 
 
(1) Represents grant of warrants on June 29, 2007 to purchase 30,000 shares of common stock at $2.67 per share, vested in full immediately, with a term of three years.
 
(2) Represents grant of warrants on December 18, 2007 to purchase 5,000 shares of common stock at $1.89 per share, vested in full immediately, with a term of three years.
 
In January 2008, each of Mr. McCullough and Dr. Domanik was also granted a stock bonus of 100,000 shares of restricted, unregistered common stock in consideration for services rendered during the 2007 fiscal year. Such awards were not subject to vesting or any performance conditions but are restricted under applicable securities laws. In each case, the Company agreed to reimburse the recipients for the tax effects thereof; in 2008 Mr. McCullough was paid $71,094 and Dr. Domanik was paid $83,094 in fulfillment of such agreement. See “Executive Officer Compensation” above for more information.
 
Warrant grants made to the Company’s executive officers and directors are made outside of the Company’s option plans, and no options have been granted pursuant to the Company’s option plans or otherwise to executive officers or directors in the last two fiscal years. The Company had one option plan, the 1999 Equity Incentive Plan (the “Plan”), which provided for the issuance to consultants, officers, non-employee directors and key employees of shares of common stock pursuant to stock options (incentive and non-qualified), restricted stock, stock appreciation rights (“SARs”) and performance shares and units. Grants under the Plan are exercisable at fair market value determined as of the date of grant in accordance with the terms of the Plan. Grants vest to recipients immediately or ratably over periods ranging from two to five years, and expire five to ten years from the date of grant. The Plan became effective on June 1, 1999 and expired on June 1, 2009.
 
At the Annual Meeting of Stockholders on May 25, 1999, stockholders also approved the 1999 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan offered employees the opportunity to purchase shares of common stock of CytoCore through a payroll deduction plan at 85% of the fair market value of such shares at specified enrollment measurement dates. There was no activity under the Purchase Plan in the 2009 or 2008 fiscal years, and the Purchase Plan expired in May 2009.


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Retirement Benefits
 
The Named Executive Officers received no benefits in fiscal year 2009 from the Company under defined benefit or defined contribution retirement plans other than the Company’s 401(k) tax qualified plan, which is currently inactive.
 
Nonqualified Deferred Compensation
 
The Named Executive Officers did not receive any benefits in fiscal year 2009 from the Company under any nonqualified deferred compensation plan.
 
Potential Payments Upon Termination or Change-in-Control
 
The Company does not offer or have in place any formal severance, change in control or similar compensation programs for its officers or employees. Rather, the Company individually negotiates with those employees for whom such compensation is deemed necessary. The Company does not currently have an agreement with any officer with respect to severance, change of control or a similar circumstance.
 
Mr. McCullough’s employment agreement provided that in the event Mr. McCullough’s employment was terminated without cause, he would be entitled to his salary for the remainder of the term of his employment agreement with the Company, as well as health insurance for himself and his children during such period. The actual value of payments made to Mr. McCullough would have depended on the date of his termination without cause and the remainder of his employment term as of the date of such termination. Mr. McCullough’s employment agreement has expired and the Company does not have any liability to Mr. McCullough for severance.
 
In November 2006, the Board adopted a plan to grant directors warrants upon the acquisition of the Company. See “Compensation of Directors — Director Compensation Arrangements” below.
 
Compensation of Directors
 
The following table sets forth certain information regarding the compensation of directors for the Company’s 2009 fiscal year. Directors who are or were also employees, including Robert F. McCullough, Jr., did not receive any compensation for their service as a director while they were employees. Daniel J. Burns, the former Chairman of the Board, also did not receive director fees. Rather, Future Wave Management, for which Mr. Burns is President and sole owner, received consulting fees from the Company pursuant to an agreement that expired November 30, 2008.
 
                                                         
                    Nonqualified
       
    Fees Earned
          Non-Equity
  Deferred
       
    or Paid
  Stock
  Option
  Incentive Plan
  Compensation
  All Other
   
    in Cash
  Awards
  Awards
  Compensation
  Earnings
  Compensation
  Total
Name
  ($)   ($)   ($)   ($)   ($)   ($)   ($)
 
John H. Abeles, M.D. 
  $ 20,000 (1)   $ 40,000 (2)                           $ 60,000  
Daniel J. Burns
    10,000 (1)(3)   $ 40,000 (2)                           $ 50,000  
Erik Danielsen
  $ 20,000 (1)   $ 40,000 (2)                           $ 60,000  
Phillip Bradley Hall, M.D. 
  $ 10,000 (1)(3)   $ 40,000 (2)                           $ 50,000  
Alexander M. Milley
  $ 20,000 (1)   $ 40,000 (2)                           $ 60,000  
Clinton H. Severson
  $ 20,000 (1)   $ 40,000 (2)                           $ 60,000  
David J. Weissberg, M.D. 
  $ 10,000 (1)(3)   $ 40,000 (2)                           $ 50,000  
 
 
(1) Represents accrued but unpaid director fees with respect to fiscal year 2009. Does not include amounts accrued but unpaid in 2008; these amounts were not paid in 2009 and have not been paid to date.
 
(2) Represents aggregate grant date fair value of a common stock award of 100,000 shares made in April 2009; these shares have not yet been issued to the directors.
 
(3) These directors declined to stand for re-election at the Company’s 2009 annual meeting of stockholders held on June 22, 2009.


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Director Compensation Arrangements
 
In November 2006, the Board of Directors approved Board compensation for each director at the rate of $5,000 per quarter effective January 1, 2007. All outside directors are entitled to receive warrants to purchase 25,000 shares of the Company’s common stock when the Company’s revenues reach $20 million and another 25,000 shares of common stock when revenues reach $50 million. The exercise price of such warrants will be at a 33% discount to the average trading price of the common stock during the 45 days prior to the date the Company achieves each revenue milestone.
 
All outside directors will also receive, upon the acquisition of the Company, as follows: (1) warrants to purchase 62,500 shares of common stock at $2.50 per share if the Company is acquired for more than $10.00 per share; (2) warrants to purchase 87,500 shares of common stock at $5.00 per share if the Company is acquired for more than $20.00 per share; and (3) warrants to purchase 125,000 shares of common stock at $7.50 per share if the Company is acquired for more than $30.00 per share.
 
In November 2006, the Board also approved an arrangement whereby the Company became obligated to reimburse Mr. McCullough, Dr. Abeles, Mr. Milley, and Dr. Weissberg for certain tax effects in connection with the exercise of warrants issued to such individuals in September 2006. The Company will be obligated to pay to each individual 39% of the taxable value of such warrants when exercised, payable within three months of such exercise, such payment to occur only if the Company is acquired or certain other conditions are met. At the same time, the Board of Directors approved amendments to all existing warrant agreements between the Company and its then-current Board members, as well as former directors and employees, such amendment to permit all such holders to exercise all such warrants on a cashless basis.
 
The Company also reimburses directors for reasonable expenses incurred in connection with their attendance at meetings of the Board of Directors.
 
For information relating to shares of the Company owned by each of the directors, see “Security Ownership of Certain Beneficial Owners and Management” below. For information concerning the compensation of directors who are or were also officers of the Company, see the “Summary Compensation Table” and accompanying narrative disclosure above. For information on other consideration received by directors or their affiliates from the Company, see “Transactions with Related Persons, Promoters and Certain Control Persons” in Item 12 below.
 
Other Equity Awards
 
In addition to the amounts shown above, Dr. Abeles is the holder of warrants to purchase an aggregate 64,583 shares of the Company’s common stock. Of such amounts, warrants representing the right to purchase 62,500 shares were granted in September 2006 at an exercise price of $2.00 per share with immediate full vesting and a term of five years, and warrants representing the right to purchase 2,083 shares were granted in May 2005 at an exercise price of $1.00 per share with immediate full vesting and a term of five years. Mr. Milley is the holder of warrants to purchase an aggregate 62,500 shares of the Company’s common stock. These warrants were granted in September 2006 at an exercise price of $2.00 per share with immediate full vesting and a term of five years. Dr. Weissberg is the holder of warrants to purchase 412,500 shares of the Company’s common stock. Of such amount warrants representing the right to purchase 400,000 were granted in September 2006 at an exercise price of $2.00 per share with immediate full vesting and a term of five years, and warrants to purchase 12,500 shares were issued in connection with his participation in the Company’s private placement in the first quarter of 2008. Such warrants were immediately exercisable at $2.00 per share with a term of three years. For information on warrants and other rights to purchase shares of common stock held by the Company’s employee-directors, see “Outstanding Equity Awards at Fiscal Year-End” above.


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Item 11.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Securities Authorized for Issuance under Equity Compensation Plans
 
For information on the securities authorized for issuance under the equity compensation plans of the Company, please see Item 4 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in Part I of this Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which information is incorporated herein by reference.
 
Common Stock — Five Percent Holders
 
The following table sets forth, as of April 22, 2010, certain information with respect to any person, including any group, who is known to the Company to be the beneficial owner of more than 5% of the common stock of the Company. There were 44,832,610 shares of common stock outstanding as of the close of business on April 22, 2010.
 
                 
    Amount and Nature of
  Percent
Name and Address of Beneficial Owner
  Beneficial Ownership(1)   of Class
 
Daniel J. Burns(2)
    3,525,500       7.9 %
946 Sea Wind Court
Del Mar, CA 92014
               
NeoMed Innovations III L.P.(3)
    2,875,800       6.4 %
Parkvein 55
N-0256 Oslo, Norway
               
Standard General Holdings, LLC
    2,534,315       5.7 %
5190 Neil Road, #430
Reno, NV 89502
               
Robert F. McCullough(4)
    3,725,853       8.3 %
c/o CytoCore, Inc.
414 N. Orleans Street, Suite 510
Chicago, IL 60610
               
David J. Weissberg, M.D(5)
    2,279,199       5.0 %
175 E. Main Street
Huntington, NY 11723
               
 
 
(1) Unless otherwise indicated, each of the persons named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name. With respect to each person or group, percentages are calculated based on the number of shares beneficially owned, including shares that may be acquired by such person or group within 60 days of April 22, 2010 upon the exercise of stock options, warrants or other purchase rights, but not the exercise of options, warrants or other purchase rights held by any other person.
 
(2) Includes 100,000 shares of common stock awarded in 2009 that have not yet been issued.
 
(3) Includes warrants to purchase 217,000 shares that are immediately exercisable.
 
(4) Includes (i) 2,187,500 shares owned by Summitcrest Capital L.P., of which Mr. McCullough is President of the General Partner; and (ii) an aggregate 158,705 shares owned by various trusts of which Mr. McCullough is trustee as follows: MJM Educational Trust (12,500) shares, PFM Educational Trust (12,500 shares), CDM Educational Trust (12,500) shares and the MPC Trust (121,205 shares).
 
(5) Includes: (i) an aggregate 160,000 shares held in trust for Dr. Weissberg’s minor children, for which Dr. Weissberg acts as trustee; (ii) 412,500 shares that are issuable upon exercise of warrants that are exercisable at any time; and (iii) 100,000 shares of common stock awarded in 2009 that have not yet been issued.


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Common Stock — Management
 
The following table sets forth, as of April 22, 2010, certain information concerning the beneficial ownership of the Company’s common stock (including directors’ qualifying shares, if any) of (i) each director, (ii) each Named Executive Officer (as defined in the “Compensation” section above), and (iii) all current directors and executive officers of the Company as a group. There were 44,832,610 shares of common stock outstanding as of the close of business on April 22, 2010.
 
                 
    Amount and Nature of
  Percent
Name of Beneficial Owner
  Beneficial Ownership(1)   Of Class
 
John H. Abeles, M.D.(2)
    377,681       *  
Daniel J. Burns(3)
    3,525,500       7.9 %
Erik Danielsen(4)
    661,845       1.5 %
Richard A. Domanik, Ph.D.(5)
    162,272       *  
Phillip Bradley Hall, M.D.(6)
    896,070       2.0 %
Robert F. McCullough, Jr.(7)
    3,725,853       8.3 %
Alexander M. Milley(8)
    965,450       2.2 %
Clinton H. Severson(9)
    110,000       *  
David J. Weissberg, M.D.(10)
    2,279,199       5.0 %
All current directors and executive officers as a group (6 persons)(11)
    5,341,256       11.9 %
 
 
Less than one percent of the common stock outstanding.
 
(1) Unless otherwise indicated, each of the persons named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name. With respect to each person or group, percentages are calculated based on the number of shares beneficially owned, including shares that may be acquired by such person or group within 60 days of April 22, 2010 upon the exercise of stock options, warrants or other purchase rights, but not the exercise of options, warrants or other purchase rights held by any other person. The address of each current director and executive officer of the Company is c/o CytoCore, Inc., 414 N. Orleans, Suite 510, Chicago, IL 60654.
 
(2) Includes: (i) 213,098 shares owned by Northlea Partners, Ltd., of which Dr. Abeles is General Partner; (ii) 64,583 shares issuable upon exercise of warrants granted by the Company to Dr. Abeles that are exercisable at any time; and (iii) 100,000 shares of common stock awarded in 2009 that have not yet been issued. Dr. Abeles disclaims beneficial ownership of all shares owned by, or issuable to, Northlea Partners except shares attributable to his 1% interest in Northlea Partners as General Partner.
 
(3) Includes 100,000 shares of common stock awarded in 2009 that have not yet been issued.
 
(4) Includes (i) 145,000 shares issuable upon exercise of warrants that are exercisable at any time; and (ii) 100,000 shares of common stock awarded in 2009 that have not yet been issued.
 
(5) Includes 35,000 shares issuable upon exercise of warrants that are exercisable at any time.
 
(6) Includes (i) 50,000 shares owned jointly with Marlene Barker; (ii) 4,825 shares issuable upon exercise of warrants that are exercisable at any time; and (iii) 100,000 shares of common stock awarded in 2009 that have not yet been issued.
 
(7) Includes: (i) 2,187,500 shares owned by Summitcrest Capital L.P., of which Mr. McCullough is President of the General Partner; and (ii) an aggregate 158,705 shares owned by various trusts of which Mr. McCullough is trustee as follows: MJM Educational Trust (12,500 shares), PFM Educational Trust (12,500 shares), CDM Educational Trust (12,500 shares) and the MPC Trust (121,205 shares).
 
(8) Includes: (i) 149,551 shares held by Azimuth Corporation, of which Mr. Milley is President and Chairman of the Board, 429,255 shares held by Cadmus Corporation, of which Mr. Milley is President and a director, 80,282 shares held by Milley Management, Inc., of which Mr. Milley is President, sole director and majority stockholder, and 23,710 shares held by Winchester National, Inc., of which Mr. Milley is a director and executive officer; (ii) 62,500 shares issuable upon exercise of options and warrants granted by the Company to Mr. Milley that are exercisable at any time; and (iii) 100,000 shares of common stock awarded in 2009 that


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have not yet been issued. Shares held directly by Mr. Milley, Cadmus Corporation, Winchester National and Milley Management, in the aggregate amount of 402,890 shares, and have been pledged to ELXSI Corp., of which Mr. Milley is President, Chief Executive Officer and Chairman of the Board.
 
(9) Includes 100,000 shares of common stock awarded in 2009 that have not yet been issued.
 
(10) Includes: (i) an aggregate 160,000 shares held in trust for Dr. Weissberg’s minor children, for which Dr. Weissberg acts as trustee; (ii) 412,500 shares that are issuable upon exercise of warrants that are exercisable at any time; and (iii) 100,000 shares of common stock awarded in 2009 that have not yet been issued.
 
(11) Does not include ownership of Daniel J. Burns, Phillip Bradley Hall, M.D., Erik Danielson or David J. Weissberg, M.D., all of whom declined to stand for re-election at the Company’s 2009 annual meeting of stockholders held on June 22, 2009.
 
Series E Convertible Preferred Stock
 
The following table sets forth, as of April 22, 2010, certain information with respect to (i) any person (including any group) who is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Series E Convertible Preferred Stock, (ii) each director and Named Executive Officer who owns such preferred stock, and (iii) all current executive officers and directors as a group. There were 19,222 shares of Series E Convertible Preferred Stock outstanding as of the close of business on April 22, 2010.
 
                 
    Amount and Nature of
  Percent
Name and Address of Beneficial Owner(1)
  Beneficial Ownership   of Class
 
Kevin F. Flynn June 1992 Non-Exempt Trust
    6,667 (2)     34.7 %
120 South LaSalle Street
Chicago, IL 60602
               
Rolf Lagerquist
    2,000 (3)     10.4 %
4522 CO Road 21 NE
Elgin, MN 55932
               
All current directors and executive officers as a group (9 persons)
    0       0.0 %
 
 
(1) No director or Named Executive Officer of the Company owns any shares of any series of preferred stock of the Company.
 
(2) Converts into 33,479 shares of common stock, including shares issuable upon payment of cumulative dividends.
 
(3) Converts into 10,043 shares of common stock, including shares issuable upon payment of cumulative dividends.
 
Changes in Control
 
The Company is not aware of any arrangements (including any pledge by any person of securities of CCI), the operation of which did or may at a subsequent date result in a change of control of the Company.
 
Item 12.   Certain Relationships and Related Transactions, and Director Independence
 
Transactions with Related Persons, Promoters and Certain Control Persons
 
The following section sets forth information regarding transactions since January 1, 2008, or any currently proposed transactions, between the Company and certain related persons. For more information on the compensation received by current and former directors and officers of the Company during the 2009 fiscal year, and the beneficial ownership of equity securities of the Company of such individuals, see the “Compensation” and “Security Ownership of Certain Beneficial Owners and Management” sections in Items 10 and 11, respectively, above.


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Board of Directors
 
During 2009, the Board of Directors, including former directors Daniel J. Burns, Philip Bradley Hall, M.D., Erik Danielsen and David J. Weissberg, M.D., voted to issue to each of its members (other than its employee-director member, Robert F. McCullough) a bonus of 100,000 shares of restricted, unregistered shares of common stock of the Company. The shares were valued at $0.40 per share and CCI recorded a charge of $280,000 for an aggregate 700,000 shares of common stock during 2009. None of the 700,000 shares authorized for issuance have been issued to date.
 
Robert F. McCullough, Jr., Chairman, Chief Executive Officer and Chief Financial Officer
 
In 2009, Summitcrest Capital LP, of which Mr. McCullough is the President of its general partner, purchased an aggregate 944,550 shares of common stock of the Company in the open market at prices ranging from $0.10 to $0.72 per share. Mr. McCullough individually purchased an aggregate 208,772 shares of common stock of the Company in the open market at prices ranging from $0.08 to $0.75 per share during the 2009 fiscal year. In 2008, Summitcrest purchased 551,400 shares of common stock of the Company in the open market at prices ranging from $0.17 to $2.30 per share and Mr. McCullough individually purchased 197,000 shares in the open market at prices ranging from $0.18 to $0.67 per share.
 
During 2009, Mr. McCullough also exercised warrants to purchase 485,000 shares of restricted, unregistered common stock at a modified price of $0.25 in exchange for the reduction of $121,000 of debt owed by CCI to him. CCI recorded a charge of $15,000 related to this warrant modification. This warrant modification was made available by the Company to all holders of warrants to purchase shares of the common stock of the Company.
 
Also in 2009, Mr. McCullough elected to receive a portion of his compensation, totaling 39,459 shares in restricted, unregistered common stock, for services rendered in 2008. CCI valued the common stock at $0.50 per share for an aggregate total of $20,000 using the fair value method.
 
Mr. McCullough and a party related to him loaned an aggregate $866,000 to the Company during the 2009 fiscal year. Of the $866,000, $121,000 was cancelled in connection with the exercise of the warrants discussed above. The outstanding balance of the loaned amount is repayable upon demand and does not bear interest.
 
During the first quarter of 2008, Mr. McCullough and various trusts of which Mr. McCullough serves as trustee participated in a private placement of units of the Company, each unit consisting of two shares of common stock and a warrant to purchase one common share. Mr. McCullough invested $90,000 and received 45,000 shares, the trusts invested $110,000 and received 55,000 shares, and the Company issued warrants to purchase an aggregate 50,000 shares.
 
Erik Danielsen, Former Director
 
Effective March 1, 2006, the Company and Mr. Danielsen entered into a Consulting Agreement, which agreement terminated on March 31, 2008, prior to his election as a director of the Company. Mr. Danielsen received $25,000 from the Company in 2008 for consulting fees under the Consulting Agreement for services rendered prior to March 31, 2008. Pursuant to the agreement, Mr. Danielsen provided financial advisory services to the Company and corporate communications and investor and public relations services as requested by CytoCore. He was also entitled to fees for assisting the Company with its capital raising activities; Mr. Danielsen assisted the Company with such activities in Europe in 2007, but did not assist in such activities in 2008.
 
Alexander M. Milley, Director
 
In July 2003, Azimuth Corporation, of which Mr. Milley is President and Chairman of the Board of Directors, and Cadmus Corporation, of which Mr. Milley is President and a director, agreed to cancel seven warrants held by Azimuth and one warrant held by Cadmus that entitled the holders to purchase a total of 312,500 shares of common stock at various exercise prices. The warrants, issued between December 1999 and August 2001, contained anti-dilution clauses which required CytoCore to increase the number of shares of common stock the holders were entitled to purchase under the warrants by approximately 150,000 shares as of the date of the agreement, with commensurate adjustments in individual exercise prices so that gross proceeds to the Company from exercise of the warrants remained the same. These anti-dilution provisions could have required the Company to make additional adjustments in shares and exercise prices based on the Company’s issuance of debt or equity instruments at prices


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below the adjusted exercise prices of these warrants. In consideration for the parties’ agreement to cancel these warrants and the forgiveness of approximately $100,000 owed to Azimuth and Cadmus, CytoCore agreed to issue new five-year warrants entitling the holders to purchase an aggregate 650,000 shares of common stock at an exercise price of $3.00 per share. In 2006, the parties again agreed to amend the warrants, reducing the number of shares that could be purchased upon exercise to an aggregate 350,000 shares and reducing the exercise price to $1.00 per share. Azimuth exercised its warrants on a cashless basis in July 2008 for an aggregate of 68,804 shares of common stock and Cadmus exercised its warrants in July 2008 for an aggregate of 195,192 shares of common stock, using SARs held as part of the consideration for said exercise. In addition, during 2008, the Company paid Cadmus $45,000 as reimbursement for taxes accruing from the warrants.
 
Daniel J. Burns, Former Chairman of the Board and Director
 
In 2009, Mr. Burns exercised warrants to purchase an aggregate 185,000 shares of unregistered, restricted common stock at a modified price of $0.25 through the reduction of $46,000 of debt owed by CCI to him. CCI recorded a charge of $6,000 related to this warrant modification. This warrant modification was made available by the Company to all holders of warrants to purchase shares of the common stock of the Company.
 
The Company had an agreement with Future Wave Management, a consulting company of which Mr. Burns is President and sole owner. The agreement, effective December 1, 2006, had a term of two years, expiring on November 30, 2008, and required Future Wave to provide business consulting services to the Company. Future Wave initially received a fee of $10,000 per month, which fee increased to $15,000 per month in April 2007 after certain milestones were met. In 2008, the Company paid Future Wave $150,000 for consulting services and reimbursed expenses, and awarded Future Wave warrants to purchase 10,000 shares of common stock at $2.06 per share for the attainment of certain performance goals under the agreement. Of the amount paid, $15,000 was deferred payments in respect of 2007.
 
During the first quarter of 2008, Mr. Burns participated in a private placement of units of the Company, each unit consisting of two shares of common stock and a warrant to purchase one common share. Mr. Burns invested $600,000 and received 300,000 shares and warrants to purchase 150,000 shares of common stock.
 
David J. Weissberg, M.D., Five Percent Holder and Former Chief Executive Officer and Director
 
During the first quarter of 2008, Dr. Weissberg participated in a private placement of units of the Company, each unit consisting of two shares of common stock and a warrant to purchase one common share. Dr. Weissberg invested $50,000 and received 25,000 shares and warrants to purchase 12,500 shares of common stock.
 
Related Person Transaction Approval Policy
 
The Company recognizes that related person transactions can present potential or actual conflicts of interest and create the appearance that Company decisions are based on considerations other than the best interests of the Company and its stockholders. The Board of Directors therefore adopted a written policy in May 2008 that requires the review, approval or ratification of all such transactions by the Nominating Committee of the Board of Directors in accordance with the procedures established for such transactions.
 
For these purposes, a “related person transaction” is any transaction, arrangement or relationship (or series of similar transactions, arrangements or relationships) in which the Company or any subsidiary is, was or will be a participant and in which a related person has, had or will have a direct or indirect interest. A “related person” includes executive officers, directors, nominees for election as a director, five percent holders, and any immediate family members of the foregoing. It also includes entities in which any of the foregoing is employed or is a partner or principal or in a similar position, or in which such person has a five percent or greater beneficial ownership interest.
 
In advance of each regularly scheduled Nominating Committee meeting, management must propose those transactions to be entered into by the Company for the coming calendar quarter, including the material terms of such transactions, the parties involved, the interests of the related person(s) in such transactions, and the proposed aggregate value of each such transaction (if calculable). After review, the Nominating Committee must approve or disapprove such transactions and at each subsequently scheduled meeting, management must update the


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Nominating Committee as to any material change to those proposed transactions. If advance approval of a related person transaction is not feasible, such transactions may be preliminarily entered into by management, subject to ratification by the Nominating Committee at its next meeting. A transaction also may be approved by the Chairman of the Nominating Committee, who possesses delegated authority to act between meetings, in circumstances where it is not practicable or desirable for the Company to wait until the next committee meeting.
 
Review and evaluation of a related person transaction include an examination of all material facts and relevant factors, including without limitation:
 
  •  the risks and benefits of such transaction to the Company,
 
  •  the extent of the related person’s interest in the transaction,
 
  •  the impact on a director’s independence in the event the related person involved in the transaction is a director, an immediate family member or an affiliated entity,
 
  •  if applicable, the availability of other sources of comparable products and services, and
 
  •  whether such transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances.
 
The Nominating Committee shall approve or ratify only those transactions that, in light of known circumstances, are in, or are not inconsistent with, the best interests of the Company and its stockholders, as the Nominating Committee determines in good faith. The committee may also determine to provide standing approval of certain types of transactions. No director shall participate in any discussion or approval of a related person transaction for which he or she is a related person, except that the director is required to provide all material information concerning such transaction as requested by the Nominating Committee or the Board of Directors.
 
Director Independence
 
As noted above, the Board has determined that each of current directors Dr. Abeles, Mr. Milley and Mr. Severson is “independent” as set forth in the rules and regulations of The Nasdaq Stock Market, including Rule 5605, and Rule 10A-3 of the Exchange Act. The Company does not utilize any other definition or criteria for determining the independence of a director or nominee, and no other transactions, relationships, or other arrangements exist to the Board’s knowledge or were considered by the Board, other than as may be discussed herein, in determining an individual’s independence. For more information on the independence of the members of the Board of Directors of the Company, including committee members, please see “Board of Directors and Committee Information” in Item 9 — Directors, Executive Officers, and Corporate Governance above.
 
Item 13.   Principal Accountant Fees and Services
 
LJ Soldinger Associates LLC (“LJSA”) served as the Company’s independent registered public accounting firm each of the fiscal years ending December 31, 2009 and 2008.
 
Fees
 
The following table presents fees for the professional services rendered by LJSA for fiscal years 2009 and 2008, respectively:
 
                 
Services Performed
  2009     2008  
 
Audit Fees(1)
  $ 128,000     $ 281,000  
Audit-Related Fees(2)
           
Tax Fees(3)
           
All Other Fees(4)
           
                 
Total Fees
  $ 128,000     $ 281,000  
                 
 
 
(1) Audit fees represent fees billed for professional services rendered for the audit of the Company’s annual financial statements and review of the financial statements included in the Company’s quarterly reports or services that are normally provided in connection with statutory and regulatory filings or engagements.


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(2) Audit-related fees represent fees billed for assurance and related services reasonably related to the performance of the audit or review of the Company’s financial statements not reported in (1) above, including those incurred in connection with securities registration and/or other issues resulting from that process.
 
(3) Tax fees represent fees billed for professional services rendered for tax compliance, tax advice and tax planning services.
 
(4) All other fees principally would include fees billed for products and services provided by the accountant, other than the services reported under the three captions above.
 
Pre-Approval Policies
 
As required by applicable law, the Audit Committee is responsible for the appointment, compensation, retention and oversight of the work of the Company’s independent registered public accounting firm. In connection with such responsibilities, the Audit Committee is required, and it is the Audit Committee’s policy, to pre-approve the audit and permissible non-audit services (both the type and amount) performed by the Company’s independent registered public accounting firm in order to ensure that the provision of such services does not impair the firm’s independence, in appearance or fact.
 
The Audit Committee pre-approved all audit services provided to the Company during fiscal 2009. No non-audit services were provided to the Company during fiscal year 2009.
 
Item 14.   Exhibits and Financial Statement Schedules
 
 
(*) Denotes an exhibit filed herewith.
 
(+) Denotes a management contract or compensatory plan, contract or arrangement.
 
         
Exhibit No.
 
Description
 
  2 .1   Stock and Membership Interest Exchange Agreement dated as of December 4, 1998 among Bell National Corporation, InPath, LLC and the InPath Members (as such term is defined therein). (Incorporated herein by reference to Appendix A to the Bell National Corporation Definitive Proxy Statement on Schedule 14A, filed on April 30, 1999 (the “1999 Proxy Statement”).)
  2 .2   Agreement and Plan of Merger of Bell National Corporation and Ampersand Medical Corporation. (Incorporated herein by reference to Appendix C to 1999 Proxy Statement.)
  2 .3   Agreement and Plan of Merger by and among AccuMed International, Inc., AccuMed Acquisition Corp. and Ampersand Medical Corporation, dated as of February 7, 2001, and Amendment No. 1 thereto. (Incorporated herein by reference to Appendix I to Registration Statement (as amended) on Form S-4, No. 333-61666, as filed on May 25, 2001 (the “May 2001 S-4”).)
  3 .1   Certificate of Incorporation of Ampersand Medical Corporation, as amended. (Incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated September 26, 2001.)
  3 .2   By-laws of Ampersand Medical Corporation. (Incorporated herein by reference to Appendix E to the 1999 Proxy Statement.)
  3 .3   Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock of Ampersand Medical Corporation. (Incorporated herein by reference to Exhibit 3.5 to the Ampersand Medical Corporation Annual Report on Form 10-K (as amended) for the fiscal year ended December 31, 2000, as filed on March 29, 2001 (the “2000 10-K”).)
  3 .4   Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock of Ampersand Medical Corporation. (Incorporated herein by reference to Exhibit 3.6 to the 2000 10-K.)
  3 .5   Section 6 of Article VII of the By-laws of Ampersand Medical Corporation, as amended. (Incorporated herein by reference to Exhibit 3.3 to the May 2001 S-4.)
  3 .6   Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock (Incorporated herein by reference to Exhibit 3.4 to the Company’s Registration Statement on Form S-2 (as amended), File No. 333-83578, as filed on February 28, 2002 (the “February 2002 S-2”).)


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Exhibit No.
 
Description
 
  3 .7   Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.5 to the February 2002 S-2.)
  3 .8   Certificate of Amendment of Amended Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.6 to the February 2002 S-2.)
  3 .9   Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.7 to the February 2002 S-2.)
  3 .10   Certificate of Designation, Preferences and Rights of Series E Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.8 to the February 2002 S-2.)
  3 .11   Certificate of Amendment to Certificate of Incorporation of the Company, dated August 5, 2004. (Incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004, as filed on August 16, 2004 (the “2004 2Q 10-QSB”).)
  3 .12   Certificate of Amendment to Certificate of Incorporation, as filed on June 22, 2006. (Incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2006, as filed on August 21, 2006)
  3 .13   Certificate of Amendment to Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on June 22, 2007. (Incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2007, as filed on August 17, 2007.)
  3 .14   Certificate of Amendment to Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on November 19, 2007. (Incorporated herein by reference to Exhibit 3.14 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, as filed April 2, 2008 (the “2007 10-KSB”)
  4 .1   Form of subscription agreement to purchase common stock of the Company at $0.25 per share. (Incorporated herein by reference to Exhibit 4.38 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, as filed on April 17, 2006 (the “2005 10-KSB”).)
  4 .2   Form of subscription agreement used to purchase common stock of the Company during 2006. (Incorporated herein by reference to Exhibit 4.43 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006, as filed April 17, 2007 (the “2006 10-KSB”).)
  4 .3   Form of common stock purchase warrant issued in 2006, 2007 and 2008 to vendors in consideration for services rendered, representing the right to purchase an aggregate 24,532 shares of common stock. (Incorporated herein by reference to Exhibit 4.21 to the 2007 10-KSB.)
  4 .4   Registration Rights Agreement in connection with $7 million maximum offering of Units completed in March 2008. (Incorporated herein by reference to Exhibit 4.22 to the 2007 10-KSB.)
  4 .5   Form of Warrant in connection with $7 million maximum offering of Units completed in March 2008. (Incorporated herein by reference to Exhibit 4.23 to the 2007 10-KSB.)
  10 .1+   1999 Equity Incentive Plan established as of June 1, 1999, as amended. (Incorporated herein by reference to Appendix B to the Company’s Definitive Proxy Statement on Schedule 14A, as filed on July 1, 2004.)
  10 .2+   1999 Employee Stock Purchase Plan. (Incorporated herein by reference to Appendix G to the 1999 Proxy Statement.)
  10 .3   Lease Agreement between Ampersand Medical Corporation and O.P., L.L.C, dated May 18, 2000, pertaining to premises located at 414 N. Orleans, Suite 510, Chicago, Illinois 60610. (Incorporated by reference to Exhibit 10.32 to the 2000 10-K.)
  10 .4   First Amendment to Lease Agreement between Ampersand Medical Corporation and O.P., L.L.C., dated February 13, 2001, pertaining to additional premises at 414 N. Orleans, Suite 503, Chicago, Illinois 60610 and extending the term of the original lease until February 28, 2006. (Incorporated by reference to Exhibit 10.33 to the 2000 10-K.)

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Exhibit No.
 
Description
 
  10 .5   Consulting Agreement, dated January 27, 2006 and effective March 1, 2006, by and between the Company and GSG Enterprises LLC (Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2006, as filed on November 20, 2006 (the “2006 3Q 10-QSB/A”).)
  10 .6+   Employment agreement dated November 15, 2006 between Augusto Ocana and the Company. (Incorporated herein by reference to Exhibit 10.39 to the 2006 10-KSB.)
  10 .7+   Employment agreement dated November 20, 2006 between Robert McCullough and the Company. (Incorporated herein by reference to Exhibit 10.40 to the 2006 10-KSB.)
  10 .8   Consulting agreement dated November 20, 2006 between Future Wave Management and the Company. (Incorporated herein by reference to Exhibit 10.41 to the 2006 10-KSB.)
  10 .9   Consulting agreement dated November 20, 2006 between EBM, Inc. and the Company. (Incorporated herein by reference to Exhibit 10.42 to the 2006 10-KSB.)
  10 .10   Common Stock Purchase Warrant dated September 28, 2006 issued to David Weissberg representing the right to purchase 400,000 shares of common stock. (Incorporated herein by reference to Exhibit 10.2 to the 2006 3Q 10-QSB/A.)
  10 .11+   Common Stock Purchase Warrant dated September 28, 2006 issued to Alexander Milley representing the right to purchase 62,500 shares of common stock. (Incorporated herein by reference to Exhibit 10.46 to the 2006 10-KSB.)
  10 .12+   Common Stock Purchase Warrant dated September 28, 2006 issued to John Abeles representing the right to purchase 62,500 shares of common stock. (Incorporated herein by reference to Exhibit 10.47 to the 2006 3Q 10-QSB/A.)
  10 .13+   Common Stock Purchase Warrant dated January 22, 2007 issued to Augusto Ocana representing the right to purchase 50,000 shares of common stock. (Incorporated herein by reference to Exhibit 10.40 to the 2007 10-KSB.)
  10 .14+   Form of common stock purchase warrants issued to Richard A. Domanik on each of June 29, 2007 and December 18, 2007 representing the right to purchase an aggregate 35,000 shares of common stock. (Incorporated herein by reference to Exhibit 10.42 to the 2007 10-KSB.)
  10 .15   Form of common stock purchase warrants issued to non-executive employees of the Company during the 2007 fiscal year representing the right to purchase an aggregate 96,000 shares of common stock. (Incorporated herein by reference to Exhibit 10.43 to the 2007 10-KSB.)
  10 .16   Form of warrant amendment (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007, as filed on May 15, 2007)
  10 .17   Distribution Agreement with M.O.S.S. S.r.L. (Incorporated herein by reference to Exhibit 10.45 to the 2007 10-KSB.)
  10 .18   Distribution Agreement with MUNDITER — Intercambio Mundial de Comercio, S.A. (Incorporated herein by reference to Exhibit 10.46 to the 2007 10-KSB.)
  10 .19   Distribution Agreement with Palex Medical S.A. (Incorporated herein by reference to Exhibit 10.47 to the 2007 10-KSB.)
  10 .20   Distribution Agreement with HT Hospital Technologies GmbH. (Incorporated herein by reference to Exhibit 10.49 to the 2007 10-KSB.)
  10 .21+   Amendment to Employment Agreement dated as of December 15, 2006 by and between the Company and Augusto Ocana dated as of July 15, 2007. (Incorporated herein by reference to Exhibit 10.50 to the 2007 10-KSB.)
  10 .22+   Second Amendment to Employment Agreement dated as of December 15, 2006 by and between the Company and Augusto Ocana. (Incorporated herein by reference to Exhibit 10.51 to the 2007 10-KSB.)
  10 .23   Purchase Agreement in connection with $7 million maximum offering of Units completed in March 2008. (Incorporated herein by reference to Exhibit 10.52 to the 2007 10-KSB.)
  10 .24   License agreement with Quantrx Biomedical Corporation dated May 19, 2008 (Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, as filed on August 11, 2008)
  10 .25*   Service agreement with Cell Solutions, LLC. Dated October 9, 2009

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Exhibit No.
 
Description
 
  10 .26   Form of Subscription Agreement and Letter of Investment Intent in connection with $7 million maximum offering of Units completed in March 2008. (Incorporated herein by reference to Exhibit 10.52 to the 2007 10-KSB.)
  10 .27*   Consulting agreement with Dr. Mauro Scimia dated April 14, 2010
  10 .28*   Distribution service agreement with Amsino International, Inc. dated April 14, 2010
  14     Code of Ethics and Business Conduct of Officers, Directors and Employees of CytoCore, Inc. (Incorporated herein by reference to Exhibit 99.1 to the 2003 10-KSB.)
  21     Subsidiaries of the Company. (Incorporated herein by reference to Exhibit 21 to the 2007 10-KSB.)
  23 .1*   Consent of L. J. Soldinger Associates
  31 .1*   Certification of the Chief Executive Officer and Chief Financial Officer of CytoCore, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .1*   Certification of the Chief Executive Officer and Chief Financial Officer of CytoCore, Inc. 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 Section 13 or 15(d) 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.
 
  By: 
/s/  Robert McCullough, Jr.
Robert McCullough, Jr.
Chief Executive Officer and
Chief Financial Officer
 
Date: May 17, 2010
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  Robert McCullough, Jr.

Robert McCullough, Jr.
  Chief Executive Officer and
Chief Financial Officer
(Principal Accounting Officer and Director)
  May 17, 2010
         
/s/  Alexander M. Milley

Alexander M. Milley
  Director   May 17, 2010
         
/s/  John Abeles, M.D.

John Abeles, M.D.
  Director   May 17, 2010
         
/s/  Clint Severson

Clint Severson
  Director   May 17, 2010


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Report of Independent Registered Public Accounting Firm
 
To The Board of Directors and
Stockholders of CytoCore, Inc.
 
We have audited the accompanying consolidated balance sheets of CytoCore, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CytoCore, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations and resulting dependence upon access to additional external financing, raise substantial doubt concerning its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/ L J Soldinger Associates LLC
 
May 14, 2010
Dear Park, Illinois


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CYTOCORE, INC. AND SUBSIDIARIES
 
 
                 
    December 31,  
    2009     2008  
    (Dollars in thousands, except per share amounts)  
 
ASSETS
Current Assets:
               
Cash and cash equivalents
  $     $ 553  
Accounts receivable, net of allowance of $7,000 for the year ended December 31, 2008
    17       36  
Inventories.
    574       1,168  
Prepaid expenses and other current assets
    44       58  
                 
Total current assets
    635       1,815  
Fixed assets, net
    1,846       2,040  
Licenses, patents, and technology, net of amortization
    62       101  
Inventories, non-current
    325        
                 
Total assets
  $ 2,868     $ 3,956  
                 
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
               
Checks issued in excess of amounts on deposit
  $ 5     $  
Account payable
    2,102       2,320  
Accrued payroll costs
    818       127  
Accrued expenses
    1,225       1,041  
Advances from related parties
    763        
Notes payable
    70       70  
                 
Total current liabilities
    4,983       3,558  
                 
Stockholders’ Equity (Deficit):
               
Preferred stock; $0.001 par value; 10,000,000 shares authorized; 373,555 and 373,559 shares issued and outstanding at December 31, 2009 and 2008, respectively (Liquidation value of all classes of preferred stock of $2,876 at December 31, 2009)
    1,492       1,492  
Common stock, $0.001 par value; 500,000,000 shares authorized; 42,173,810 and 41,226,903 shares issued and 42,154,601 and 41,207,694 shares outstanding at December 31, 2009 and 2008, respectively
    42       41  
Additional paid-in capital
    92,106       91,065  
Treasury stock at cost: 19,209 shares at December 31, 2009 and 2008
    (327 )     (327 )
Accumulated deficit
    (95,351 )     (91,799 )
Accumulated comprehensive loss — Cumulative translation adjustment
    (77 )     (74 )
                 
Total stockholders’ equity (deficit)
    (2,115 )     398  
                 
Total liabilities and stockholders’ equity
  $ 2,868     $ 3,956  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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CYTOCORE, INC. AND SUBSIDIARIES
 
 
                 
    Year Ended December 31,  
    2009     2008  
    (Dollars in thousands, except per share amounts)  
 
Net Sales
  $ 44     $ 125  
Operating Expenses
               
Cost of revenues
    3       81  
Provision for inventory adjustment to market
    400        
Research and development (net of settlement of trade debt of $457,000 for the year ended December 31, 2009
    (85 )     1,852  
Selling, general and administrative
    3,022       4,301  
Selling, general and administrative — related parties
          263  
                 
Total cost and expenses
    3,340       6,497  
                 
Operating Loss
    (3,296 )     (6,372 )
                 
Other Income (Expense):
               
Interest expense
    (34 )     (9 )
Provision for legal settlement
    (222 )      
                 
Interest income
          53  
                 
Total other income (expense)
    (256 )     44  
                 
Loss from operations before income taxes
    (3,552 )     (6,328 )
Income taxes
           
                 
Net Loss
    (3,552 )     (6,328 )
Preferred stock dividends
          (58 )
                 
Net loss applicable to common stockholders
  $ (3,552 )   $ (6,386 )
                 
Basic and fully diluted net loss per common share
  $ (.08 )   $ (.16 )
                 
Weighted average number of common shares outstanding
    41,874,890       39,984,394  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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CYTOCORE, INC. AND SUBSIDIARIES
 
 
                 
    Year Ended December 31,  
    2009     2008  
    (Dollars in thousands)  
 
Operating Activities:
               
Net loss
    (3,552 )   $ (6,328 )
Non-cash charge for legal settlement
    222        
Depreciation
    379       229  
Amortization of license
    100       58  
(Decrease) increase in allowance for doubtful accounts
    (7 )     7  
Provision for inventory adjustment to market
    400        
Loss on disposal of fixed asset
          1  
Non-cash interest related to warrant modification
    21        
Stock and warrants issued to non-employees for services
    5       37  
Non-cash compensation expense
    2       87  
Stock issued to directors for compensation
    350        
Gain on settlements of trade indebtedness
    (457 )     (19 )
Changes in assets and liabilities:
               
Accounts receivable
    26       (28 )
Inventories
    (131 )     (1,155 )
Prepaid expenses and other current assets
    14       159  
Checks issued in excess of deposits
    5        
Accounts payable
    61       371  
Accrued expenses
    925       (537 )
                 
Net cash used for operating activities
    (1,637 )     (7,118 )
                 
Investing activities:
               
Purchase of license
    (61 )     (139 )
Capital purchases
    (10 )     (1,544 )
                 
Net cash used for investing activities
    (71 )     (1,683 )
                 
Financing activities:
               
Proceeds from issuance of common stock
          9,381  
Financing costs in connection with private placement of stock
          (405 )
Proceeds from related parties advances/demand loans
    885        
Proceeds from exercise of warrants and options
    270       62  
                 
Net cash provided by financing activities
    1,155       9,038  
                 
Net (decrease) increase in cash and cash equivalents
    (553 )     237  
Cash and cash equivalents at beginning of year
    553       316  
                 
Cash and cash equivalents at end of year
  $     $ 553  
                 
Supplemental disclosure of cash flow information:
               
Non-cash transaction during the year for:
               
Preferred stock and cumulative dividends converted into common stock
  $     $ 136  
Payment of accrued wages with common stock
  $ 31     $ 604  
Warrant exercised with debt in satisfaction of related party advances and other liabilities
  $ 168     $ 180  
 
The accompanying notes are an integral part of these consolidated financial statements.


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CYTOCORE, INC. AND SUBSIDIARIES
 
 
                                                                                 
                                                    Accumulated
       
    Preferred Stock
    Common Stock
                Additional
          Other
    Total
 
    par Value $0.001     par Value $0.001(1)     Treasury Stock(1)     Paid-in
    Accumulated
    Comprehensive
    Stockholders’
 
    Shares     Amount     Shares     Amount     Shares     Amount     Capital(1)     Deficit     Loss     Deficit  
    (Dollars in thousands)  
 
January 1, 2008
    403,272     $ 1,628       35,866,156     $ 36       19,209     $ (327 )   $ 80,917     $ (85,413 )   $ (77 )   $ (3,236 )
Comprehensive Loss:
                                                                               
Net loss
                                                    (6,328 )           (6,328 )
Foreign currency translation
                                                          3       3  
                                                                                 
Total net comprehensive loss
                                                                (6,325 )
Series B preferred stock converted to common stock
    (28,736 )     (115 )     19,786                           169       (54 )            
Series E preferred stock and cumulative dividends converted to common stock
    (977 )     (21 )     4,305                           25       (4 )            
Sale of common stock, net of financing costs of $405
                  4,690,500       5                     8,971                   8,976  
Exercise of warrants
                  301,288                           242                   242  
Common stock issued for compensation
                  200,000                           356                   356  
Common stock issued for services
                  144,868                           261                   261  
Warrants issued for compensation
                                              87                   87  
Warrants issued for services
                                              37                   37  
                                                                                 
December 31, 2008
    373,559     $ 1,492       41,226,903     $ 41       19,209     $ (327 )   $ 91,065     $ (91,799 )   $ (74 )   $ 398  
                                                                                 
Comprehensive Loss:
                                                                               
Net loss
                                                    (3,552 )           (3,552 )
Foreign currency translation
                                                          (3 )     (3 )
                                                                                 
Total net comprehensive loss
                                                                (3,555 )
Series E preferred stock and cumulative dividends converted to common stock
    (4 )           20                                              
Exercise of warrants
                  869,614       1                     437                   438  
Common stock issued for compensation
                  61,144                           576                   576  
Common stock issued for services
                  16,129                           5                   5  
Warrants issued for compensation
                                              2                   2  
Warrants issued for services
                                              21                   21  
                                                                                 
December 31, 2009
    373,555     $ 1,492       42,173,810     $ 42       19,209     $ (327 )   $ 92,106     $ (95,351 )   $ (77 )   $ (2,115 )
                                                                                 
 
The accompanying notes are an integral part of these consolidated financial statements


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CYTOCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular data in thousands, except per share amounts)
 
Note 1.   The Company and Basis of Presentation
 
CytoCore, Inc. (“CCI”, “CytoCore” or the “Company”) was incorporated as Ampersand Medical Corporation in Delaware in December 1998.
 
In September 2001, following the Company’s acquisition of AccuMed International, Inc. (“AccuMed”) via the merger of AccuMed into a wholly-owned subsidiary of CCI, the Company changed its corporate name to Molecular Diagnostics, Inc. in order to better represent its operations and products. On June 16, 2006, the shareholders ratified a proposal to change the Company’s name from Molecular Diagnostics, Inc. to CytoCore, Inc., which change was effected in Delaware on June 22, 2006. Except where the context otherwise requires, “CCI,” “CytoCore”, the “Company,” “we” and “our” refers to CytoCore, Inc. and our subsidiaries and predecessors.
 
CCI currently has one product for sale-its SoftPAP® collector. CCI is developing 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.
 
Liquidity
 
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 depend upon its securing substantial additional financing. During the first quarter of 2009, the Company began an offering of 1.4 million units at an offering price of $5.00 per unit. Each unit consisted of one share of Series F Convertible Preferred Stock and one warrant to purchase five shares of common stock. The warrants were offered with an exercise price of $0.75 per share. The preferred stock was to accrue dividends at the rate of $0.50 per annum, payable in cash or in additional shares of Series F preferred stock at the Company’s option. The preferred stock is convertible into common stock at $0.50 per share, subject to adjustment, at any time. The Company did not receive any proceeds from this offering during the 2009 fiscal year.
 
During the first quarter of 2009, the Company offered to holders of its warrants to purchase common stock the opportunity to exercise such warrants at a reduced price of $0.25 per share. During the year ended December 31, 2009, holders of warrants to purchase an aggregate 854,371 shares exercised their warrants at this reduced price. The Company received $214,000 from these exercises. In addition, other holders of warrants to purchase 28,292 shares exercised their warrants at the original exercise price. The Company received $56,000 from these exercises. Also holders of warrants to purchase an aggregate 670,000 shares of common stock exercised their warrants for a reduction of $168,000 of debt.
 
CCI has only enough cash to operate into June 2010. Management’s plans include efforts to obtain additional capital, although no assurances can be given about the Company’s ability to obtain such capital. If the Company is unable to obtain adequate additional financing or generate profitable sales revenues, or negotiate a favorable settlement plan with creditors, it will be unable to continue its product development and other activities and may be forced to cease operations. The consolidated financial statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.


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Note 2.   Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements included herewith include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
 
Use of Estimates
 
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.
 
Revenue Recognition
 
CCI recognizes revenue from product sales when the following criteria are met: shipment of a product or license to customers has occurred and there are no remaining Company obligations or contingencies; persuasive evidence of an arrangement exists; sufficient vendor-specific, objective evidence exists to support allocating the total fee to all elements of the arrangement; the fee is fixed or determinable; and collection is probable.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
 
Inventory
 
As of December 31, 2009 and 2008, inventory consisted of purchased parts totaling $272,000 and $136,000, and finished goods held for sale totaling $627,000 and $1,032,000, respectively. Inventory is valued at the lower of cost or market, using the first in, first out method. As of December 31, 2009, a writedown for valuation of the finished goods inventory totaling $400,000 was recorded in the statement of operations. Due to the uncertainty as to the timing of expected sales, the Company has classified $325,000 of inventory as non-current.
 
Property and Equipment
 
Property and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method over the assets’ estimated useful lives. Principal useful lives are as follows:
 
     
Furniture and fixtures
  5 years
Laboratory equipment
  5 years
Computer and communications equipment
  3 years
Design and tooling
  5 years
Machinery and equipment
  7 years
Leasehold improvements
  Useful life or term of lease, whichever is shorter
 
Normal maintenance and repairs for property and equipment are charged to expense as incurred, while significant improvements are capitalized.


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Licenses, Patents, and Technology
 
Licenses, patents, and purchased technology are recorded at their acquisition cost. Costs to prepare patent filings are expensed when incurred. Costs related to abandoned or denied patents are written off at the time of abandonment or denial. Amortization is begun as of the date of acquisition or upon the grant of the final patent. Costs are amortized over the asset’s useful life, which ranges from two to 17 years. The Company assesses licenses, patents, and technology periodically for impairment.
 
Impairment or Disposal of Long-Lived Assets
 
At each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, management of the Company evaluates the recoverability of such assets. An impairment loss is recognized if the amount of undiscounted cash flows is less than the carrying amount of the asset, in which case the asset is written down to fair value. The fair value of the asset is measured by either quoted market prices or the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.
 
Research and Development Costs
 
Research and development costs are charged to operations as incurred. CCI conducts a portion of its research activities under contractual arrangements with scientists, researchers, universities, and other independent third parties.
 
Stock Based Compensation
 
We follow the guidance of Financial Accounting Standards Board Codification 718-10, which requires that share-based payments be reflected as an expense based upon the grant-date fair value of those awards. The expense is recognized over the remaining vesting periods of the awards, if any.
 
Foreign Currency Translation
 
The functional currency of the Company’s foreign operations is the local currency. Accordingly, all assets and liabilities are translated into U.S. dollars using year-end exchange rates, and all revenues and expenses are translated using average exchange rates during the year.
 
Fair Value of Financial Instruments
 
The carrying value of accounts receivable, accounts payable, accrued expenses and notes payable approximate their respective fair values due to their short maturities.
 
Other Comprehensive Income (Loss)
 
Translation adjustments related to the Company’s foreign dormant subsidiary are included in other comprehensive loss and reported separately in stockholders’ equity (deficit).
 
Net Loss Per Share
 
Basic loss per share is calculated based on the weighted-average number of outstanding common shares. Diluted loss per share is calculated based on the weighted-average number of outstanding common shares plus the effect of dilutive potential common shares, using the treasury stock method. CCI’s calculation of diluted net loss per share excludes potential common shares as of December 31, 2009 and 2008 as the effect would be anti-dilutive (i.e. would reduce the loss per share).
 
Income Taxes
 
CCI follows the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting carrying amounts and the respective tax


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bases of assets and liabilities, and are measured using tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Valuation allowances are provided against deferred tax assets if it is more likely than not that the deferred tax assets will not be realized.
 
The Company adopted Codification 740-10 which relates to Accounting for Uncertainty in Income Taxes. This Interpretation prescribes a comprehensive model for financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.
 
Risks from Concentrations
 
Revenues were derived solely from two customers in 2009 and six customers during 2008.
 
Recent Accounting Pronouncements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to fair value measurements and related disclosures. This new guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. We adopted this new guidance on January 1, 2008, as required for our financial assets and financial liabilities. However, the FASB deferred the effective date of this new guidance for one year as it relates to fair value measurement requirements for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring basis. We adopted these remaining provisions on January 1, 2009. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.
 
In December 2007, the FASB issued new accounting guidance that defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. It also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to those arrangements. This new accounting guidance was effective for us on January 1, 2009, and its adoption did not have a significant impact on our consolidated financial statements.
 
In December 2007, the FASB issued new accounting guidance related to the accounting for non-controlling interests in consolidated financial statements. This guidance establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance requires that non-controlling interests in subsidiaries be reported in the equity section of the controlling company’s balance sheet. It also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. This guidance is effective for fiscal years beginning after December 15, 2008. We adopted this guidance on January 1, 2009, and it had no material impact on our consolidated financial statements.
 
In December 2007, the FASB issued new accounting guidance related to business combinations. The guidance establishes principles and requirements for how an acquirer entity (i) recognizes and measures in its financial statements the identifiable asset acquired, the liabilities assumed and any controlling interests in the acquired entity; (ii) recognizes and measures the goodwill acquired in the business combinations or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Costs of the acquisition will be recognized separately from the business combinations. The new guidance was effective for periods beginning after December 15, 2008. The Company has considered this standard when evaluating current and potential transactions to which it would apply.
 
In March 2008, new guidance was issued on disclosures about derivative instruments and hedging activities. The new guidance amends and expands the disclosure requirements of previously issued guidance and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The disclosures required by this guidance are included in Note 3, Acquisition of a Business in Note 16, Financial Instruments with Off-balance Sheet Risk and Concentrations of Credit Risk.
 
In June 2008, the FASB issued new accounting guidance clarifying that non-forfeitable instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the earnings allocation in computing earnings per share under the two-class method. The two-class method is an earnings allocation formula that treats participating securities as having the same rights to earnings as available to


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common shareholders. The adoption of the new guidance in first quarter 2009 did not impact reported basic and diluted earnings per share amounts because the Company did not have any non-forfeitable instruments granted in share based payment transactions.
 
In November 2008, the FASB issued new accounting guidance on equity method investment accounting considerations. The new guidance generally continues existing practices under the equity method of accounting for investments in common stock including the use of a cost-accumulation approach to initial measurement of the investment. The new guidance does not require the investor to perform a separate impairment test on the underlying assets of an equity method investment. However, an equity-method investor is required to recognize its proportionate share of impairment charges recognized by the investee, adjusted for basis differences, if any, between the investee’s carrying amount for the impaired assets and the cost allocated to such assets by the investor. The new guidance is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years and shall be applied prospectively. We adopted the guidance effective January 1, 2009, the result of which did not have a material impact on the Company since we currently have no equity method investments.
 
In December 2008, the FASB issued new accounting guidance concerning disclosures about transfers of financial assets and interests in variable interest entities. The new guidance includes disclosure objectives and requires public entities to provide additional year-end and interim disclosures about transfers of financial assets and involvement with variable interest entities. The requirements apply to transferors, sponsors, servicers, primary beneficiaries, and holders of significant variable interests in a variable-interest entity or qualifying special purpose entity. The new guidance is effective for the first interim period or fiscal year ending after December 15, 2008. Effective January 1, 2009, we adopted this guidance. Adoption of these provisions did not have a material impact on the Company’s consolidated financial statements.
 
In April 2009, the FASB issued new accounting guidance on fair value measurements. The new guidance impacts certain aspects of fair value measurement and related disclosures. The new guidance was effective beginning in the second quarter of 2009. The impact of adopting this new guidance did not have a material effect on the Company’s consolidated results of operations or financial position.
 
In May 2009, the FASB issued new accounting guidance related to the accounting and disclosures of subsequent events. This guidance incorporates the subsequent events guidance contained in the auditing standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. This guidance is effective for all interim and annual periods ending after June 15, 2009. We adopted this guidance upon its issuance and it had no material impact on our consolidated financial statements.
 
In June 2009, the FASB issued new accounting guidance related to the accounting and disclosures for transfers of financial assets. This guidance requires entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk with respect to the assets. This guidance is effective for fiscal years beginning after November 15, 2009. The Company adopted this guidance on January 1, 2010 and it did not have a material impact on the consolidated financial statements.
 
In June 2009, the FASB issued new accounting guidance to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the impact that the adoption of this guidance will have on our consolidated financial statements.
 
In June 2009, the FASB issued new accounting guidance entitled, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“ASC”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This new guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and was adopted by the Company during the third quarter of 2009. The adoption of this guidance has changed how we reference various elements of GAAP when preparing our financial statement disclosures, but did not have an impact on the Company’s consolidated financial statements.


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In September 2009, the accounting standard regarding arrangements that include software elements was updated to require tangible products that contain software and non-software elements that work together to deliver the products essential functionality to be evaluated under the accounting standard regarding multiple deliverable arrangements. This standard update must be adopted no later than January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented. We are currently evaluating the impact this new standard update will have on our consolidated financial statements.
 
In October 2009, the accounting standard regarding multiple deliverable arrangements was updated to require the use of the relative selling price method when allocating revenue in these types of arrangements. This method allows a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update must be adopted no later than January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented. We are currently evaluating the impact this standard update will have on our consolidated financial statements.
 
In January 2010, the FASB issued new guidance regarding improving disclosures about fair value measurements. The guidance requires new disclosures related to transfers in and out of Level 1 and Level 2 as well as activity in Level 3 fair value measurements. The guidance also provides clarification to existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Our effective date for the new disclosures and clarifications is the quarter ending March 31, 2010. Our effective date for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements is January 1, 2011. When effective, we will comply with the disclosure provisions of this new guidance.
 
Note 3.   Fixed Assets
 
Fixed assets consist of the following at December 31:
 
                 
    2009     2008  
 
Furniture and fixtures
  $ 47     $ 47  
Laboratory equipment
    508       508  
Computer and communications equipment
    261       261  
Design and tooling
    1,204       1,019  
Machinery and equipment
    777       777  
Construction in progress
    399       399  
                 
      3,196       3,011  
Less accumulated depreciation and amortization
    (1,350 )     (971 )
                 
Total
  $ 1,846     $ 2,040  
                 
 
For the years ended December 31, 2009 and 2008, depreciation expense was $379,000 and $229,000, respectively. The Company did not allocate any of the depreciation expense of the machinery and equipment or the design and tooling into inventory as very little of the time was spent manufacturing. This depreciation was included as a selling, general and administrative expense as excess idle time. Due to the financial condition of the Company, property and equipment was tested to determine if an impairment was required at December 31, 2009. The Company determined no impairment was necessary.
 
During the second quarter of 2009, a supplier filed suit against CCI alleging that the Company owes it approximately $377,000. This supplier had previously placed a lien on all of the Company’s machinery and equipment. See Note 11-Commitments and Contingencies for additional information regarding this claim.


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Note 4.   Licenses, Patents, and Technology
 
 
Licenses, patents, and technology include the following at December 31:
 
                 
    2009     2008  
 
Licenses
  $ 220     $ 159  
Patent costs
    133       133  
LabCorp Technology Agreement
    260       260  
                 
Subtotal
    613       552  
Less accumulated amortization
    (551 )     (451 )
                 
Total
  $ 62     $ 101  
                 
 
During 2008, the Company purchased a license for certain technology for a total of $200,000, of which $100,000 was paid upon signing the license agreement, and the balance of which was due in 18 equal monthly installments of $5,556. There were no payments remaining as of December 31, 2009. In addition, CCI is obligated to make future payments totaling $100,000 upon obtaining certain milestones. The Company is amortizing this license over its estimated useful life of two years. CCI recorded $100,000 and $58,000 as amortization expense during the years ending December 31, 2009 and 2008, respectively. All patents and technology have been fully amortized.
 
Note 5.   Accrued Expenses
 
Accrued expenses include the following at December 31:
 
                 
    2009     2008  
 
Accrued interest
  $ 363     $ 357  
Reserve for legal settlement
    220        
Accrued taxes
    214       102  
Accrued compensation
    40       241  
Other accrued expenses
    388       341  
                 
Total
  $ 1,225     $ 1,041  
                 
 
Note 6.   Notes Payable
 
Notes payable at December 31 consist of:
 
                 
    2009     2008  
 
Xillix Technologies Corporation, $361,000 Promissory Note issued June 26, 1998; interest rate Canadian Prime plus 6% per annum; represents a debt of AccuMed; due December 27, 1999
    34       34  
Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate 9% per annum
    15       15  
Ventana Medical Systems, Inc., $62,946 Promissory Note issued November 30, 2003; due December 31, 2003; interest at 8% per annum payable after December 31, 2003
    21       21  
                 
    $ 70     $ 70  
                 
 
The Company has failed to make principal and interest payments when due and is in breach of certain warranties and representations under certain of 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.


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Note 7.   Stockholders’ Equity
 
Earnings (loss) per share
 
A reconciliation of the numerator and the denominator used in the calculation of earnings (loss) per share is as follows:
 
                 
    For the Years Ended December 31,  
    2009     2008  
 
Basic and Diluted:
               
Net loss applicable to common stockholders (in thousands)
    (3,552 )   $ (6,328 )
Weighted average common shares outstanding
    41,874,890       39,984,394  
Net loss per common share
  $ (.08 )   $ (.16 )
                 
 
Stock options and warrants to purchase 3,471,197 and 5,546,339 shares and preferred stock convertible into 522,045 and 493,628 shares for the years ended December 31, 2009 and 2008, respectively, 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 years ended December 31, 2009 and 2008, respectively.
 
Preferred Stock
 
A summary of the Company’s preferred stock as of December 31 is as follows:
 
                         
        Shares Issued &
  Shares Issued &
        Outstanding
  Outstanding
Offering
  Shares Authorized   2009   2008
 
Series A convertible
    590,197       47,250       47,250  
Series B convertible, 10% cumulative
    1,500,000       93,750       93,750  
Series C convertible, 10% cumulative
    1,666,666       38,333       38,333  
Series D convertible, 10% cumulative
    300,000       175,000       175,000  
Series E convertible, 10% cumulative
    800,000       19,222       19,226  
Undesignated Preferred Series
    5,143,137              
                         
Total Preferred Stock
    10,000,000       373,555       373,559  
                         
 
Summary of Preferred Stock Terms
 
Series A Convertible Preferred Stock
 
     
Liquidation Value:
  $4.50 per share
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
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 dividends in arrears at December 31, 2009 were $332,000


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Series C Convertible Preferred Stock
 
     
Liquidation Value:
  $3.00 per share
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 dividends in arrears at December 31, 2009 were $94,000
 
Series D Convertible Preferred Stock
 
     
Liquidation Value:
  $10.00 per share
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 dividends in arrears at December 31, 2009 were $1,430,000
 
Series E Convertible Preferred Stock
 
     
Liquidation Value:
  $22.00 per share
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 dividends in arrears at December 31, 2009 were $349,000
 
Issuance of Securities
 
Common Stock
 
On March 23, 2009, the Company offered to all holders of warrants to purchase shares of the Company’s common stock the option to exercise their warrants at a reduced exercise price of $0.25 per share. During the year ended December 31, 2009, the Company received gross proceeds of $214,000 from the exercise of warrants for an aggregate 854,371 shares of unregistered, restricted common stock in connection with its offer. In addition, our former Chairman of the Board of Directors and our Chief Executive Officer exercised warrants to purchase an aggregate 670,000 share of unregistered restricted common stock through the reduction of $168,000 of debt. CCI recorded a charge of $21,000 related to this warrant modification and recorded the amount as interest expense. In addition, holders of warrants to purchase 28,292 shares exercised their warrants at the original exercise price. CCI received approximately $56,000 from these exercises.
 
For the year ended December 31, 2009, CCI received proceeds totaling $270,000 and reduced its debt by $168,000 from the exercise of warrants to purchase an aggregate 1,552,663 shares of unregistered, restricted common stock. As of December 31, 2009, 683,049 shares were not yet issued by the transfer agent.
 
During the year ended December 31, 2009, Board of Directors voted to accept, in lieu of payment for director fees amounting to $311,000 due to them, 778,194 shares of restricted, unregistered common stock. The common stock was valued at a fair value of $0.40 per share. The shares have not yet been issued by the transfer agent.


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In the first quarter of the 2009 fiscal year, as described in Note 8 below, the Company issued to two of its executive officers an aggregate 61,144 shares of restricted, unregistered common stock valued at $0.50 per share as compensation for services rendered in 2008. The shares were valued at $31,000, and such amount was recorded as compensation in 2008.
 
Also, the Board of Directors granted each director a bonus of 100,000 shares of restricted, unregistered common stock for services rendered. The shares granted totaled 700,000 and were valued at $0.40 per share. The Company recorded a charge of $280,000 as a selling, general and administrative expense. Such, shares have not yet been issued by the transfer agent.
 
CCI also issued 16,129 shares of unregistered, restricted common stock to a consultant and were valued at $0.31 per share. The Company recorded a charge of $5,000 as a selling, general and administrative expense.
 
During 2008, the Company offered units in a private placement to accredited investors in exchange for cash. Each unit consisted of two shares of common stock and a warrant to purchase one share of common stock at an exercise price of $2.00 per share. These warrants are for a term of three years and are exercisable immediately. Each unit was priced at $4.00. CCI received proceeds totaling approximately $8,976,000, net of expenses of $405,000 from the sale of an aggregate 2,345,250 units. The Company issued a total of 4,690,500 shares of common stock and warrants to purchase an aggregate 2,345,250 shares of common stock. In addition, the Company issued warrants to purchase an aggregate 311,500 shares of common stock to the placement agent that assisted the Company with the unit offering. The placement agent warrants have an exercise price of $2.25 per share and are exercisable for three years.
 
Also during 2008, the Company received gross proceeds of $242,000 from the exercise of warrants for 232,484 shares of unregistered, restricted common stock. Of the 232,484 shares exercised, warrants with respect to 195,192 shares were exercised by an affiliate of one of the Company’s directors. Payment of the exercise price for these warrants was made in part through tendering to the Company stock appreciation rights with a value of $180,000 owed by CCI to the affiliate. In addition, another affiliate of the same director exercised a warrant to purchase 154,808 shares of common stock under a cashless exercise option. As a result, it received 68,804 shares of common stock.
 
During 2008, CCI issued an aggregate 140,000 shares of restricted, unregistered common stock valued at $1.78 per share to its non-employee directors as payment for services rendered in 2007. The Company previously recorded the value of the common stock as non-cash compensation in 2007. CCI also issued 4,868 shares of unregistered restricted common stock to a non-affiliated consultant at a fair value of $12,000 as payment for services rendered. In addition, during the first quarter of 2008 CCI granted to each of its Chief Executive Officer and its Chief Operating Officer an award of 100,000 shares of restricted, unregistered common stock for services rendered in 2007. CCI recorded the value of such shares as a non-cash compensation expense in 2007.
 
Warrants
 
During the three months ended December 31, 2009, the Company issued warrants to purchase 2,000 shares of common stock with an exercise price of $0.04 per share to an employee. During the year ended December 31, 2009, the Company issued warrants to purchase 13,000 shares of common stock with a weighted average exercise price of $0.16 per share to an employee. CCI valued the warrants at $2,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation expense. These warrants have a term of three years and are immediately exercisable.
 
During 2008, the Company issued warrants to a company affiliated with the former Chairman of the Board of Directors under the terms of a consulting agreement. The warrants, which are exercisable immediately, entitle the recipient to purchase 10,000 shares of common stock at $2.06 per share and have a term of three years. CCI valued the warrants at $16,000 using the Black-Scholes valuation model and recorded the amount as a selling, general and administrative expense. In addition, CCI issued warrants to non-affiliated consultants to purchase an aggregate 11,428 shares of common stock with exercise prices ranging from $2.06 to $2.85 per share. CCI valued these warrants at $21,000 and recorded the amount as a selling, general and administrative expense.


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During the year ended December 31, 2008, the Company issued warrants in payment for services to purchase an aggregate 21,428 shares of common stock with exercise prices ranging from $2.06 to $2.85 per share. The warrants are for a term of three years and are exercisable immediately. CCI valued the warrants at $37,000.
 
As noted above, the Company also issued warrants during the 2008 fiscal year to purchase an aggregate 2,345,250 shares to participants in its unit financing and warrants to purchase an aggregate 311,500 shares of common stock to the placement agent that assisted the Company with such offering. All of these warrants are exercisable for three years; the warrants issued to investors have an exercise price of $2.00 per share and the warrants issued to the placement agent have an exercise price of $2.25 per share.
 
During 2008, the Company also issued warrants to purchase 10,000 shares of common stock with an exercise price of $2.06 per share to its Chief Executive Officer under the terms of his employment agreement. CCI valued the warrants at $16,000 using the Black-Scholes valuation model and recorded the amount as a selling, general and administrative expense. The warrants had a term of three years and were immediately exercisable.
 
In addition, the Company issued warrants to purchase an aggregate 50,000 shares of common stock with exercise prices ranging from $0.17 to $3.25 per share to employees. CCI valued the warrants at $71,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation expense in selling, general and administrative expense. The employee warrants have a term of three years and are immediately exercisable.
 
Conversions of Preferred Stock
 
During the year ended December 31, 2009, a holder of four shares of Series E Convertible Preferred Stock of CCI elected to convert such preferred shares and accrued and unpaid dividends thereon into 20 unregistered shares of the Company’s common stock. Dividends on these preferred shares were $7.00.
 
During 2008, a holder of 28,736 shares of Series B Convertible Preferred Stock elected to convert its preferred shares and accrued and unpaid dividends into 19,786 unregistered shares of the Company’s common stock, and holders of an aggregate 977 shares of Series E Convertible Preferred Stock elected to convert such preferred shares and accrued and unpaid dividends thereon into an aggregate 4,305 unregistered shares of the Company’s common stock. Dividends paid in common stock on these preferred shares were $58,000 for the 2008 fiscal year.
 
Application of Black-Scholes Valuation Model
 
In applying the Black-Scholes valuation model, the Company used the following assumptions for the years ended December 31:
 
         
    2009   2008
 
Expected volatility
  171% – 250%   125% – 132%
Expected term (years)
  11/2   11/2
Risk-free interest rate
  1.00%   4.25%
Expected dividend yield
  0%   0%
Forfeiture rate
  0%   0%
Resulting weighted average grant date fair value
  $0.16   $1.49
 
Expected volatility is based solely on historical volatility of our common stock over the period commensurate with the expected term of the warrants or stock options. The expected term calculation is based upon the expected term the warrant or option is to be held, which in most cases is one-half of the term of the warrant or option. The risk-free interest rate is based upon the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield of zero is based on the fact that we have never paid cash dividends on our common stock and we have no present intention to pay cash dividends.


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Warrants
 
At December 31, 2009, the Company had the following outstanding warrants to purchase shares of Common Stock:
 
                                 
    Total Warrant
  Warrant Shares
  Exercise Price
  Weighted Average
    Shares Outstanding   Exercisable   (not Weighted)   Years Until Expiration
 
      2,000       2,000     $ 0.06       2.94  
      2,000       2,000     $ 0.09       2.62  
      2,000       2,000     $ 0.17       1.86  
      9,000       9,000     $ 0.20       2.39  
      7,000       7,000     $ 0.61       1.68  
      63,333       63,333     $ 1.00       0.56  
      5,000       5,000     $ 1.33       1.00  
      5,000       5,000     $ 1.45       1.33  
      490,833       490,833     $ 1.50       1.32  
      2,000       2,000     $ 1.60       0.62  
      10,000       10,000     $ 1.66       0.62  
      5,000       5,000     $ 1.70       1.25  
      240,595       240,595     $ 1.80       1.92  
      27,000       27,000     $ 1.89       1.17  
      2,000       2,000     $ 1.90       1.43  
      2,190,167       2,190,167     $ 2.00       1.29  
      1,000       1,000     $ 2.23       1.25  
      283,266       283,266     $ 2.25       1.29  
      30,000       30,000     $ 2.67       0.49  
      64,000       64,000     $ 2.87       0.30  
      10,000       10,000     $ 3.25       1.25  
      10,003       10,003     $ 3.50       0.71  
                                 
Total
    3,461,197       3,461,197                  
                                 
 
Note 8.   Equity Incentive Plan and Employee Stock Purchase Plan
 
On May 25, 1999, CCI stockholders approved the establishment of the 1999 Equity Incentive Plan effective as of June 1, 1999 (the “Plan”). The Plan provided that the Board may grant various forms of equity incentives to directors and employees, including but not limited to Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, and Restricted Stock Awards. Grants under the Plan are exercisable at fair market value determined as of the date of grant in accordance with the terms of the Plan. Grants vest to recipients immediately or ratably over periods ranging from two to five years, and expire five to ten years from the date of grant.
 
On May 23, 2000, stockholders approved an amendment to the Plan, which increased the number of shares of common stock allocated for use in the Plan from 200,000 shares to 300,000 shares. On June 21, 2002, stockholders approved a second amendment to the Plan, which increased the number of shares allocated for use in the Plan from 300,000 shares to 550,000 shares. On July 29, 2004, stockholders approved a third amendment to the Plan, which increased the number of shares for use in the Plan from 550,000 to 2,000,000 shares. The Plan terminated in June 2009.
 
The Board of Directors has also granted options and warrants to purchase common stock of CCI that are not covered by the terms of the Plan.
 
For the years ended December 31, 2009 and 2008, the Company did not grant any options under the Plan or otherwise.


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However, during the quarter ended March 31, 2009, CCI’s Chief Executive Officer and Chief Operating Officer elected to receive a portion of their compensation, totaling 39,459 and 21,685 shares respectively, in restricted, unregistered common stock for services rendered in 2008. CCI valued the common stock at $0.50 per share for an aggregate total of $31,000 using the fair value method and recorded such value as compensation expense in 2008.
 
During the quarter ended June 30, 2009, our former Chairman of the Board of Directors and our Chief Executive Officer exercised warrants to purchase an aggregate 670,000 shares of unregistered, restricted common stock at a modified price of $0.25 through the reduction of $168,000 of debt. CCI recorded a charge of $15,000 related to this warrant modification and recorded the amount as interest expense for the three months ended June 30, 2009.
 
During 2008, the Company issued warrants to purchase 10,000 shares of common stock with an exercise price of $2.06 per share to its Chief Executive Officer under the terms of his employment agreement. CCI valued the warrants at $16,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation expense in selling, general and administrative expense. The warrants have a term of three years and are immediately exercisable.
 
Also in 2008, the Company issued to non-executive employees warrants to purchase an aggregate 50,000 shares of common stock with exercise prices of $0.17 and $3.25 per share. The Company valued these warrants at $71,000 using the Black-Scholes valuation model. The warrants have a term of three years and are immediately exercisable.
 
The fair value of each stock option and warrant award was determined as of the date of grant using the Black-Scholes option-pricing model with the following assumptions in each of the years ended December 31:
 
         
    2009   2008
 
Expected volatility
  171% – 250%   125% – 132%
Expected term (years)
  11/2   11/2 – 2
Risk-free interest rate
  1.00%   4.25
Expected dividend yield
  0%   0%
Forfeiture rate
  0%   0%
Resulting weighted average grant date fair value
  $0.16   $1.49
 
Expected volatility is based solely on historical volatility of our common stock over the period commensurate with the expected term of the warrants or stock options. The expected term calculation is based upon the expected term the warrant or option is to be held, which in most cases is one-half of the term of the warrant or option. The risk-free interest rate is based upon the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield of zero is based on the fact that we have never paid cash dividends on our common stock and we have no present intention to pay cash dividends.
 
As of December 31, 2009, there were no unrecognized compensation costs related to unvested share-based compensation arrangements since all costs related to grants in 2009 or previous years were fully recognized as of December 31, 2009.


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A summary of the Company’s stock option activity and related information follows:
 
1999 Stock Option Plan
 
                                 
        Weighted
      Weighted Average
        Average
  Aggregate
  Remaining
        Exercise
  Intrinsic
  Contractual Life
    Options   Price   Value   (Years)
 
Outstanding at December 31, 2007
    160,786     $ 3.050     $ 0.00       1.01  
Granted
                             
Exercised
                             
Forfeited
    (50,000 )   $ 3.220                  
                                 
Outstanding at December 31, 2008
    110,786     $ 2.974     $ 0.00       0.15  
Granted
                             
Exercised
                           
Forfeited
    (100,786 )   $ 2.000                  
                                 
Outstanding at December 31, 2009
    10,000     $ 11.940     $ 0.00       1.42  
 
Warrants and options issued outside of the Plan for employee compensation
 
                                 
        Weighted
      Weighted Average
        Average
  Aggregate
  Remaining
    Options and
  Exercise
  Intrinsic
  Contractual Life
    Warrants   Price   Value   (Years)
 
Outstanding at December 31, 2007
    1,305,000     $ 1.82     $ 299,000          
Granted
    79,000     $ 1.45                  
Exercised
                             
Forfeited
                             
Outstanding at December 31, 2008
    1,384,000     $ 1.80     $ 7,000          
Granted
    13,000     $ 0.16                  
Exercised
    (595,000 )   $ 1.60                  
Forfeited
                             
                                 
Outstanding at December 31, 2009
    802,000     $ 2.05                
 
At the Annual Meeting of Stockholders on May 25, 1999, CCI stockholders also approved the 1999 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan offered employees the opportunity to purchase shares of common stock of CCI through a payroll deduction plan at 85% of the fair market value of such shares at specified enrollment measurement dates. The Purchase Plan terminated during the second quarter of 2009. There was no activity in the Purchase Plan in 2009 or 2008.
 
Stock Appreciation Rights
 
During 2008, the holder of 45,000 stock appreciation rights (“SARs”) tendered the debt to the Company totaling $180,000 as payment for part of an exercise of warrants to purchase common stock. These SARs, issued in 1989, had an exercise price of $3.00 and could be exercised through November 20, 2001. These SARs were deemed automatically exercised on November 20, 2001 if not done so at the option of the holder. In general, each SAR entitled the holder to receive upon exercise an amount equal to the excess, if any, of the market value per share of common stock at the date of exercise over the exercise price of the SAR, plus any dividends or distributions per share made by CCI prior to the exercise date.


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Note 9.   Leases
 
During the year ended December 31, 2008, the Company amended its current facilities lease. CCI moved its administrative and sales operations to Suite 510 from Suite 502 in the same location, thereby increasing its leased space by approximately 3,100 square feet to 5,627 square feet. The amended lease is for a term of five years terminating on October 31, 2013, with one option to terminate the lease with nine months notice on October 31, 2011. The amended lease provides for initial annual rental payments of approximately $127,000, increasing each year to reach $150,000 in the final year of the lease. Total rental expense related to the Company’s headquarters location during the years ended December 31, 2009 and 2008 was $133,000 and $136,000, respectively.
 
Future minimum annual lease payments under these leases as of December 31, 2008 are:
 
         
    Operating
 
Year
  Leases  
 
2010
  $ 137  
2011
    141  
2012
    145  
2013
    124  
2014
     
         
Total
  $ 547  
         
 
Note 10.   Income Taxes
 
The provision for income taxes consists of the following for the years ended December 31, 2009 and 2008:
 
                 
    2009     2008  
 
Federal
  $     $  
State and local
           
Foreign
           
                 
Total income tax expense
  $     $  
                 
 
                 
    2009     2008  
 
Current
           
Deferred
           
                 
Total Income Tax Expense
           
                 
 
For the years ended December 31, 2009 and 2008, the provision for income taxes differs from the expected tax provision computed by applying the U.S. federal statutory rate to income before taxes as a result of the following:
 
                 
    2009   2008
 
Statutory U.S. federal rate
    (34.0 )%     (34.0 )%
Permanent differences
           
Valuation allowance
    34.0 %     34.0 %
Provision for income tax expense(benefit)
    0.0 %     0.0 %
                 


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The significant components of the Company’s deferred tax assets and liabilities are as follows:
 
                 
    2009     2008  
 
Deferred Tax Assets:
               
Net Operating Loss Carryforwards
  $ 29,500     $ 28,307  
Non-cash compensation
    156       391  
Writedown of intangibles
    (9 )     21  
Provision for inventory adjustment
    (100 )      
Accrued Liabilities
    23       188  
Allowance and reserves
    5       2  
                 
Total Deferred Tax Assets
    29,575       28,909  
Deferred Tax Liabilities:
               
Total Deferred Tax Liabilities
           
                 
Net Deferred Tax Asset
    29,575       28,909  
Valuation Allowance
    (29,575 )     (28,909 )
Net Deferred Tax Asset
  $     $  
                 
 
At December 31, 2009 and 2008, CytoCore had net operating loss carry forwards for U.S. federal income tax of approximately $73.3 million and $71.7 million and state income tax of approximately $83.0 million and $81.2 million respectively, which will begin to expire in 2018 and 2017, respectively. In September 2001, the Company acquired 100% of the outstanding stock of AccMed International, Inc. by means of merger of AccuMed into a wholly-owned subsidiary of the Company. AccuMed had a net operating loss carry forward for U.S. federal income tax purposes. For federal tax purposes, the acquired NOL is subject to limitation as prescribed under IRC Section 382 to approximately $6.2 million. The net operating loss carry forward expires at approximately $415,000 per year, starting December 31, 2006. At December 31, 2009, the total net operating loss carry forward from AccuMed is approximately $4.6 million.
 
For financial reporting purposes, the entire amount of deferred tax assets related principally to the net operating loss carry forwards has been offset by a valuation allowance due to uncertainty regarding the realization of the assets. The valuation allowance increased by approximately $0.7 million and decreased $1.5 million for the years ended December 31, 2009 and 2008, respectively.
 
Tax Uncertainties
 
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. The interpretation prescribes recognition and measurement parameters for the financial statement recognition and measurement of tax positions taken or expected to be taken in the Company’s tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.
 
Pursuant to FIN 48, the Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. The periods subject to examination for the Company’s tax returns are for the years from 2003 to 2008. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded consequently, the Company did not record a cumulative effect adjustment. The Company has not yet filed its 2008 income tax returns.


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The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in millions):
 
         
    Amount  
 
Gross Unrecognized tax benefits at December 31, 2008
  $  
Increases in tax positions for current year
     
Settlements
     
Lapse in statute of limitations
     
         
Gross Unrecognized tax benefits at December 31, 2009
  $  
         
 
The Company is subject to U.S. federal income tax including state and local jurisdictions. Currently, no federal or state income tax returns are under examination by the respective taxing jurisdictions.
 
The Company’s accounting policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company has not accrued interest for any periods.
 
Note 11.   Commitments and contingencies
 
Legal Proceedings
 
Settled in 2010
 
NeoMed Innovation III L.P.  In October 2007, NeoMed Innovation III L.P. (“NeoMed”) filed suit against the Company in the United State District Court, Eastern District of Illinois (Case No. 07C 5721). NeoMed alleged that the Company breached a contract with NeoMed. The alleged contract provided among other things that the Company would exchange two existing notes for a new note in the principal amount of $1,110,000 with an interest rate of 12%, payable on July 31, 2003 at the option of the holder in the form of common stock valued at $1.50 (adjusted for stock splits and equity raised at lower valuations). In 2006, the Company paid to NeoMed $1,060,000 and accrued interest calculated at 7% totaling $318,913. Despite accepting this payment, NeoMed demanded that the Company honor the alleged contract.
 
In April 2009, the Company entered into a tentative settlement agreement with NeoMed. The terms of the agreement provided that the Company would issue to NeoMed 2,658,800 shares of restricted, unregistered common stock and a warrant to purchase 217,000 shares of restricted unregistered common stock at an exercise price of $0.50 per share. As a result of the tentative settlement, the Company made an additional provision totaling $948,000, which was charged to other expense in the first quarter of 2009. In February 2010, the settlement agreement was approved by the court and CCI issued 2,658,800 shares of restricted unregistered common stock and a warrant to purchase 217,000 shares of restricted unregistered common stock to NeoMed. The warrant has a term of three years and is exercisable immediately. As a result of the settlement becoming final, CCI reduced the $948,000 provision to $222,000 in the fourth quarter. The $726,000 credit was applied to other expense in the fourth quarter.
 
Pending as of December 31, 2009
 
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 asking for payment of $377,000. The Company believes that it has made adequate provision for any obligation to MedPlast.
 
Wildman, Harrold, Allen & Dixon LLP.  In November 2009, Wildman, Harrold, Allen & Dixon (“Wildman”) filed suit against the Company in the Circuit Court of Cook County Illinois (Case No. 2009-L-013902). Wildman alleged that the Company failed to pay for legal services in the amount of $41,407. In January 2010, the Company entered into a Confession of Judgment and a payment plan with Wildman. The payment plan provides for an initial payment of $5,000 in January 2010, two payments of $1,500 each in February and March 2010, two payments of $2,500 each in April and May 2010, two payments of $4,000 each in June and July 2010, one payment of $10,203 in


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August 2010 and a final payment of $10,203 in September 2010. The Company has made all of the required payments to date.
 
Securities and Exchange Commission Subpoenas
 
SEC action.  The Company received subpoenas dated June 29, 2009, July 24, 2009 and March 2, 2010 (the “Subpoenas”) from the Securities and Exchange Commission (the “Commission”). The Subpoenas request documents pertinent to the Company’s procedures to raise equity in 2008 and 2009, as well as personal information including trading records of insiders and certain other documents relating to the Company’s operations. CCI has submitted to the Commission requested documents. The Company does not know what, if any, action the Commission intends to take at this time.
 
Other claims
 
Other Creditors.  CCI was 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.
 
In 2009, a vendor entered into a non-cash settlement releasing the Company from an obligation totaling $457,000. The settlement was recorded as a reduction in Research and Development expense in the fourth quarter.
 
Commitments
 
The Company has entered into long term commitments with various parties for the distribution of its products in foreign markets. As a result of cash constraints experienced by the Company, the Illinois Franchise Taxes due for the year 2009 have not been paid. CCI believes that it has made adequate provision for the liability including penalties and interest.
 
Note 12.   Related Party Transactions
 
During the year ended December 31, 2009, the Company was advanced $884,000 from related parties. Of these advances, $121,000 was used to exercise warrants held by the lender in lieu of the Company repaying that portion of the loan in cash. This resulted in a remaining balance of $763,000 as of December 31, 2009. These advance are payable upon demand and are non-interest bearing.
 
Our Chief Executive Officer exercised warrants to purchase an aggregate 485,000 shares of unregistered restricted common stock at a modified price of $0.25 through the reduction of $121,500 of debt. CCI recorded a charge of $15,000 related to this warrant modification and recorded the amount as interest expense.
 
In 2009, our former Chairman of the Board Daniel J. Burns exercised warrants to purchase an aggregate 185,000 shares of unregistered, restricted common stock at a modified price of $0.25 through the reduction of $46,000 of debt owed by CCI to him. This warrant modification was made available by the Company to all holders of warrants to purchase shares of the common stock of the Company.
 
During the year ended December 31, 2008, Mr. Burns was paid directly $17,000 as reimbursement for income taxes incurred on a common stock award made in 2006 and $23,000 as a reimbursement for expenses. Also, Future Wave Management Inc., of which Mr. Burns is President, was paid $181,000 for consulting services and $25,000 for expenses. In addition, the Company issued warrants to Future Wave under the terms of a consulting agreement. The warrants, which are exercisable immediately, entitle the recipient to purchase 10,000 shares of common stock at $2.06 per share and have a term of three years. The warrants were valued at $16,000.
 
During the first quarter of 2008, Mr. Burns participated in a private placement of units of the Company, each unit consisting of two shares of common stock and a warrant to purchase one common share. Mr. Burns invested $600,000 and received 300,000 shares and warrants to purchase 150,000 shares of common stock.
 
During 2008, the Company paid to Erik Danielsen, who became a director of the Company in September 2008, $25,000 under a consulting agreement which terminated in March 2008.


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Note 13.   Subsequent Events
 
The Company has evaluated subsequent events through May 14, 2010, which is the date it issued its financial statements, and concluded that the following subsequent events have occurred that require recognition in the Financial Statements or disclosure in the Notes to the Financial Statements.
 
In April 2010, the company received advances of $300,000 from a related party to fund operations. These advances are non-interest bearing and are due on demand.


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