Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - Medite Cancer Diagnostics, Inc.v424204_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Medite Cancer Diagnostics, Inc.v424204_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Medite Cancer Diagnostics, Inc.v424204_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - Medite Cancer Diagnostics, Inc.v424204_ex32-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended September 30, 2015
   
¨ 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 000-00935

 

MEDITE CANCER DIAGNOSTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 36-4296006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
   
4203 SW 34 th Street, Orlando, FL 32811
(Address of principal executive offices) (Zip Code)

 

(407) 996-9630

(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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨ (not required) ¨

 

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

 

Large Accelerated Filer ¨ Accelerated Filer  ¨
   
Non-Accelerated Filer ¨ Smaller Reporting Company x

 

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

 

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

 

COMMON STOCK, $0.001 PAR VALUE, at November 13, 2015: 20,766,206

 

 

 

 

MEDITE Cancer Diagnostics, Inc.

 

Form 10-Q

 

For the Quarterly Period Ended September 30, 2015

 

TABLE OF CONTENTS

 

  Page
PART I.  – FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
a) Condensed Consolidated Balance Sheets – September 30, 2015 (unaudited) and December 31, 2014 3
     
b) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) — Three and Nine months Ended September 30, 2015 and 2014 (unaudited) 4
     
c) Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2015 and September 30, 2014 (unaudited) 6
     
d) Notes to Condensed Consolidated Financial Statements (unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
Item 4. Controls and Procedures 19
     
PART II. — OTHER INFORMATION  
     
Item 1. Legal Proceedings 20
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
     
Item 3. Defaults upon Senior Securities 20
     
Item 6. Exhibits 21
     
SIGNATURES 22
     
EXHIBIT INDEX  
     
Exhibit 31.1     Section 302 Certification of Chief Executive Officer  
Exhibit 31.2     Section 302 Certification of Chief Financial Officer  
Exhibit 32.1     Section 906 Certification of Chief Executive Officer  
Exhibit 32.2     Section 906 Certification of Chief Financial Officer  

 

 2 

 

 

PART I. — FINANCIAL INFORMATION

 

MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except shares and per share amounts)

 

   September 30,   December 31, 
   2015   2014 
   (unaudited)     
Assets          
           
Current assets:          
Cash  $347   $230 
Accounts receivable, net   1,302    1,991 
Inventories   4,161    3,415 
Prepaid expenses and other current assets   208    154 
Total current assets   6,018    5,790 
           
Property and equipment, net   2,016    2,091 
In-process research and development   4,620    4,620 
Trademarks, trade names   1,240    1,240 
Goodwill   2,453    2,453 
Other assets   398    245 
Total assets  $16,745   $16,439 
           
Liabilities and Stockholders’ Equity          
           
Current liabilities:          
Secured lines of credit and current portion of long-term debt  $1,764   $2,555 
Account payable and accrued expenses   4,025    4,134 
Advances – related parties   85    110 
Total current liabilities   5,874    6,799 
Long-term debt, net of current portion   981    1,209 
Total liabilities   6,855    8,008 
           
Commitments and contingencies          
           
Stockholders’ equity :          
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 198,355 and 373,355 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively (liquidation value of all classes of preferred stock $1,121 and $2,871 as of September 30, 2015 and December 31, 2014, respectively)   962    1,487 
Common stock, $0.001 par value; 3.5 billion shares authorized, 20,766,206 and 19,427,331 issued and outstanding as of September 30, 2015 and December 31, 2014, respectively   21    19 
Additional paid-in capital   8,343    5,763 
Treasury stock   (327)   (327)
Accumulated other comprehensive loss   (479)   (149)
Retained earnings   1,370    1,638 
Total stockholders’ equity   9,890    8,431 
           
Total liabilities and stockholders’ equity  $16,745   $16,439 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 3 

 

 

MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except shares and per share amounts)

 

   Three Months Ended September 30, 
   2015   2014 
   (unaudited)   (unaudited) 
         
Net sales  $2,662   $2,785 
Cost of revenues   1,493    1,198 
Gross profit   1,169    1,587 
           
Operating expenses          
Depreciation and amortization expense   30    48 
Research and development   222    317 
Selling, general and administrative   785    1,260 
Total operating expenses   1,037    1,625 
Operating income (loss)   132    (38)
           
Other expenses          
Interest expense   46    71 
Other expenses   11    2 
Total other expenses   57    73 
           
Income (loss) before income taxes   75    (111)
           
Income tax expense (benefit)   16    (8)
Net income (loss)   59    (119)
           
Preferred dividend   (23)   (18)
           
Net income (loss) applicable to common stockholders  $36   $(137)
           
Condensed consolidated statements of comprehensive income (loss)          
Net income (loss)   59    (119)
Other comprehensive income (loss)          
Foreign currency translation adjustments   (170)   45 
           
Comprehensive (loss)  $(111)  $(74)
           
Earnings (loss) per share          
Net income (loss) applicable to common stockholders   36    (137)
Basic and diluted earnings (loss) per share   -    (0.01)
Weighted average basic and diluted shares outstanding   20,484,936    19,345,231 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 4 

 

 

MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except shares and per share amounts)

 

   Nine Months Ended September 30, 
   2015   2014 
   (unaudited)   (unaudited) 
         
Net sales  $7,081   $8,694 
Cost of revenues   4,028    4,456 
Gross profit   3,053    4,238 
           
Operating expenses          
Depreciation and amortization expense   95    126 
Research and development   825    762 
Selling, general and administrative   2,191    2,902 
           
Total operating expenses   3,111    3,790 
Operating income (loss)   (58)   448 
           
Other expenses          
Interest expense   157    221 
Other expenses   61    153 
Total other expenses   218    374 
           
Income (loss) before income taxes   (276)   74 
           
Income tax expense (benefit)   (9)   24 
Net income (loss)   (267)   50 
           
Preferred dividend   (69)   (54)
           
Net (loss) applicable to common stockholders  $(336)  $(4)
           
Condensed consolidated statements of comprehensive income (loss)          
Net income (loss)   (267)   50 
Other comprehensive income (loss)          
Foreign currency translation adjustments   (330)   41
           
Comprehensive income (loss)  $(597)  $91 
           
Earnings (loss) per share          
Net (loss) applicable to common stockholders   (336)   (4)
Basic and diluted earnings (loss) per share   (.01)   - 
Weighted average basic and diluted shares outstanding   20,051,206    17,683,284 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 5 

 

 

MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

 

   Nine Months
Ended September 30,
 
   2015   2014 
   (unaudited)   (unaudited) 
Cash flows from operating activities:          
Net income (loss)  $(267)  $50 
Adjustments to reconcile net income (loss) to net cash used in operating activities          
Depreciation   95    126 
Non cash interest   -    4 
Changes in assets and liabilities:          
Accounts receivable, net   689    56 
Inventories   (746)   (1,058)
Prepaid expenses and other current assets   (54)   (150)
Accounts payable and accrued liabilities   (109)   (391)
Net cash used in operating activities   (392)   (1,363)
           
Cash flows from investing activities:          
Purchases of equipment   (19)   (391)
Increase (decrease) in other assets   (154)   1 
Net cash used in investing activities   (173)   (390)
           
Cash flows from financing activities:          
Net advances (repayments) on lines of credit and long-term debt   (791)   180 
Term note repayments   (228)   (159)
Proceeds from sale of common stock, net issuance costs of $28   2,056    1,842 
Net advances from (repayment to) related parties   (25)   9 
Net cash provided by financing activities   1,012    1,783 
           
Effect of exchange rates on cash   (330)   21 
Net increase in cash   117    140 
Cash at beginning of year   230    75 
           
Cash at end of the period  $347   $215 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $103   $149 
Cash paid for income taxes  $68   $16 
           
Supplemental schedule of non-cash financing activity:          
Conversion of preferred stock to common stock  $525   $- 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 6 

 

 

MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular data in thousands, except shares and per share amounts)

 

Note 1. Organization and Summary of Significant Accounting Policies

 

MEDITE Cancer Diagnostics, Inc., (“MDIT”, “MEDITE” or the “Company”) was incorporated in Delaware in December 1998.

 

These statements include the accounts of MEDITE Cancer Diagnostics, Inc., (former CytoCore, Inc., the “Company”, “we” and “us”) and its wholly owned subsidiaries, which consists of MEDITE Enterprise, Inc., MEDITE GmbH, Burgdorf, Germany, MEDITE GmbH, Salzburg, Austria, MEDITE Lab Solutions, Inc. (formerly MEDITE Inc.), Orlando, USA, MEDITE sp. z o.o., Zilona-Gora, Poland and CytoGlobe, GmbH, Burgdorf, Germany.

 

In April 2014, the shareholders of the Company consummated a transaction in which 100% of the issued and outstanding shares of MEDITE Enterprise, Inc., were acquired by CytoCore, Inc. in exchange for the issuance by CytoCore, Inc., of 15,000,000 shares of its common stock to the shareholders of the Company. The result of this transaction was for the Company and its wholly owned subsidiaries to become wholly owned subsidiaries of CytoCore, Inc., a US public company. In addition, the shareholders of the Company became the majority owners of CytoCore, Inc., which resulted in the transaction being accounted for as a reverse merger, in which the financial statements of MEDITE Enterprise, Inc. and its subsidiaries became those of CytoCore, Inc., now MEDITE Cancer Diagnostics, Inc.         

 

MEDITE is a medical technology company specializing in the development, engineering, manufacturing and marketing of premium medical devices and consumables for detection, risk assessment and diagnosis of cancer and related diseases. By acquiring MEDITE the company changed from solely research operations to an operating company with 71 employees in four countries, a distribution network to about 70 countries worldwide, a well-known and established brand name, a wide range of selling products and the established infrastructure necessary for a company acting in the medical industry.

 

Consolidation, Basis of Presentation and Significant Estimates

 

The accompanying condensed consolidated financial statements for the periods ended September 30, 2015 and 2014 included herein are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2015 or for any other period. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the interim information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements disclosed in the Report on Form 10-K/A for the year ended December 31, 2014 and other filings with the Securities and Exchange Commission.

 

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

 

Revenue Recognition

 

The Company derives its revenue primarily from the sale of medical products and supplies for the diagnosis and prevention of cancer. Product revenue is recognized when all four of the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products has occurred; (3) the selling price of the product is fixed or determinable; and (4) collectability is reasonably assured. The Company generates the majority of its revenue from the sale of inventory. The Company recognizes revenue when title and risk of loss transfer to the customer and all other revenue recognition criteria have been met. For a small subset of sales, the Company and its customers agree in the sales contract that risk of loss and title transfer upon the Company packing the items for shipment, segregating the items packaged and notifying the Customer that their items are ready for pickup. The Company records such sales at time of completed packaging and segregation of the items from general inventory and notification has been confirmed by the customer.

 

 7 

 

  

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets as follows:

 

Buildings 33 yrs
Machinery and equipment 3-10 yrs
Office furniture and equipment 2-10 yrs
Vehicles 5 yrs
Computer equipment 3-5 yrs

 

Normal maintenance and repairs for equipment are charged to expense as incurred, while significant improvements are capitalized.

 

Research and Development

 

All research and development costs are expensed as incurred. Research and development costs consist of engineering, product development, testing, developing and validating the manufacturing process, and regulatory related costs.

 

Acquired In-Process Research and Development

 

Acquired in-process research and development (“IPR&D”) that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, MEDITE will make a determination as to the then useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results.

 

Impairment or Disposal of Long-Lived Assets Including Finite Lived Intangibles

 

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. Unless events or circumstances have changed significantly, we generally do not re-test at year end assets acquired from a business combination in the year of acquisition.

 

Impairment of Indefinite Lived Intangible Assets Other Than Goodwill

 

The Company has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if the Company concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Financial Accounting Standards Board Codification Subtopic 350-30.

 

 8 

 

 

Goodwill

 

The Company allocates goodwill to reporting units based on the reporting unit expected to benefit from the business combination. The Company evaluates our reporting units on an annual basis. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December 31) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Unless events or circumstances have changed significantly, we generally do not re-test at year end assets acquired from a business combination in the year of acquisition.

 

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

 

Impairment Policy and Procedures for In Process Research and Development, Trademarks, Trade Names and Goodwill

 

The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

 

These assets were independently valued at April 3, 2014, the date of the MEDITE Enterprise, Inc. purchase by CytoCore, Inc., based upon valuation assumptions such as projected discounted cash-flow amongst others and updated through September 30, 2015. In the future, the Company plans to review the assumptions annually to determine if any impairment allowances are necessary until the underlying products under development and long-lived assets have been commercialized.

 

Recent Accounting Pronouncements

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): “Simplifying the Measurement of Inventory”. The amendments require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The Company does not expect this amendment to have a material impact on its consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations and securitization structures. The amendments in the ASU affect the consolidation evaluation for reporting organizations and simplifies the current US GAAP requirements by reducing the number of consolidation models. The guidance is effective for fiscal years and interim reporting periods beginning on or after December 15, 2015. The Company does not expect this standard to have a material impact on its statements of operations, statements of cash flows or financial position.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue with Contracts from Customers.” ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The ASU introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The updated guidance is effective for public entities for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently evaluating the impact of the updated guidance, but the Company does not believe that the adoption of ASU 2014-09 will have a significant impact on its consolidated financial statements.

 

Note 2. Reverse Merger

 

In January 2014, the Company and the previous owners of MEDITE Enterprise, Inc. entered into an agreement to merge with the former CytoCore, Inc. The merger required as a pre-requisite that among other items CytoCore settle certain outstanding payroll amounts in stock and that CytoCore complete a private placement with gross proceeds of a minimum of $2 million, which was later amended to $1.5 million. On April 3, 2014 CytoCore issued 697,234 shares of its common stock in satisfaction of approximately $1.6 million in outstanding accrued payroll. On April 4, 2014 the Company closed on a private placement in which it received gross proceeds of $1.5 million and issued 955,875 shares of its common stock. The merger closed on April 4, 2014 with the previous owners of MEDITE Enterprise, Inc. receiving 14,687,500 shares of the Company’s common stock. An additional 312,500 shares remained to be issued because certain conditions had not been fulfilled in accordance with the agreement to complete the exchange for 100% of the issued and outstanding stock of MEDITE Enterprise, Inc. The remaining 312,500 shares were issued in October 2015. The consideration paid was determined based upon the number of shares outstanding from the former CytoCore, Inc. of approximately 3,502,700 common shares outstanding before the merger at $1.60 per share (the same price per share in the concurrent private placement noted above).

 

Because the owners of MEDITE Enterprise, Inc. received approximately 81.1% of the then issued and outstanding stock of the Company, the merger was treated as a reverse acquisition, in which for accounting purposes MEDITE Enterprise, Inc. acquired CytoCore, Inc.

 

 9 

 

 

Under the purchase method of accounting, the assets acquired and liabilities assumed are recorded at their respective fair values as of the transaction date. In connection with the merger, the consideration paid, the assets acquired and liabilities assumed, recorded at fair value on the date of acquisition, are summarized in the following table:

 

   In thousands 
Assets acquired     
Cash  $1 
Other current assets   12 
Property and equipment   81 
Trade names /trademarks   1,240 
In-Process research and development   4,620 
Goodwill   2,453 
    8,407 
      
Liabilities assumed     
Accounts payable & accrued expenses   3,220 
Related party advances   102 
Loans payable   21 
    3,343 
      
Consideration paid in the form of common stock  $5,064 

 

The Company is treating the fair value assigned to trade names/trademarks as indefinite lived intangibles. The in process research and development covers four separate areas (a) breast pap device and related consumables (b) new biomarkers (c) a new stain and (d) the SoftKit. Until the Company either completes development or abandons such development, the in-process research and development costs are treated as indefinite lived intangible assets. If the Company is successful in these development projects, it expects the in-process research and development will be amortized over an approximate 15 year life.

 

Note 3. Inventories

 

The following is a summary of the components of inventories (in thousands):

 

   September 30,   December 31, 
   2015   2014 
   (unaudited)     
Raw materials  $1,934   $1,229 
Work in progress   225    33 
Finished Goods   2,002    2,153 
           
   $4,161   $3,415 

 

No amounts were reserved for obsolete inventory as of September 30, 2015 and December 31, 2014.

 

 10 

 

 

Note 4. Property and Equipment

 

The following is a summary of the components of property and equipment (in thousands):

 

   September 30,   December 31, 
   2015   2014 
   (unaudited)     
Land  $215   $233 
Buildings   1192    1,291 
Machinery and equipment   546    529 
Office furniture and equipment   295    265 
Vehicles   42    103 
Computer equipment   111    110 
Construction in progress   521    559 
Less: Accumulated depreciation   (906)   (999)
   $2,016   $2,091 

 

Depreciation expense amounted to approximately $95,000 and $126,000 for the nine months ended September 30, 2015 and 2014, respectively.

 

Note 5. Long-term Debts and Lines of Credit

 

The Company’s outstanding note payable indebtedness was as follows as of (in thousands):

 

   September 30,   December 31, 
   2015   2014 
   (unaudited)     
Hannoversche Volksbank credit line #1  $1,169   $1,880 
Hannoversche Volksbank credit line #2   399    465 
Hannoversche Volksbank term loan #1   62    135 
Hannoversche Volksbank term loan #2   50    81 
Hannoversche Volksbank term loan #3   203    270 
Ventana Medical Systems, Inc. Promissory Note   21    21 
Denture DZ Equity Partners Participation right   841    912 
   $2,745   $3,764 

 

In July 2006, MEDITE GmbH, Burgdorf, entered into a master line of credit agreement #1 with Hannoversche Volksbank. The line of credit was amended in 2012 and was later amended to increase the credit limit to Euro 1.8 million ($2.0 million as of September 30, 2015). In January 2015, the master credit line was reduced to Euro 1.6 million ($1.8 million as of September 30, 2015) and further reduced to the original Euro 500,000 ($560,865 as of September 30, 2015) and subsequently increased to Euro 1.1 million ($1.2 million as of September 30, 2015) effective July 1, 2015. Borrowings on the master line of credit agreement #1 bears interest at a variable rate based on Euribor (Euro Interbank Offered Rate) depending on the type of advance elected by the company and defined in the agreement. Interest rates depending on the type of advance elected ranged from 3.77 – 8.00% during the period ended September 30, 2015. The line of credit has no stated maturity date. The line of credit is collateralized by the accounts receivable and inventory of MEDITE GmbH, Burgdorf, a mortgage on the buildings owned by the Company and is guaranteed by Michaela Ott and Michael Ott, the former sole shareholders of the Company.

 

In June 2012, CytoGlobe, GmbH, Burgdorf, entered into a line of credit agreement #2 with Hannoversche Volksbank. The line of credit granted a maximum borrowing authority of Euro 400,000 ($448,692 as of September 30, 2015). Borrowings on the master line of credit agreement #2 bears interest at a variable rate based on Euribor (Euro Interbank Offered Rate) depending on the type of advance elected by the Company and defined in the agreement. Interest rates depending on the type of advance elected ranged from 3.77 – 8.00% during the period ended September 30, 2015. The line of credit has no stated maturity date. The line of credit is collateralized by the accounts receivable and inventory of CytoGlobe GmbH, Burgdorf and is guaranteed by Michaela Ott and Michael Ott, the former sole shareholders of the Company, and the state of Lower Saxony (Germany) to support high-tech companies in the area.

 

In December 2006, MEDITE GmbH, Burgdorf, entered into a Euro 500,000 ($560,865 as of September 30, 2015) term loan agreement #1 with Hannoversche Volksbank with an interest rate of 3.4% per annum. The term loan has a maturity of September 2016 and requires semi-annual principal payments of approximately Euro 27,780 ($31,162 as of September 30, 2015). The term loan is guaranteed by Michaela Ott and Michael Ott, the former sole shareholders of the Company and a mortgage on the property of the Company. 

 

 11 

 

 

 

In June 2006, MEDITE GmbH, Burgdorf, entered into a Euro 400,000 ($448,692 as of September 30, 2015) term loan #2 with Hannoversche Volksbank with an interest rate of 3.6 % per annum. The term loan has a maturity of June 2016, requires 18 semi-annual principal repayments of approximately Euro 22,220 ($24,928 as of September 30, 2015). The term loan is guaranteed by Michaela Ott and Michael Ott, the former sole shareholders of the Company and is collateralized by subordinated assignments of all of the receivables and inventories of MEDITE GmbH, Burgdorf and also has a subordinated pledge of share term life insurance policies.

 

In November 2008, MEDITE GmbH, Burgdorf, entered into a Euro 400,000 ($448,692 as of September 30, 2015) term loan #3 with Hannoversche Volksbank with an interest rate of 4.7% per annum. The term loan has a maturity of December 31, 2018, and requires quarterly principal repayments of Euro 13,890 ($15,581as of September 30, 2015). The term loan is guaranteed by Michaela Ott and Michael Ott, the former sole shareholders of the Company, and is collateralized by a partial subordinated pledge of the receivables and inventory of MEDITE GmbH, Burgdorf.

 

In March 2009, the Company entered into a participation rights agreement in the form of a debenture with a mezzanine lender who advanced the Company up to Euro 1.5 million, ($1.7 million as of September 30, 2015) in two tranches of Euro 750,000 each, ($841,298 as of September 30, 2015). The first tranche was paid to the Company at closing with the second tranche being conditioned on MEDITE GmbH, Burgdorf and its subsidiaries hitting certain performance targets. Those targets were not met and the second tranche was never called. The debenture pays interest at the rate of 12.15% per annum and matures at December 31, 2016.

 

As of the date of filing, the remaining balance of approximately $21,000 on the note payable to Ventana Medical Systems, Inc. was in default. However, on February 23, 2015, the Company reached an agreement with Ventana Medical Systems, Inc. whereby both parties have agreed that Ventana Medical Systems, Inc. will accept $38,281 as payment in full for all outstanding principal and accrued interest. The $38,281 has been included in current portion of long-term debt on the consolidated balance sheet. As part of this agreement, Ventana Medical Systems, Inc. has agreed to convert $1.75 million stated value of Series D Preferred stock and all outstanding accrued dividends of $656,250 for 12,000 shares of the Company’s common stock. Prior to the execution of this agreement, the Company had failed to make principal and interest payments when due and is in breach of certain warranties and representations under the notes included above.

 

During 2015, the Company reduced their floating lines of credit and term loans with Hannoversche Volksbank by $1,019 net of currency fluctuations.

 

Note 6. Related Party Advances

 

At September 30, 2015 and December 31, 2014, the Company owed its then CFO and Chairman of the Board for prior advances of approximately $85,000 and $110,000 respectively.

 

Note 7. Common Stock

 

During the nine months ended September 30, 2015, the Company issued 1,338,875 shares of unregistered stock to qualified individuals pursuant to exemptions from registration under Regulation D and Section 4(2) of the Securities Act of 1933 at 1.60 for proceeds of $2,134,000, net of $81,000 of issuance costs. Further, the Company issued 12,000 shares of common stock in a Series D Preferred Stock conversion as further discussed in Note 8. During the third quarter ended September 30, 2015 the Company issued 1,086,250 shares of common stock at $1.60 for proceeds of $600,000 to the President of UNIC Medical of China. UNIC is the Company’s distributor in China and other Asian countries.

 

Note 8. Preferred Stock and Warrants

 

A summary of the Company’s preferred stock as of September 30, 2015 and December 31, 2014 is as follows.

 

   September 30,   December 31, 
   2015   2014 
   (unaudited)     
   Shares Issued &   Shares Issued & 
Offering  Outstanding   Outstanding 
Series A convertible   47,250    47,250 
Series B convertible, 10% cumulative dividend   93,750    93,750 
Series C convertible, 10% cumulative dividend   38,333    38,333 
Series D convertible, 10% cumulative dividend   -    175,000 
Series E convertible, 10% cumulative dividend   19,022    19,022 
Total Preferred Stock   198,355    373,355 

 

 12 

 

 

As of September 30, 2015 and December 31, 2014, the Company had cumulative preferred undeclared and unpaid dividends. In accordance with the Financial Accounting Standard Board’s Accounting Standards Codification 260-10-45-11, “Earnings per Share”, these dividends were added to the net loss in the net loss per share calculation for the six months ended Septebmer 30, 2015.

 

Summary of Preferred Stock Terms

 

Series A Convertible Preferred Stock

Liquidation Value: $4.50 per share, $212,625
Conversion Price: $10,303 per share
Conversion Rate: 0.00044—Liquidation Value divided by Conversion Price ($4.50/$10,303)
Voting Rights: None
Dividends: None
Conversion Period: Any time

 

Series B Convertible Preferred Stock

Liquidation Value: $4.00 per share, $375,000
Conversion Price: $1,000 per share
Conversion Rate: 0.0040—Liquidation Value divided by Conversion Price ($4.00/$1,000)
Voting Rights: None
Dividends: 10%—Quarterly—Commencing March 31, 2001
Conversion Period: Any time

Cumulative dividends in arrears at September 30, 2015 and December 31, 2014 were $548,788 and $520,665, respectively.

  

Series C Convertible Preferred Stock

Liquidation Value: $3.00 per share, $115,000
Conversion Price: $600 per share
Conversion Rate: 0.0050—Liquidation Value divided by Conversion Price ($3.00/$600)
Voting Rights: None
Dividends: 10%—Quarterly—Commencing March 31, 2002
Conversion Period: Any time

Cumulative dividends in arrears at September 30, 2015 and December 31, 2014 were $160,038 and $151,413, respectively.

 

Series D Convertible Preferred Stock

Liquidation Value: $1,000 per share, $ 525,000
Conversion Price: $1,000 per share
Conversion Rate: .01—Liquidation Value divided by Conversion Price ($10.00/$1,000)
Voting Rights: None
Dividends: 10%—Quarterly—Commencing April 30, 2002
Conversion Period: Any time

Cumulative dividends in arrears at September 30, 2015 and December 31, 2014 were $0 and $660,000, respectively.

 

Series E Convertible Preferred Stock

Liquidation Value: $22.00 per share, $418,488
Conversion Price: $800.00 per share
Conversion Rate: .0275—Liquidation Value divided by Conversion Price ($22.00/$800)
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 September 30, 2015 and December 31, 2014 were $585,948 and $558,173 respectively.

 

Warrants outstanding

 

               Weighted 
       Weighted       Average 
       Average   Aggregate   Remaining 
       Exercise   Intrinsic   Contractual 
   Warrants   Price   Value   Life (Years) 
Outstanding at December 31, 2014   143,308   $2.64        6.46 
Granted                
Exercised                
Expired                
Outstanding at September 30, 2015   143,308   $2.64        6.46 

 

 13 

 

 

Note 9. Commitments and Contingencies

 

The Company currently leases 12 vehicles for sales and service employees, delivery and other purposes with expirations ranging from November 2015 through June 2018. The current minimum monthly payment for these vehicle leases is approximately $5,463.

 

The Company has several operating leases for office, laboratory and manufacturing space. The Company’s operating lease for one of its German facilities can be cancelled by either party with a 3 months’ notice, its Poland facility can be terminated by either party with a six month notice. Monthly rent payments for the German and Poland facilities are Euro 4,000 ($4,487 as of September 30, 2015) and PLN 6,240 ($1,660 as of June 30, 2015) respectively. The Company’s laboratory facility in Chicago, IL terminates June 30, 2016 and requires monthly payments of $1,070. The Company also subleases its former Chicago laboratory facility for $3,948 per month. The lease for this facility terminates October 30, 2016 and requires monthly rent payments of $4,394. The Company’s Orlando facility has escalating rents ranging from $2,416 to $2,563 per month and terminates July 31, 2018. The total aggregate monthly lease payments (net of the sublease) required on these leases is approximately $10,051.

 

The Company also leases IT Hardware and Software for 3-D Design which require aggregate monthly lease payments of $1,645 through March 2018.

 

In 2014, the Company became a defendant in a lawsuit brought by D&D Technologies, Inc. (“D&D”) in the state of New Jersey for breach of contract and breach of implied covenant of good faith that allegedly occurred in 2013 for failure to pay for past contractual services. The original complaint was dismissed and then refiled by D&D. D&D is seeking damages over $86,000 plus equitable relief. In the second quarter of 2015, the Company and D&D reached a settlement agreement with D&D Technologies, Inc for $15,000. This amount was paid during the third quarter.

 

The Company’s former auditor L.J. Soldinger and Associates filed a claim against the Company in Illinois’ Lake County Superior Court. The Company believes the claims are without merit and has adequately reserved for costs associated with the claim.

 

Note 10. Segment Information

 

The Company operates in one operating segment. However, the Company has assets and operations in the United States, Germany and Poland. The first quarter numbers included in the nine month period ended September 30, 2014 represent MEDITE as a private company before the reverse merger with the former CytoCore Inc. After April 3, 2014, results reflect the combination of both companies. The influence in revenues by the significant change of the currency exchange rate between USD and EURO since September 30, 2014 compared to September 30, 2015 is approximately $1.1 million (USD/EURO exchange rate of 1.1151 vs. 1,3560). The following tables show the breakdown of the Company’s operations and assets by region (in thousands):

 

   United States   Germany   Poland   Total 
   Sep. 30,
2015
   Dec. 31,
2014
   Sep.30,
2015
   Dec. 31,
2014
   Sep. 30,
2015
   Dec. 31,
2014
   Sep. 30,
2015
   Dec. 31,
2014
 
Assets  $9,125   $9,387   $7,416   $6,989   $204   $63   $16,745   $16,439 
Property & equipment, net   87    98    1,924    1,985    5    8    2,016    2,091 
Intangible assets   8,313    8,313    -    -    -    -    8,313    8,313 

 

   United States   Germany   Poland   Total 
   Sep. 30,
2015
   Sep. 30,
2014
   Sep. 30,
2015
   Sep. 30,
2014
   Sep. 30,
2015
   Sep 30,
2014
   Sep. 30,
2015
   Sep. 30,
2014
 
Revenues  $928   $1,321   $6,114   $7,373   $39   $0   $7,081   $8,694 
Net income (loss)   (552)   (182)   339    232    (54)   -    (267)   50 

 

 14 

 

 

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

 

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/A for the year ended December 31, 2014. 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 MEDITE Cancer Diagnostics, Inc.

 

MEDITE Cancer Diagnostics, Inc. (the “Company”, “we”, or “us”), formerly CytoCore, Inc., is a medical technology company specializing in the development, engineering, manufacturing and marketing of premium medical devices and consumables for detection, risk assessment and diagnosis of cancer and related diseases. Depending upon the type of cancer, segments within the current target market of approximately $5.8 billion are growing at annual rates between 10 and 30%.

 

By acquiring MEDITE in 2014, the Company changed from just research operations to an operating company with 76 employees in four countries, a distribution network to about 70 countries worldwide, a well-known and established brand name, a wide range of selling products and the established infrastructure necessary for a company acting in the medical industry. Both company structures and cultures were successfully merged to one new company organization.

 

Several synergies were realized with this strategy, for example cost reduction of the former CytoCore research segment by about 50 %, complementary products in the cytology product segment which is now addressing all components from cell collection through cell processing to diagnostic tools like cancer markers and screening systems. Some of them are already selling and some are in a late stage of development expecting to sell within one or two years.

 

The cancer markers developed by the former CytoCore, Inc. over the last three years are showing excellent results in internal studies but have not yet been tested in formal clinical trials. In our opinion, one of the tests based upon these biomarkers has the potential for displacing the current expensive Human Papilloma Virus (HPV) testing methods in both initial and follow up testing, resulting in less costs for the patient, laboratory and payer. The test may identify cancerous and precancerous cells regardless of the presence of HPV. The Company hopes to market the test globally outside the United States in 2016, and in the United States by 2017.

 

Another major business focus for 2015 is the Chinese market, which the Company entered in 2014. It is the fastest growing, and by 2016 management expects it will be the largest, market for the Company’s products. This is due to our Chinese distributor UNIC Medical who was successful in receiving the Chinese Food & Drug Administration (“CFDA”) approval for all MEDITE histology laboratory devices. The UNIC sales team now can sell MEDITE products in China, and currently successfully is doing so. During the nine months ended September 30, 2015, the Company trained 50 UNIC sales employees and representatives to sell MEDITE equipment. During the third quarter MEDITE and UNIC attended a larger Chinese Cytology show and presented MEDITE’s cytology product line. Also, together with UNIC, the Company is part of a government supported project to standardize the histology laboratory process using MEDITE equipment and consumables for processing part of the process, MEDITE immuno-assays, and the UNIC technology for digitalization and computer aided diagnostics utilizing the latest cloud technology.

 

Several other innovative product developments are realized or going to be realized before end of 2015. In the first quarter, the Company’s important German priority patent for the fully automated histology lab, a Lab-In-One unit, was granted. This technology is demanded by the market, following the trend toward higher automation in the industry and has the ability to change the competition in histology.

 

 15 

 

  

To sell the Company’s complete cytology product line set “SureThin” also in the US, a US Food and Drug Administration (“FDA”) application is required to be submitted and approved, which currently is under preparation using data by a study made in Germany and is expected to be submitted in 2016. The use with the currently highest market volume for products is in cervical cancer screening, but increasingly also in non-gynecology applications such as lung cancer screening.

 

The Company operates in one industry segment for cancer diagnostics instruments and consumables for histology and cytology laboratories.

 

Definition: Histology - Cancer diagnostics based on the structures of cells in tissues
  Cytology - Cancer diagnostics based on the structures of individual cells

 

Cancers and precancerous conditions are defined in terms of structural abnormalities in cells. For this reason, cytology is widely used for the detection of such conditions, while histology is typically used for the confirmation, identification and characterization of the cellular abnormalities detected by cytology. Other diagnostics methods, such as marker-based assays, provide additional information that can supplement, but which cannot replace cytology and histology. The trend towards more personalized treatment of cancer increases the need for cytology, histology and assays for identifying and testing the best treatment alternatives. We believe that this segment will therefore be increasingly important for future development of strategies to fight the “cancer epidemic” (World Health Organization: World Cancer Report 2014) which expects approximately a 50 % increase in cancer cases worldwide within the next 20 years.

 

This segment sees a trend toward, and demand for, higher automation for more throughput in bigger laboratories, process standardization, digitalization of cell and tissue slides and computer aided diagnostic systems, while also looking for cost effective solutions. In the US, the Patient Protection and Affordable Care Act is a national example for the industry. More people have health insurance, and therefore can afford early cancer screening, while at the same time the payers for health care continue looking for cost reductions.

 

MEDITE acts as a one-stop-shop for histology (also known as anatomic pathology) laboratories either as part of a hospital, as part of a chain of laboratories or individually. It is one out of only four companies offering all equipment and consumables for these type of laboratories worldwide. The MEDITE Brand stands for innovative and high quality products – most equipment made in Germany – and competitive pricing.

 

For the cytology market, MEDITE offers a wide range of consumable products and equipment; in particular for liquid-based-cytology, which is an important tool in cancer screening and detection in the field of cervical, bladder, breast, lung and other cancer types. We also developed an innovative new type of easy to use standardized staining solutions, and a very innovative and effective early cancer detection marker-based assay. These new developments are cost effective solutions able to replace more expensive competitive products, and therefore are also becoming the first choice for the growing demand in emerging countries.

 

All of the Company’s operations during the reporting period were conducted and managed within this segment, with management teams reporting directly to our Chief Executive and Operating Officers. For information on revenues, profit or loss and total assets, among other financial data, attributable to our operations, see the unaudited condensed consolidated financial statements included herein.

 

Outlook

 

Due to promising new products and distributions contracts executed in the last two years, management believes the profitability and cash-flow of the business will grow and improve. However, significant on-going operating expenditures may be necessary to manufacture and market new and existing products to achieve the accelerated sales growth targets outlined in the Company’s business plan. To realize the planned growth potential, management will focus its efforts on 1.) Finishing and gaining approval for the products currently under development and 2.) Increase direct sales in the USA and continue to expand Chinese market sales by broadening the Company’s collaborations with the local distributor UNIC. We also will work on continuously optimizing manufacturing cost to increase our gross margin. Implementation of our plans will be contingent upon securing substantial additional debt and/or equity financing. If we are unable to obtain additional capital or generate profitable sales revenues, we may be required to curtail product development and other activities.

 

Currently, approximately 85 % of the Company’s sales are generated in Euro currency. During the third quarter ended September 30, 2014, on average, $1.3560 was received for every Euro. During the first nine months of 2015, the average exchange rate of Euro for dollars dropped to $1.1151 which had an influence of 18% on the revenues. Therefore, the Company’s revenues translated from Euro into dollars may be down year over year if the exchange rate remains at that level or lower during the remainder of 2015. The Company is working to lessen the impact of the Euro’s decline versus the dollar by increasing the percentage of overall product sales in the United States and other countries such as China whose currency is not pegged to the Euro.

 

 16 

 

 

 

The Company believes the combination of MEDITE Enterprise, Inc. with CytoCore, Inc. will expedite the development and marketability of CytoCore’s cytology products which include collection devices, image analysis software, special stains and immuno-assays. Currently, the recent launch of new products, the positive impact from several new initiatives, and some recently executed distribution contracts in the United States, Europe and China are some primary positive factors assisting growth.

 

Results of Operations

 

The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed 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/A for the year ended December 31, 2014 filed with the SEC on May 8, 2015.

 

The results of the Company for the nine months ended September 30, 2015, include the results of the entire MEDITE Cancer Diagnostics, Inc. group (consolidated former CytoCore, Inc. with MEDITE Enterprise, Inc.) while the results for the nine months period ended September 30, 2014, reflect operations for MEDITE Enterprise, Inc. only from January 1 through April 4, 2014 and the combined companies of CytoCore, Inc and Medite Enterprise, Inc. for the period of April 5 through September 30, 2014.

 

Three months ended September 30, 2015 as compared to the three months ended September 30, 2014 (in thousand USD)

 

Revenue

 

Revenue for the three months ended September 30, 2015, was $2,662 as compared to $2,785 for the three months ended September 30, 2014. Due to the fact that approximately 85% of all sales are invoiced in Euro currency, the recent fluctuation of the USD/EURO exchange rate had a major impact of approximately $400 on the revenue decrease. On a comparable exchange rate, the revenue of the third quarter 2015 would have been increased by approximately 10%. Revenue of almost $0.5 million related to a public tender won in Mexico will be invoiced in the fourth quarter while most of the manufacturing for the product was finished by the end of the third quarter ended September 30, 2015.

 

Costs of Revenue

 

Cost of revenues were $1,493, or 56% of the revenues for the three months ended September 30, 2015 as compared to $1,198 or 43% of the revenues for the three months ended September 30, 2014. More sales through international distributors as compared to higher margin direct sales is the major reason for the decreased gross margin.

 

Research and Development

 

Research and development expenses are an important part of our business to keep our existing products competitive, and to develop new innovative solutions with interesting market potential that will help us grow future revenues. These expenses include research work for cancer marker consumables and developing work, including engineering and industrial design, for histology and cytology laboratories worldwide. Major parts of these expenses are payroll-related costs for in-house scientific research, mechanical and electrical engineering, instrument related software development staff, prototype expenses and material purchased for R&D.

 

For the third quarter 2015, research and development expenses decreased to $222 compared to $317 for the third quarter 2014. This was partly caused by the lower USD/Euro exchange rate and by shifting engineering capacity from Germany to the lower cost country of Poland. We expect to continue to expend considerable effort and resources to continue to grow our product offerings.

 

Selling, General and Administrative

 

For the third quarter ended September 30, 2015, SG&A expenses were $785 as compared to $1,260 for the third quarter ended September 30, 2014. The decrease of $475 is partly caused by the lower exchange rate in addition to the management’s ability to reduce administrative expenses with the former CytoCore, Inc. business.

 

Operating Income (Loss)

 

The operating income of $132 for the third quarter ended September 30, 2015 compared to an operating loss of $38 for the third quarter ended September 30, 2014 is due primarily to the decrease of administrative and R&D expenses.

 

Interest Expense 

 

Interest expenses decreased by 35% to $46 in the third quarter ended September 30, 2015 compared to $71 for the third quarter ended September 30, 2014, due to the decreased use of lines of credit and repayment of term loans, both used for working capital financing of the European entities.

 

 17 

 

 

Net Income (Loss)

 

The net income for the third quarter ended September 30, 2015, increased by $178 and totaled $59 as compared to net loss of $119 for the third quarter ended September 30, 2014. As noted above the primary reason for the profit in the third quarter 2015 was the management’s ability to decrease administrative and R&D expenses more than the decrease of gross margin for the quarter.

 

Nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 (in thousand USD)

 

Revenue

 

Revenue for the nine months ended September 30, 2015, was $7,081 as compared to $8,694 for the nine months ended September 30, 2014. Due to the fact that approximately 85% of all sales are invoiced in Euro currency, the recent fluctuation of the USD/EURO exchange rate had a major impact of approximately $1.1 million on the revenue decrease. Revenue of almost $0.5 million related to a public tender won in Mexico will be invoiced in the fourth quarter while most of the manufacturing for the product was finished by the end of the third quarter ended September 30, 2015.

 

Costs of Revenue

 

Cost of revenues were $4,028, or 57% of the revenues for the nine months ended September 30, 2015 as compared to $4,456 or 51% of the revenues for the nine months ended September 30, 2014. More sales through international distributors as compared to higher margin direct sales is the major reason for the decreased gross margin.

 

Research and Development

 

Research and development expenses are an important part of our business to keep our existing products competitive, and to develop new innovative solutions with interesting market potential that will help us grow future revenues. These expenses include research work for cancer marker consumables and developing work, including engineering and industrial design, for histology and cytology laboratories worldwide. Major parts of these expenses are payroll-related costs for in-house scientific research, mechanical and electrical engineering, instrument related software development staff, prototype expenses and material purchased for R&D.

 

For the first nine months of 2015, research and development expenses increased to $825 compared to $762 for the first nine months of 2014. This increase of $63 or 8% is the result of the inclusion of MEDITE Poland and the CytoCore expenses for the entire period of the first nine months of 2015. The Polish operations were not started until the end of 3rd quarter 2014 and CytoCore’s expenses for 2014 did not include expenses prior to April 3, 2014, the effective merger date. We expect to continue to expend considerable effort and resources to continue to grow our product offerings.

 

Selling, General and Administrative

 

For the nine months ended September 30, 2015, SG&A expenses were $2,191 as compared to $ 2,902 for the first nine months ended September 30, 2014. The decrease of $711 for the first nine months of 2014 compared to the first nine months of 2015 was mainly caused by management’s ability to reduce administrative expenses in the former CytoCore, Inc. business.

 

Operating Income (Loss)

 

The operating loss of $58 for the first nine months of 2015 compares to an operating profit of $448 for the first nine months of 2014 is due primarily by the decrease in the gross profit of $1,185 partly offset by the decrease in administrative expenses of $711.

 

Interest Expense 

 

Interest expenses decreased by 29% to $157 in the nine months ended September 30, 2015 compared to $221 for the nine months ended Septbember 30, 2014 due to the decreased use of lines of credit and repayment of term loans, both used for working capital financing of the European entities.

 

 18 

 

 

Net Income (Loss)

 

The net income (loss) for the nine month ended September 30, 2015, totaled $(267) as compared to net income of $50 for the nine months ended September 30, 2014 is due primary to a decrease in gross profit.

 

Liquidity and Capital Resources

 

For the nine months ended September 30, 2015, the Company issued a total of 1,338,875 shares of unregistered stock to qualified individuals pursuant to exemptions from registration under Regulation D and Section 4(2) of the Securities Act of 1933 at 1.60 for proceeds of $2,134,000, net of $81,000 of issuance costs. During the third quarter ended September 30, 2015 the Company issued 375,000 shares of common stock at $1.60 for proceeds of $600,000 to the President of UNIC Medical of China. UNIC Medical is the Company’s distributor for China and other Asian countries.

 

The Company therefore increased its equity ratio from 51.3% as of December 31, 2014 to 59.1% by the third quarter ended September 30, 2015. It also reduced total liability by $1,153 during the nine months ended September 30, 2015.

 

Due to promising new products and distributions contracts executed in the last two years, management believes the profitability and cash flow of the business will grow and improve. However, significant on-going operating expenditures may be necessary to manufacture and market new and existing products to achieve the accelerated sales growth targets outlined in the Company’s business plan. To realize the planned growth potential management will focus its efforts on 1.) Finishing and gaining approval for the products currently under development and 2.) Increase direct sales in the USA and continue to expand Chinese market sales by broadening the Company’s collaborations with the local distributor UNIC. We also will work on continuously optimizing manufacturing cost to increase our gross margin. Implementation of our plans will be contingent upon securing substantial additional debt and/or equity financing. If we are unable to obtain additional capital or generate profitable sales revenues, we may be required to curtail product development and other activities. Approximately, $1.9 million of accrued liabilities represents unpaid wages and vacation benefits. We believe subject to employee approval at least 75% of this liability will be converted into equity. In summary, management believes current working capital is sufficient to fund current operations.

 

A part of the Company’s outstanding indebtedness under its master credit line #1 with Hannoversche Volksbank availability was reduced by Euro 500 ($561 as of September 30, 2015) effective July 1, 2015. The bank has agreed to work with the Company as we raise additional equity and maintain the current level of funding. Should the bank demand additional reductions in the line of credit, the Company is confident additional financing can be obtained through completion of the private placement still outstanding or obtain bank funding elsewhere at equivalent terms.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2015, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our chief executive and chief financial officers have concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that the information we are required to disclose in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

 19 

 

 

Part II. Other Information

 

Item 1. Legal Proceedings.

 

The appealed verdict between Hologic Deutschland GmbH and the Company was decided by the court in October 2015 completely in favor of the Company. The previously imposed possible penalties for the Company are no longer valid.

 

The Company’s former auditor L.J. Soldinger and Associates filed a claim against the Company in Illinois’ Lake County Superior Court. The case was later transferred to Federal District Court in Chicago, Illinois. The Company believes the claims are without merit and is adequately reserved for costs associated with the claim.

 

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

 

During the quarter ended September 30, 2015 the Company sold 375,000 shares of common stock to the President of UNIC Medical, a distributor-customer of the Company, at a per share price of $1.60, pursuant to Regulation S of the Securities Act of 1933. This person is a foreign national.

  

We issued the foregoing securities in reliance on the safe harbor and exemptions from registration provided by Regulation S of the Securities Act of 1933, as amended. No investor who participated in the offering was a U.S. citizen, and the offering was conducted by the officers and directors of the Company without the participation of any underwriters, and no commissions were paid to any person.

 

Item 3. Defaults upon Senior Securities.

 

As of the end of the third quarter, the remaining balance of approximately $21,000 on the note payable to Ventana Medical Systems, Inc. was in default. However, on February 23, 2015, the Company reached an agreement with Ventana Medical Systems, Inc. whereby both parties have agreed that Ventana Medical Systems, Inc. will accept $38,281 as payment in full for all outstanding principal and accrued interest. The $21,000 has been included in current portion of long-term debt on the consolidated balance sheet and $17,281 has been included in account payable and accrued expenses on the consolidated balance sheet. As part of this agreement, Ventana Medical Systems, Inc. has agreed to convert $1.75 million stated value of Series D Preferred stock and all outstanding accrued dividends of $656,250 for 12,000 shares of the Company’s common stock. Prior to the execution of this agreement, the Company had failed to make principal and interest payments when due and is in breach of certain warranties and representations under the notes included above.

 

 20 

 

 

Item 6. Exhibits

 

Exhibit    
Number   Description
     
31.1   Section 302 certification by the principal executive officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
     
31.2   Section 302 certification by the chief financial officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
     
32.1   Section 906 certification by the principal executive pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
     
32.2   Section 906 certification by the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
     
101.INS   XBRL Instance
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation
     
101.DEF   XBRL Taxonomy Extension Definition
     
101.LAB   XBRL Taxonomy Extension Labels
     
101.PRE   XBRL Taxonomy Extension Presentation

  

 21 

 

 

SIGNATURES

 

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

 

  MEDITE Cancer Diagnostics, Inc.
   
Date:  November 13, 2015 /s/ Michaela Ott
        Michaela Ott
        Chief Executive Officer
   
Date: November 13, 2015 /s/ Robert F. McCullough, Jr.
        Robert F. McCullough, Jr.
        Chief Financial Officer

 

 22