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CYTOCORE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 15, 2014

Caution Regarding Forward-Looking Statements

This report contains "forward-looking statements" - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," or "will." These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: our ability to raise capital; our ability to retain key employees; our ability to engage third party distributors to sell our products; economic conditions; technological advances in the medical field; demand and market acceptance risks for new and existing products, technologies, and healthcare services; the impact of competitive products and pricing; U.S. and international regulatory, trade, and tax policies; product development risks, including technological difficulties; ability to enforce patents; and foreseeable and unforeseeable foreign regulatory and commercialization factors, our ability to develop new products and respond to technological changes in the markets in which we compete, our ability to obtain government approvals of our products, our ability to market our products, changes in third-party reimbursement procedures, and such other factors that may be identified from time to time in our Securities and Exchange Commission ("SEC") filings and other public announcements including those set forth under the caption "Risk Factors" in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Readers are cautioned not to place undue reliance on our forward-looking statements, as they speak only as of the date made. Except as required by law, we assume no duty to update or revise our forward-looking statements.

Overview of CytoCore, Inc.



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

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

On April 3, 2014, we acquired 100% of the issued and outstanding capital stock of Medite. Medite specializes in the development, manufacture and distribution of medical laboratory automation equipment and supplies for pathology, histology and cytology. Medite's focus is on the development of medical devices for the detection, risk assessment and diagnosis of cancer and related diseases.

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

Outlook



We have incurred significant losses since inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement our business plan and develop, manufacture and market our products. During the year ended December 31, 2013, we raised approximately $460,000 through the sale of common stock and advances from related parties. During the three months ended March 31, 2014, we raised approximately $62,000 through the sale of common stock and advances from related parties.

On April 3, 2014, in conjunction with the acquisition of Medite we closed on a private placement and received net proceeds totaling $1,529,400. We may require additional capital to complete our business plan. No assurances can be given about our ability to obtain capital.

Results of Operations



The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements presented in Part I, Item 1 of this Quarterly Report and the notes thereto, and our audited consolidated financial statements and notes thereto, as well as our Management's Discussion and Analysis, contained in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on April 14, 2014.

Three Months Ended March 31, 2014 as compared to Three Months Ended March 31,

2013 Revenue



Revenues for the three months ended March 31, 2014 decreased $8,000, or 73%, to $3,000 from $11,000 for the three months ended March 31, 2013. There were no sales of the collection system relating to the detection of breast cancer. Licensing revenue decreased approximately $1,000 to $3,000 for the quarter ended March 31, 2014.

Costs and Expenses Cost of Revenues



There was no cost of revenues for the quarter ended March 31, 2014, as a result of zero of the collection system relating to the detection of breast cancer. Cost of revenues for the quarter ended March 31, 2013 was $6,000.

10 Research and Development



For the three months ended March 31, 2014, our research and development ("R&D") expenses were $54,000, a $27,000, or 33%, decrease from $81,000 for the corresponding period in 2013. Of this $27,000 decrease, $15,000 related to a decrease in consultants costs, $4,000 related to a decrease in payroll costs and $8,000 related to a decrease in other project expenses,

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

Selling, General and Administrative

For the three months ended March 31, 2014, selling, general and administrative expenses ("SG&A") were $370,000 before an adjustment of trade debt totaling $66,000. Expenses for the quarter ended March 31, 2013 were $304,000 before an adjustment of trade debt totaling $193,000 and a reduction in the franchise taxes of $146,000, for a net gain of $35,000. The SG&A expenses represent a $66,000, or 22%, increase in the quarter ended March 31, 2014. Of this $66,000 increase, directors fees increase $84,000, professional fees increased $30,000, and payroll expense increased $16,000. These increases were partially offset by a decrease in depreciation expense of $24,000, a decrease in marketing costs of $12,000, a decrease in rent expense of $25,000, a decrease in payments made to consultants of $21,000, a decrease in insurance expense of $2,000 and a decrease in other costs of $6,000.

Other Income (Expense)



Interest expense decreased $60,000 to $3,000 for the three month period ended March 31, 2014 from $63,000 for the three month period quarter ended March 31, 2013. Of this decrease, $59,000 relates to the non-cash charge for related party advances that were converted to equity in the second quarter of 2013.

Net Loss



The net loss from operations for the three-month period ended March 31, 2014 was $358,000, as compared to $104,000 for the corresponding period in 2013, an increase of $254,000, or 244%. Of this increase, $359,000 resulted from the increase in SG&A expenses and a decrease in revenues partially offset by a decrease in R&D and interest expense.

The net loss applicable to common stockholders, which reflects the unpaid and undeclared preferred stock dividends from the period, increased to $394,000 for the quarter ended March 31, 2014 from $170,000 for the quarter ended March 31, 2013, an increase of $224,000, or 132%. The net loss per common share for each of the three month periods ended March 31, 2014 and March 31, 2013 was $0.00 per share on 277,535,857 and 78,610,477 weighted average common shares outstanding, respectively.

Liquidity and Capital Resources

To date, our capital resources and liquidity needs have been met from advances from related parties, and sales of our debt and equity securities to individual and institutional investors.

Research and development, clinical trials and other studies of the components of our CytoCore Solutions System, conversions from designs and prototypes into products and product manufacturing, sales and marketing efforts, medical consultants and advisors, and research, administrative and executive personnel are and will continue to be the principal basis for our cash requirements. We have obtained operating funds for the business since inception through private offerings of debt and equity securities to U.S. accredited and foreign investors. We will be required to make additional offerings in the future to support our operations until we are able to generate sufficient income from the sale of our products. We used $62,000 for operating activities during the three months ended March 31, 2014 compared to $86,000 during the three months ended March 31, 2013. During the quarter ending March 31, 2014, approximately $54,000 was incurred for R&D and approximately $305,000 was incurred for SG&A functions.

We did not engage any investing activity during the quarter ended March 31, 2014. At this time, we have no other material commitments for capital expenditures during the remainder of the 2014 fiscal year.

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We were able to raise proceeds of $62,000 through the sale of our common stock and advances from related parties during the three months ended March 31, 2014. The proceeds were used to develop our products and satisfy certain present and past obligations. At March 31, 2014, we had $2,000 of cash on hand. We believe that our current cash resources after the closing of our Private Placement on April 3, 2014, which raised gross proceeds of $1.529 million, will be sufficient to fund operations for the next twelve months. We continue to meet with qualified investors and although no assurance can be given, we believe will be able to raise capital to fund operations in the immediate future until we can be self-sufficient through operations.

Our operations have been, and will continue to be, dependent upon management's ability to raise operating capital through the issuance and sale of debt and equity securities and advances from related parties. We have incurred significant operating losses since inception of the business. We expect that significant on-going operating expenditures will be necessary to successfully implement our business plan and develop, manufacture and market our products.

Off-Balance Sheet Arrangements

As of March 31, 2014, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.


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Source: Edgar Glimpses


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