Note 10. | Subsequent Events |
Note 10. Subsequent Events
On October 26, 2016,May 4, 2017, the Board of Directors (the “Board”) of the Company held a meeting whereby itMEDITE Cancer Diagnostics, Inc. (the “Company”) accepted the resignation of Michaela Ott as Chief ExecutiveOperating Officer of the Company, effective immediately. Michaela Ott was then appointed by a unanimous voteFurther, the Board accepted Ms. Ott’s resignation from her position as Managing Director of the Company’s wholly-owned subsidiary, Medite GmbH, as well as managing director of CytoGlobe GmbH, Burgdorf, a wholly owned subsidiary of Medite GmbH, effective immediately. Ms. Ott shall further resign from her position as Managing Director of Medite GmbH, Austria, also a wholly-owned subsidiary of Medite GmbH, effective no later than September 30, 2017. Ms. Ott shall remain on the Board of Directors of the Company. Ms. Ott’s resignations do not arise from any disagreement on any matter relating to the position of Chief Operating OfficerCompany’s operations, policies or practices, or regarding the general direction of the Company or any of its subsidiaries. Ms. Ott shall take all her remaining holiday leave with no further obligation to render services to the Company or its subsidiaries and shall receive her monthly remuneration of EUR 10,000 ($10,682 at March 31, 2017) through September 30, 2017. The Company agrees to pay to Ms. Ott outstanding accrued compensation due to her in the amount of EUR 75,098, to be paid in eighteen monthly installments of EUR 4,172 commencing October 31, 2017, and at the end of each subsequent month thereafter until paid in full. Further, the Company agrees that upon achieving annual revenue of EUR 15 million (16.0 million at March 31, 2017) by no later than December 31, 2020, the same termsCompany shall make a one- time payment to Ms. Ott of EUR 30,000 ($32,046 at March 31, 2017). The payment will be due one month after the adoption of the annual financial statement for the year in which the revenue threshold is exceeded. The Company shall repay to Ms. Ott a loan provided by her to the Company with a current loan value of EUR 91,136 ($97,351 at March 31, 2017). Repayment of the loan shall be made in twenty-four equal monthly installments of EUR 3,797 ($4,056 at March 31, 2017), commencing on October 31, 2017, and conditions ason the last day of each month thereafter until the loan is repaid in full. Ms. Ott agrees to maintain her current employment,personal guarantee to servevarious financial institutions with respect to certain financial obligations of the Company until her resignation or removal.September 30, 2017. The Company shall undertake to provide sufficient security to these financial institutions commencing October 1, 2017, whereby the Company shall secure the release of Ms. Ott’s personal guarantee. The Company shall further transfer to Ms. Ott the direct life insurance policy currently maintained by the Company for the benefit of Ms. Ott.
Further, on May 4, 2017, the Board also accepted the resignation of Michael Ott as Chief Operating OfficerChairman of the Company,Board, effective immediately. Mr. Ott shall remain on the Board of Directors of the Company. Mr. Ott further resigned as Managing Director of the Company’s wholly-owned German subsidiary, Medite GmbH, as well as from his position as Managing Director of CytoGlobe GmbH, Burgdorf, a wholly-owned subsidiary of Medite GmbH, effective immediately. Mr. Ott shall resign from his position as Managing Director of Medite sp. z. o.o., Poland, also a wholly-owned subsidiary of Medite GmbH, effective no later than September 30, 2017. Mr. Ott’s resignations do not arise from any disagreement on any matter relating to the Company’s operations, policies or practices, or regarding the general direction of the Company or its subsidiaries. Mr. Ott shall take all his remaining holiday leave and shall receive his monthly remuneration of EUR 10,000 ($10,682 at March 31, 2017) through September 30, 2017. The Company agrees to pay to Mr. Ott outstanding accrued compensation due to him in the amount of EUR 52,473 ($56,052 at March 31, 2017), to be paid in eighteen monthly installments of EUR 2,915 ($3,114 at March 31, 2017) commencing October 31, 2017, and at the end of each subsequent month thereafter until paid in full. Further, the Company agrees that upon achieving annual revenue of EUR 15 million ($16 million at March 31, 2017) by no later than December 31, 2020, the Company shall make a one- time payment to Mr. Ott of EUR 30,000 ($32,046 at March 31, 2017). The payment will be due one month after the adoption of the annual financial statement for the year in which the revenue threshold is exceeded. Mr. Ott agrees to maintain his personal guarantee to various financial institutions with respect to certain financial obligations of the Company until September 30, 2017. The Company shall undertake to provide sufficient security to these financial institutions commencing October 1, 2017 whereby the Company shall secure the release of Mr. Ott’s personal guarantee. The Company shall further transfer to Mr. Ott the direct life insurance policy currently maintained by the Company for the benefit of Mr. Ott.
On May 4, 2017, the Board unanimously elected David E. Patterson, the Company’s Chief Executive Officer of the Company’s wholly owned subsidiaries, MEDITE Enterprises, Inc., and MEDITE GmbH, and CytoGlobe, GmbH.
The Board further accepted the resignation of Robert F. McCullough, Jr. as Chairman of the Board and unanimously elected Michael OttDirector, to the position of Chairman of the Board to serve until such time as his resignation or removal.
On November 5, 2016, The Board of the Company held a special meeting and dismissed Robert F. McCullough, Jr. from his position as Chief Financial Officer, Secretary and Treasurer.
The Board, by unanimous consent, appointed David E. Patterson to the position of Chief Executive Officer and Director of the Company to serve until such time as his removal or resignation. Pursuant to Mr. Patterson’s Executive Employment Agreement with the Company, the Commencement Date of Mr. Patterson’s appointment shall be October 31, 2016. He shall receive an annual base salary of $120,000. He shall also be granted 250,000 restricted shares valued at $85,000 of the Company’s common stock (the “Shares”). The Shares will vest in three (3) equal installments on each of the first three annual anniversary dates of Mr. Patterson’s appointment, so long as he remains employed by the Company through each such vesting date. Mr. Patterson shall also be entitled to annual performance bonuses, benefits and vacation in accordance with the Company’s current policy.
The Board further unanimously voted to appoint David E. Patterson to the position of DirectorDirectors of the Company, to serve until his resignation or removal.
On November 12, 2016, the Board ofEffective April 28, 2017, the Company held a meeting whereby it appointed our Chief Executive Officer, David E, Patterson,increased the authorized shares from 35,000,000 to the position of Chief Financial Officer/Treasurer/Secretary to serve on an interim basis until a suitable permanent replacement is appointed.
On November 2, 2016, the Company filed a Form D Notice of Exempt Offering of Securities for up to $3,000,000. The Company received $306,000, as an initial funding of this offering at $0.50 a share, 613,830 shares of common stock issued. The offering is subject to a up to 7.5% commission paid to their broker/dealers. plus warrants of 7.5% coverage at $0.50 conversion price per share, with a term of 5 years. The Company has an agreement with one broker/dealer to provide 7% commission paid in cash to them plus warrants of 50% coverage at $0.50 conversion price per share, with a term of 5 years. Total cash commissions paid was $22,484. As of November 14, 2016, these shares have not yet been issued but will be issued shortly after this filing.
50,000,000.
The Notes discussed in Note 5 above for $500,000 maturedBoard appointed two officers on March 31, 2016May 4, 2017 who will receive 350,000 shares of restricted common stock with a three year vesting schedule and $150,000 matured on August 25, 2016, respectively and were not repaid. Therefore, the Notes were in defaults asApril 26, 2017 appointed an officer who will receive 200,000 shares of the date of this filing. The Company agreed to pay the Purchasers 10% of the principal balance of the Notes in warrants for the months of October and November 2016restricted common stock with an aggregate total of 115,000. The Company recorded a discount related to the issuance of these warrants attributed to the secured promissory note default of approximately $40. The Company determined the fair value of the warrants issued with the secured promissory notes using the Black Scholes pricing model and the following assumptions: an interest free rate of 1.33%, volatility of 50% and a remaining term of 5 years. Based on information known at each default period, the Company priced the warrants with an assumed stock and exercise price of $0.80. This discount will be amortized into interest expense during the period of default. As of the date of this filing, the Company had not issued the October warrants totaling 15,000 to the $150,000 secured promissory note holders or the November warrants totaling 50,000 to the $500,000 secured promissory note holders.three year vesting schedule.
Note 11. | Segment Information |
The Company operates in one operating segment. However, the Company has assets and operations in the United States, Germany and Poland. The following tables show the breakdown of the Company’s operations and assets by region (in thousands):
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Assets | $11,416 | $11,826 | $6,911 | $6,357 | $253 | $195 | $18,580 | $18,378 |
Property and equipment, net | $72 | $84 | $1,795 | $1,853 | $3 | $4 | $1,870 | $1,941 |
Intangible assets | $10,518 | $10,518 | $- | $- | $- | $- | $10,518 | $10,518 |
Revenue Segment Information Three Months Ended September 30:
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Revenues | $182 | $283 | $2,137 | $2,340 | $20 | $39 | $2,339 | $2,662 |
Net income (loss) | $(376) | $(708) | $70 | $223 | $- | $(54) | $(306) | $59 |
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Revenues: | | | | | | | | |
Histology Equipment | $68 | $- | $1,337 | $1,225 | $0 | $1 | $1,405 | $1,226 |
Histology Consumables | 26 | 39 | 613 | 667 | 20 | 33 | 659 | 739 |
Cytology Consumables | 88 | 244 | 187 | 448 | 0 | 5 | 275 | 697 |
Total Revenues | $182 | $283 | $2,137 | $2,340 | $20 | $39 | $2,339 | $2,662 |
Included in Germany are sales of Histology Equipment to China for the three months ended September 30, 2016 of approximately $295 compared to $81 for the same period in 2015.
Revenue Segment Information Nine Months Ended September 30:
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Revenues | $735 | $928 | $6,513 | $6,114 | $38 | $39 | $7,286 | $7,081 |
Net income (loss) | $(1,353) | $(552) | $314 | $339 | $(91) | $(54) | $(1,130) | $(267) |
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Revenues: | | | | | | | | |
Histology Equipment | $283 | $292 | $3,901 | $3,280 | $8 | $1 | $4,192 | $3,573 |
Histology Consumables | 96 | 152 | 1,770 | 1,768 | 27 | 33 | 1,893 | 1,953 |
Cytology Consumables | 356 | 484 | 842 | 1,066 | 3 | 5 | 1,201 | 1,555 |
Total Revenues | $735 | $928 | $6,513 | $6,114 | $38 | $39 | $7,286 | $7,081 |
Included in Germany are sales ofHistology Equipment to China for the nine months ended September 30, 2016 of approximately $980 compared to $380 for the same period in 2015.
Item 2. 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 for the year ended December 31, 2015. 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”, “it”, “we”, or “us”), formerly CytoCore, Inc., specializes in the marketing and selling of MEDITE core products (instruments and consumables), manufacturing, development manufacturing,of new solutions in histology and cytology and marketing of molecular biomarkers,biomarkers. These premium medical devices and consumables are for detection, risk assessment and diagnosis of cancerous and precancerous conditions 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%. To use theThe well-established brand of MEDITE Cancer Diagnostics is well received and to haveremains a betterprofessional description of the Company’s business, the Board approved the name change to “MEDITE Cancer Diagnostics, Inc.” As a result, thebusiness. The Company’s trading symbol was changed tois “MDIT”.
In 20152016 and 20162017 we focused on implementation of several growth opportunities including enhanced distribution of core products through focused sales and distribution channel(s), newly developed and patent pending assays, new laboratory devices and several marketing projects like the Chinese standardization projects for histology and cytology. The Company is optimistic about recent marketing efforts focusing on larger laboratory chains.chains and other important strategic relationships. The Company has 78approximately 80 employees in threefour countries, a distribution network to about 70 countries and a wide range of products for anatomic pathology, histology and cytology laboratories available for sale.
After the successful market entrance into China in 2014, the Company increased its revenueCompany’s revenues in this market toare approximately $1 million in 2015,$65,000 for the three months ended March 31, 2017 compared to zero$185,000 for the three months ended March 31, 2016. The Company has received $240,000 in 2014.orders for China which they believe they can complete partially in the second quarter and partially in the third quarter. The Company’s delayed financing during 2015 and 2016 and into 2017 has impacted the delivery of sales due to availability of raw materials, parts, and work in progress inventory and the needed investment in that inventory. The Company originally anticipated sales in 2016 of approximately $2 million with the assumption that the timing of the scheduled capital raise would happen earlier in the year. Due to the delay in the capital raise, the Company is revisingrevised its target to $1.3 million. Total sales for the nine monthsyear ended September 30,December 31, 2016 were approximately $980,000$1 million compared to $380,000$897,000 for the same period in 2015. The Chinese market is growing quickly, and by 2016 the Company expects it will be theone of two largest marketmarkets for its products. By working with its Chinese distributor, UNIC Medical, the Company has successfully received China Food and Drug Administration (“CFDA”) approval for all MEDITE histology laboratory devices at the end of 2014, and for the Cytology device in 2015. The Company is working with UNIC Medicaland are anticipating increased sales team is selling MEDITE products in China with increasing volumes.in the third and fourth quarter of 2017. Also, together with UNIC, we are part of a government supported project to standardize the histology laboratory process in China. UNIC Medical is using MEDITE equipment and consumables for processing, and developinglaunching new assays. UNIC has taken an active role in branding MEDITE Cancer Diagnostics in China. Medite is working through certain product rollout issues which have impacted its anticipated increase in sales.
On May 31, 2016, UNIC received CFDA approval as a Class I in vitro diagnostic reagent for MEDITE's "SureThin" cell preservation solution. As China adaptsadopts Cytopathology standards across the country, the Company expects 'Liquid Based Cytology Tests (LBC)' will be used for the majority of Pap collections for cervical cancer screening. We are prepared to sell the complete SureThin products,product line, including the already approved Processor to this potential market of 485 million women between the ages of 16 and 64 years of age. Management anticipates launching the product in China by the third quarter of 2017 and in the U.S. by the fourth quarter of 2017.
The Company’s cytology product line revenue remained at about the same levels in Europe (non-Gyn and Gyn applications) during 2016 and 2017 related to a competitive threat that management believes has been alleviated. The Company is in the process of moving forward the submission of an application to the U.S. Food and Drug Administration (“FDA”) for SureThin Gyn applications. Once approved we can compete with some of the dominant suppliers in this $600 million market and target major strategic lab partners. The impact of the gynecology segment SureThin solution in the US and China market will drive significant new revenue and gross margin improvement opportunities in the later part of 2017.
MEDITE is clearing certain hurdles in obtaining FDA clearance of its SureThin product offering for gyn use in the US. The product is attracting the interest in larger labs that will use both the SureThin non-gyn and gyn applications. The gyn clearance with the sale of the SureThin processor will encourage market growth the Management believes will provide sources for improved sales channels.
The developed and U.S. patented self-collection device SoftKit is targeting the growing POC & POP (point of care or point of people care) market. Growth in this area is due to consumer driven health care requirements and the necessity to support and address incremental patient population needs for screening and on-going diagnostic tests. SoftKit serves as just such a product, addressing this market requirement. SoftKit is planned to be sold through various marketing channels that serve the gynecology physician consumer health and emerging post-acute care as the influence of clinical labs are expanded. Initially the SoftKit is targeted at the uterine cancer/HPV screening market. The next phase of testing will include cervical screening.
Management believes that 2017 developments, allows us to more fully leverage the products and biomarker solutions from CytoCore component of MEDITE. The first entry will be the introduction of SureCyte+ (fluorogenic) instant staining, offering tremendous lab efficiencies and enhanced patient care through the use of SureCyte+. SureCyte+ is the first of many new offering under the SureCyte brand.
MEDITE’s Breast Cancer Risk Assessment Product is non-invasive, easy, gentle, and highly sensitive, enabling young women between 20 and 45 years of age to obtain their individual breast cancer risk assessment. An automatic and gentle collection device for breast cells together with a newly developed assay is used to determine a woman’s risk to develop breast cancer. Knowing the individual breast cancer risk will provide relief to a majority of young women who have no elevated risk of developing breast cancer. For those who have a higher risk, it enables them to monitor that risk closer for earlier treatment, if needed. The earlier a precancerous or cancerous situation is detected, the greater the chance for reducing the fatality rate for these conditions. Product development of BreastPap continued in 2016, reflecting feedback from doctors’ test use of prototype units’ and doctorsdoctor’s office feedback to continuously improve the product prior to launching. During the third quarter, the Company initiated a co-operation with Leibnitz University of Hannover, Germany, on the final design and usability of the BreastPap. The project is scheduled to begin on February 15, 2017. The delay in market introduction is planned by management is due to additional quality assurance measures being performed by the Company .as well as insuring that US feedback from providers are considered. The Company’s BreastPap product is a risk assessment tool planned to detect “abnormal” cells contained inevaluate the women’s breast aspirant. cancer risk on certain results based on the treatment.
Upon detection of abnormal cells,receiving the results, women, based upon their physicians’ advice may be candidates for further diagnostic testing.
The developed and patent pending self-collection device SoftKit is targeting the growing POC & POP (point of care or point of people care) market. Growth in this area is due to consumer driven health care requirements and the necessity to support and address incremental patient population needs for screening and on-going diagnostic tests. SoftKit serves as just such a product, addressing this market requirement. SoftKit is planned to be sold through various marketing channels that serve the consumer health and emerging post-acute care as the influence of clinical labs are expanded.
The Company’s cytology product line, revenue grew in Europe (non-Gyn applications) during 2015 and 2016. The Company isBreatPap will undergo further customer testing in the processUS and EU markets. This product has been placed on hold and will be evaluated by Management, so they can focus their attention, and resources on their other product rollouts. Management plans on revisiting this Product by the end of preparing an application to the U.S. Food and Drug Administration (“FDA”) for SureThin Gyn applications and once approved can compete with some of the dominant suppliers in this $600 million market.2017.
The Company brought several other innovative products closer to marketability during 2015, and continued during the first and second quarter of 2016 as listed above. Also, in early 2015, the German priority patent for a fully automated system used in the histology lab, a “Lab-In-One” unit, was granted. This technology, if successfully accepted by the market, has the ability to change the competitive landscape within the industry.
During the first quarter of 2016, the Company opened a second German manufacturing facility with approximately 4,000 square feet in Nussloch. This facility is utilizing the local workforce utilizingand their experience for the specialized skills required for manufacturing of the newly developed and updated MicrotomesMicrotome product line and the newly developed Cryostat (instruments used for sectioning tissue biopsies). During the third quarter 2016, the Company manufactured and delivered from order backlog 12 units. The Company began manufacturing the new Cryostat line during the thirdfirst quarter of 2017 and anticipates the first pre serial series to be available before the end of the second quarter. This enhanced microtome and cryostat production facility will allow MEDITE to meet the anticipated demand for these instruments as well as enhance its worldwide distribution channel through its suppliers including China.
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 |
CancerousCancers 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 approximatelyabout a 50%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 Brandbrand 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. WeIt 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.assays. 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.Office. 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. Further during these 2016 and 2017 periods we added key personnel with excellent historical performance in new product commercialization, sales development and internal operations improvement.
Outlook
Due to promising innovative new products for cancer risk assessment and an increasing number of 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) finishing1.) Finishing and gaining approval for the products currently under development and 2) increasing2.) Increase direct sales in the United SatesU.S. and continuingcontinue to expand Chinese market sales by broadening the Company’s collaborations with the local distributor UNIC. We also will work on continuously optimizing manufacturing costcapacity to increase our gross margin. Implementation of our plans will be contingent upon securing substantial additional debt and/or equity financing. If we arethe Company is unable to obtain additional capital or generate profitable sales revenues, we may be required to curtail product development and other activities. The condensed consolidated financial statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.
Currently, the Company’s sales primarily are generated in Euro currency. While in 2016 the average USD/Euro exchange rate was 1.10682 for the three months ended March 31, 2016, compared to 1.0655 in and March 31, 2017 a decrease of 0.04132, however the conversion rate at December 31, 2016 was 1.05204 and 1.0682 at March 31, 2017. MEDITE’s sales in USD were lower on a year over year basis as approximately 80% of our sales currently occurs in Euros. 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 U.S. and other countries such as China whose currency is not pegged to the Euro.
The Company believes the combination of MEDITE Enterprise, Inc. with MEDITE Cancer Diagnostics, Inc.(“Cancer Diagnostics”),CytoCore, Inc. will expedite the development and marketability of Cancer Diagnostic’sCytoCore’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,U.S., Europe and China are some primary positive factors assisting growth.
growth in its new product introductions. Similar approaches are in place in China and scheduled for the EU.
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 for the year ended December 31, 20152016 filed with the SEC on April 12, 2016 and Form 10-K/A filed on September 6, 2016.14, 2017.
Three months ended September 30, 2016March 31, 2017 as compared to the three months ended September 30, 2015March 31, 2016 (in thousand USD)
Revenue
Revenue for the three months ended September 30, 2016,March 31, 2017, was $2,339$1,891 as compared to $2,662$2,131 for the three months ended September 30, 2015. The 12% revenue decrease primarily relatesMarch 31, 2016. Due to some seasonality in the Company’s delays in sales. The Company had over $1 million dollars in backlog which they were not able to fillindustry, usually the first quarter of the year is weak because many public customers buy during the period duelast 4 to cash constraints.
Costs of Revenue
Cost of revenues were $1,336, or 57.12%5 months of the revenuesyear. Revenues were nominally impacted by the conversion rate between the USD/Euro, or $63 for the three months ended September 30, 2016 asMarch 31, 2017, compared to $1,493 or 56.09% of the revenues for the three months ended September 30, 2015. The cost of revenue for thesame period was slightly higher with prior period percentages compared to revenue. The overall decrease in cost of revenue relates to higher sales of manufactured instruments with higher gross margins for the period.
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 2016, research and development expenses increased to $305 compared to $222 for the third quarter 2015. During 2016, the Company hired a project manager to oversee the planned field study for our newly developed cancer assay in China to shorten the time to market. The new hire is a German-Chinese PhD in Biochemistry. 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, 2016, SG&A expenses were $860 as compared to $785 for the third quarter ended September 30, 2015.2016. The Company has incurred higher costs related to growing the business, in anticipation of the equity financing, including hiring consultants to assist in increasingincreased sales in the United Statescytology product during 2016 period , partially through the US sales doubling during the 2016 period however due to cash constraints during the end of 2016 and evaluating the needs of the Companyearly 2017, cytology products were not available for sale. MEDITE manufactured lab equipment decreased during 2016.
Operating Loss
The operating loss of $215 for the third quarter of ended September 30, 20162017, compared to an operating income of $132 for the third quarter of September 30, 2015 is due primarily to thesame period in 2016, offset by higher selling, general and administrative expenses and lower revenues for the period discussed above.histology consumables sold during 2017.
Interest Expense
Interest expenses increased by 270% to $170 in the three months ended September 30, 2016 compared to $46 for the three months ended September 30, 2015, due to interest expense attributed to secured promissory notes issued at December 31, 2015 and May 25, 2016, which matured on March 31, 2016 and August 25, 2016, respectively. These notes bear interest at 15%, or $25 for the three month period ended September 30, 2016. Further, interest expense includes $56 of the estimated fair value of warrants issued July through September 2016 as a penalty due to a default on the secured promissory notes.. Further, a discount on the May 25, 2016 secured promissory notes in the amount of $31 was amortized into interest expense during the three months ended September 30, 2016. The warrant expense is considered a non-cash settlement on the defaulted Notes. The effect of the interest, and fair value of the warrants on the secured promissory notes was an effective yield of 68% for the three months ended September 30, 2016.
Net Loss
The net loss for the quarter ended September 30, 2016, totaled $306 as compared to net income of $59 for the quarter ended September, 2015. As noted above, the primary reasons for the loss in the third quarter of 2016 was due to lower revenues, increased selling, general and administrative and interest expense.
Nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 (in thousand USD)
Revenue
Revenue for the nine months ended September 30, 2016, was $7,286 as compared to $7,081 for the nine months ended September 30, 2015, an increase of 3%. The increase in revenue was due to an increase in $619 of both direct and distributor sales of histology equipment offset by a reduction of, $60 and $354 in histology and cytology consumables during the nine months ended September 30, 2016, respectively.
Costs of Revenue
Cost of revenues were $4,095,$1,211, or 56.20%64% of the revenues for the ninethree months ended September 30, 2016March 31, 2017, as compared to $4,028$1,213, or 56.88%57% of the revenues for the ninethree months ended September 30, 2015.March 31, 2016. The cost of goods sold as a percentagerevenue consisted of revenue are consistent, year over year.higher manufacturing and fixed costs during 2017 due delays in sourcing parts and some installation issues.
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. The major components consist of 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 nine months ended September 30, 2016,first quarter 2017, research and development expenses increased to $1,086$425 compared to $825$360 for the same period in 2015. During 2016, the Company hired a project manager to oversee the planned field study for our newly developed cancer assay in China to shorten the time to market. The new hire is a German-Chinese PhD in Biochemistry.first quarter 2016. The Company continues to place a high priority to its research andexpensed approximately $138 of development efforts.
expense for the three months ended March 31, 2017.
Selling, General and Administrative
For the nine months ended September 30, 2016,first quarter 2017, SG&A expenses were $,656$782 as compared to $2,191$857 for the nine months ended September 30, 2015. The nine month ended September 30, 2016 compared to the same period in 2015 expense reflects a recovery of bad debts of $101 for 2015 compared to $38 expense for the same period infirst quarter 2016. The first quarter 2016 period included approximately $45 of professional fees attributed to the restatement of the intangible assets and deferred income tax liability in the financial statements for the year ended December 31, 2015 and higher professional2015. Professional fees attributed to increase board fees. The directors fess were increased from $5,000 a director perlower for the quarter to $10,000 a director per quarter, an increase of $60,000. The Company has incurred higher costsended March 31, 2017 specifically related to growinglower audit fees for the business, in anticipation2016 audit and timing of the equity financing, including hiring consultants to assist in increasing sales in the United States and evaluating the needscompletion of the Company.audit through April 2017.
Operating Loss
The operating loss of $684$576 for the nine months ended September 30, 2016first quarter of 2017, compares to anMEDITE’s operating loss of $58$350 for the same period in 2015,first quarter of 2016, and is directly related to higher generallower sales for the period and administrative expenses relating to higher selling, general and administrative expenses and higher research and development expensescosts discussed above, offset by higher revenue.above.
Interest Expense
Interest expenses increaseddecreased by 263%26% to $570$193 in the ninethree months ended September 30, 2016March 31, 2017, compared to $157$261 for the ninethree months ended September 30, 2015March 31, 2016, due to the amortization of the debt issuance costs and the amortization of the debt discount attributed to the secured promissory notes issued at December 31, 2015, and May 25, 2016, which matured on March 31, 2016 and August 24, 2016, respectively.2016. These notes bear interest at 15%, or $65$24 for the 2017 period compared to $19 for the 2016 period and the amortization of the debt issuance costs and debt discount totaled $250$200 for the ninethree months ended September 30, 2016 plusMarch 31, 2016. The 2017 period did not have any amortization of the $116 attributeddebt issuance costs. During the three months ended March 31, 2017 the Company recorded $64 and $57 to interest expense related to repricing of the warrants related to the secured promissory notes and the fair value of 195,000 warrants issued forrelated to the default.penalty feature in secured promissory notes issued on December 31, 2015 and May 25, 2016. The effect of the interest, debt issuance costs of $250and debt discount, repricing and the $108penalty warrants on the secured promissory notes was an effective yield of warrant expense are considered non-cash settlement on these Notes.89% and 175% for the three months ended March 31, 2017 and 2016, respectively.
Net Loss
The net loss for the nine monthquarter ended September 30, 2016,March 31, 2017, totaled $1,130$955, as compared to net loss of $267$622 for the nine monthquarter ended September 30, 2015 is due primaryMarch 31, 2016. The loss for 2016 directly related to alower sales for the period and higher selling, general and administrative expenses and research and development costs anddiscussed above. Decreased interest costs attributed todiscussed above, resulted from the amortization of the debt issuance cost and debt discount with the secured promissory notes discussed above,of $200 in 2016 offset by increases revenues.repricing and warrant issuances discussed above.
Liquidity and Capital Resources
Due to promising new products and distributions contracts executed in the last two years and management believeschanges with increased focus on the various sales channels and manufacturing and quality systems, management anticipates 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)1.) finishing and gaining approval for the products currently under development and 2) increasing2.) increase direct sales in the USA and continuingcontinue 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.
For the three months ended March 31, 2017, we used net cash in operations of approximately $645 compared to $559 for the same period in 2016. During 2017, cash used in operations consisted of loss from operations, offset by non-cash transactions for warrants issued related to secured promissory notes. During 2016, cash used in operations consisted of loss from operations, offset by non-cash transactions for warrants issued related to secured promissory notes.
For the three months ended March 31, 2017, net cash used in investing activities were $16 compared to $94 for the same period in 2016. The improvement in this activity relates to lower purchases of equipment in 2017 compared to 2016.
For the three months ended March 31, 2017, financing activities provided $914 compared $59 used in financing activities for the same period in 2016. The Company sold 2.4 million shares of common stock for $1.1 million during the first quarter of 2017, net of $83 of issuance costs.
The Company must contemplate continuation as a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. At March 31, 2017, the Company’s cash balance was $269 and its operating losses for the three months ended March 31, 2017 and the year ended December 31, 2016, have used most of the Company’s liquid assets. These factors raise substantial doubt about the Company’s ability to continue as a going concern. However working capital has improved by approximately $600 from December 31, 2016. The Company raised additional cash of $250 from the sale of equity subsequent to April 1, 2017 through the date of this filing.
The Company has settled three of the five employee notes for $330 and warrants. In April 2017 the Company paid $94 for the first installment and issued warrants to purchase 1,029,734 shares of common stock at $0.50, for a period of 5 years.
During the three months ended March 31, 2017, the Company paid $167 of secured promissory notes, reducing the balance to $483. The Company received notice that one noteholder will convert $50 into 100,000 shares of common stock at $0.50. Management believes that the remainder of the balance will be settled in some combination of cash and stock.
Management is actively seeking additional equity financing contemplated in the $4.25 million stock purchase agreement. The Company has negotiated with certain parties whose obligations are due in the next twelve months to extend payment terms beyond one year. One lender with an outstanding balance of $801 has stated that they will not be able to refinance the debt. The default rate of interest will increase three percent.
Accrued salaries, vacation and related expenses at March 31, 2017, includes amounts owed to the former CFO of approximately $1.1 million. See further discussion regarding the legal proceedings with the Company’s former Chief Financial Officer. Also included in accrued salaries, vacation and related expenses are amounts owed to both the Michaela and Michael Ott totaling approximately $152. Included in advances – related parties are amounts owed to the Company’s former CFO $50 at March 31, 2017.
The Company owes Ms. Ott, 91 Euros, ($97 as March 31, 2017). The Company has established a payment plan whereby the balances owed will be repaid beginning on October 31, 2017, extending between 18 and 24 months.
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 an increase in profitable sales revenues, we may be required to curtail product development and other activities. At September 30, 2016, the Company had approximately, $1.9 million of accrued liabilities which represents unpaid wages and vacation benefits. At December 31, 2015, the Company refinanced $927,000 of these liabilities through notes due to employees which are payable over a three year period and are convertible into equity at a discount defined in the agreement. At September 30, 2016, the Company was in default on certain notes with employees due to missed monthly payments. The Company has classified all notes, except one note in default as short-term on the Condensed Balance Sheets. Included in accounts payable and accrued expenses are accrued salaries and benefit expenses due to our former Chief Financial Officer, Robert F. McCullough, Jr. of $1 million. Also, $133,000 is due to Michaela Ott, currently our COO, and Michael Ott, currently our Chairman of the Board and Chief Executive Officer of two of our wholly owned subsidiaries, for unpaid wages and car allowance and vacation. Michaela Ott has also loaned $102,000 to the Company to be repaid by December 31, 2016. The Company believes executives and employees will work with the Company to ease financial strains emanating from amounts currently due and payable. The Company believes some portion of these liabilities will be settled in the common stock of the Company.
The current level of working capital shortfalls has been partially financed by additional advances on our credit lines with a German bank and from recently issued secured promissory notes. In order to continue growing the business, the Company is planning to raise additional funds through the sale of equity securities or convertible debt. The Company is also investigating additional bank financing with European institutions which will increase the availability against current collateral of approximately $5 million. The Company’s security agreement with its lender has provided borrowings of 35% of our collateralized assets. The Notes discussed above matured on June 30, 2016 and were not repaid. Therefore, the Notes were in default as of April 1, 2016. The Company agreedcontinues to pay the Purchasers 10% of the principal balance of the Notes in warrants for the months of April through September 2016 and by the date of this filing, October and November 2016. Therefore, for the months of April through September 2016, the Company issued 300,000 warrants and recorded interest expense related to the issuance of these warrants, attributable to the secured promissory notes of approximately $105,000. On May 25, 2016, the Company issued $150,000 of additional promissory notes. The May Notes were matured on August 25, 2016. The Company issued warrants for the months of August and September consistent with the terms of the Notes discussed above and by the date of this filing, October 2016 warrants. The Company anticipates that some of the noteholders will convert their matured notes into convertible debt or equity which the company may offer near term. The Company is investigating various sources of debt and equity to assist them in their growth plans andseek to refinance their maturingthis debt obligations. to provide additional liquidity.
On May 25, 2016, the Company entered into a Securities Purchase Agreement (the “May Purchase Agreement”) with two (2) individual accredited investors (collectively the “May Purchasers”), pursuantManagement continues to which the Company agreed to issue to the May Purchasers secured promissory notes in the aggregate principal amount of $150,000 (the “Note(s)”)expand its product offerings and warrants to purchase up to an aggregate amount of 150,000 shares of the common stock, par value $0.001 per share, of the Company (the “May Warrant(s)”). The Notes mature on the earlier of the third (3rd ) month anniversary date following the Closing Date, as defined in the Note, or the third (3rd ) business day following the Company’s receipt of funds exceeding one million dollars ($1,000,000) from an equity or debt financing, not including the financing contemplated under the May Purchase Agreement. The Notes may be converted into Units issued pursuant to the Company’s private financing of up to $5,000,000 (the “Follow On Offering”) Units at a price of $.80/Unit (the “Units”) consisting of: (i) a 2 year unsecured convertible note, which converts into shares of common stock at an initial conversion price of $.80 per sharehas also expanded its sales and (ii) a warrant to purchase one half additional share of common stock, with an initial exercise price equal to $.80 per share (the “Follow On Warrant”), in accordance with Article 2 set forth in the Notes. On November 2, 2016, the Company filed a Form D Notice of Exempt Offering of Securities for up to $3,000,000. The Company received $306,000, as an initial funding of this offering at $0.50 a share, 613,830 shares of common stock issued The offering is subject to a up to 7.5% commission paid to their broker/dealers totaling $22,484 plus warrants of 7.5% coverage at $0.50 conversion price per share, with a term of 5 years. The Company has an agreement with one broker/dealer to provide 7% commission paid in cash to them plus warrants of 50% coverage at $0.50 conversion price per share, with a term of 5 years.distribution channels during 2017.
In summary, the Company is working on extending its payment terms on employee notes, settling with its former CFO, raising additional equity and refinancing debt and other noteholders. In addition, the Company has slowed the pace of some of their new product rollouts. If management is unsuccessful in obtaining new forms of debt orcompleting its equity financing, they will begin negotiating with some of their major vendors and lenders to extend the terms of their debt and also evaluate certain expenses that have been implemented for the Company’s growth strategy. However, there can be no assurance that the Company will be successful in these efforts. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As a result
In summary, management believes current working capital is sufficient to fund current operations. The Company intends to continue growing using current working capital, however the growth of all these factors and conditionsthe Company could be slowed down if we are unable to obtain debt and/or equity financing. Consequently, there is substantial doubt about our ability to continue as a going concern.
Off-Balance Sheet Arrangements
As of September 30, 2016,March 31, 2017, 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. 4. ConControlstrols and Procedures
Evaluation of Disclosure Controls and Procedures
Our chief executive officerChief Executive Officer and our interim chief financial officer,Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15€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 executiveChief Executive and chief financial officersChief 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 officerChief Executive Officer and interim chief financial officer,Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Part II. Other Information
Item 1.Item 1. Legal Proceedings.
MEDITE Lab Solutions, Inc. sold four shipmentsOn November 13, 2016, the Company’s former CFO filed a complaint against the Company and certain officers and directors of CoverTape to Richard-Allan Scientificthe Company in the Anatomical PathologyUnited States District Court for the Northern District of Illinois, Eastern Division, Case No. 1:16-cv-10554, whereby he is alleging (i) breach of Thermo Fisher Scientific Inc. Of those shipments, Richard-Allan refused to pay for $115,275 worththe Illinois Wage and Protection Act, (ii) breach of already-received CoverTape, asserting that the CoverTape was non-conforming, which assertion MEDITE emphatically denies, and for which MEDITE has provided counter-evidence. Richard-Allan also failed to purchase further quantities as agreed between the parties. After attempting to resolve the matter through consultation, MEDITE is prepared to initiate binding arbitration to recover the $115,275 and $1,073,700 contractually available to MEDITE for Richard-Allan's failure to purchase further quantities under theemployment contract and $72,000 for inventory produced specific(iii) breach of loan agreement. He is seeking monetary damages up to the contractual terms.approximately $1,665,972. The Company has reserveddenied the substantive allegations in the complaint and is vigorously defending the suit. Management believes that the claims set forth in the complaint against the Company are without merit. The Company has accrued wages and vacation of approximately $1.1 million and a portion$50,000 note payable to the former CFO at March 31, 2017. The Company believes that $836,000 was to be converted into common stock as a condition of the outstanding balancemerger agreement at December 31, 2015$2.00 a share.
On April 26, 2017 mediation with a court appointed Magistrate Judge occurred. The mediation ended with detail of $115,275 and ofsettlement parameters. The Magistrate dismissed the OEM branded stock of $72,000, pending final resolution of this matter.meeting with specific instructions to both sides to settle the lawsuit. If needed a September 7, 2017 update meeting with the Magistrate Judge is scheduled. Both sides will continue to work towards an equitable settlement prior to September 7, 2017.
Item 2.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the nine month period ended September 30, 2016,On March 7, 2017 the Company issued 213,317filed a $4,250,000 Form D to issue up to 8.5 million shares of common stock and approximately 2.2 million warrants to certain members of the Board of Directors and other unrelated parties as consideration for $210,000 of accrued director and consulting fees.
On November 2, 2016, the Company filed a Form D Notice of Exempt Offering of Securities for up to $3,000,000. The Company received $306,000, as an initial funding of this offeringissue common stock at $0.50 a share, 613,830share. From January through March 31, 2017 the Company received $1.2 million proceeds for the sale of 2.4 million shares of common stock at a purchase price of $0.50, with 50% of the shares issued, The offering is subjector 1.2 million warrants to a up to 7.5% commission paid to their broker/dealers totaling $22,484 plus warrants of 7.5% coveragepurchase common shares at $0.50, conversion price per share, with a term of 5 years. The Company has an agreementincurred $83,400 of cash commissions and will issue 90,375 warrants associated with one broker/dealer to provide 7% commission paid in cash to them plus warrantsthe sale of 50% coverage at $0.50 conversion price per share, with a term of 5 years.these securities.
We issued the foregoing securities in reliance on the safe harbor and exemptions from registration provided by Section 4(a)(2) and Regulation D of the Securities Act of 1933, as amended.
During the nine months ended September 30, 2015, the Company sold 711,250 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.On December 31, 2015, the Company entered into a Securities Purchase Agreement (the “2015 Purchase Agreement”) with seven (7) individual accredited investors, one which serves on the Company’s Board of Directors and is the chairman of the Company’s Audit Committee (collectively the “Purchasers”), pursuant to which the Company agreed to issue to the Purchasers secured promissory notes in the aggregate principal amount of $500,000 with interest accruing at an annual rate of 15% (the “Note(s)”) and warrants to purchase up to an aggregate amount of 250,000 shares of the common stock, par value $0.001 per share, of the Company (the “Warrant(s)”). See Note 8 for further discussion on warrants issued on the Notes. The Notes matured on March 31, 2016 and were not repaid. Therefore, the Notes were in default on April 1, 2016. The Company agreed to pay the Purchasers 10% of the principal balance of the Notes in warrants until the principal balance is repaid. See Note 8 for further discussion on warrants issued on the Notes. The Notes are secured by the Company’s accounts receivable and inventories held in the United States.
On May 25, 2016, the Company entered into a Securities Purchase Agreement (the “May Purchase Agreement”) with two (2) individual accredited investors, one of which who serves on the Company’s Board of Directors (collectively the “May Purchasers”), pursuant to which the Company agreed to issue to the May Purchasers secured promissory notes in the aggregate principal amount of $150,000 (the “May Note(s)”) with an interest rate of 15% and warrants to purchase up to an aggregate amount of 150,000 shares of the common stock, par value $0.001 per share, of the Company (the “May Warrant(s)”). The Notes mature on the earlier of the third (3rd) month anniversary date following the Closing Date or August 25, 2016 and were not repaid. The May Notes may be converted into Units issued pursuant to the Company’s private financing of up to $5,000,000 (the “Follow On Offering”) Units at a price of $.80/Unit (the “Units”) consisting of: (i) a 2 year unsecured convertible note, which converts into shares of common stock at an initial conversion price of $.80 per share and (ii) a warrant to purchase one half additional share of common stock, with an initial exercise price equal to $.80 per share (the “Follow On Warrants”).
In November 2015 and February 2016, the Company entered into promissory notes totaling $927,000 with certain employees to repay wages earned prior to December 31, 2014 not paid (“Notes Due to Employees"). The Notes Due to Employees are to be paid monthly through September 2019, with no interest due on the outstanding balances. The monthly amounts increase over the payment term. The amounts due become immediately due and payable if payments are more than ten days late either one or two consecutive months as defined in the agreement with the employee. At September 30, 2016, all Notes Due to Employees are in default and due on demand, except one. Therefore, the Notes Due to Employees in default are presented as current in the condensed consolidated balance sheets. Certain employees may convert any of the amounts owed during the duration of the note to equity at a discounted price as defined in the agreement. The Company is currently negotiating with the employees whose notes are in default to extend payment terms.
ItemItem 3. Defaults upon Senior Securities.On January 10, 2017, the Board of Directors agreed to renegotiate the terms of the 2015 Notes and 2016 Notes (collectively the “Notes”) with the consent of the 2015 Purchasers and 2016 Purchasers (collectively the “Note Holders”), which was obtained on January 16, 2017, as follows:
● | The Note Holders agreed to waive the defaults and extend the Notes for the earlier of six months or the receipt of a $3,000,000 investment into the Company pursuant to a future private equity offering, whichever occurs first (the “Extension”). |
● | Upon the Company’s receipt of the first $1,000,000 invested (including the capital raised to date in a prior private equity offering), the Note Holders will be repaid one third of their principal investment. On March 31, 2017, the Company paid approximately $167,000 of the outstanding Notes. |
● | Upon the Company’s receipt of the second and third $1,000,000, respectively, the Note Holders will be repaid one third of their principal investment on each $1,000,000 raised. |
● | The exercise price on the Warrants were adjusted from $0.80 to $0.50. |
● | If the Notes are not paid back in full on the six month extension date, the Note Holders will each receive additional warrants equal to 50% of their respective investments, exercisable at $0.50, as a penalty. |
● | The interest payments on the Notes will continue to accrue on the remaining balance of the unpaid Notes, and the additional warrants of 10% of the amount of Notes outstanding, previously penalty warrants, shall continue to accrue pursuant to the Notes. |
● | The Note Holders will have the option to convert their Notes to equity either before or at the six month extension end date into units offered in any future private equity offering of the Company. |
Exhibit | | |
Number | | Description |
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10.1 | | Form of First Amendment to Amended and Restated Securities Purchase Agreement |
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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. |
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31.2 | | Section 302 certification by the principalchief 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. |
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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. |
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32.2 | | Section 906 certification by the principalchief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
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101.INS | | XBRL Instance |
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101.SCH | | XBRL Taxonomy Extension Schema |
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101.CAL | | XBRL Taxonomy Extension Calculation |
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101.DEF | | XBRL Taxonomy Extension Definition |
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101.LAB | | XBRL Taxonomy Extension Labels |
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101.PRE | | XBRL Taxonomy Extension Presentation |
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 14, 2016May 15, 2017 | /s/ David E. Patterson |
| David E. Patterson |
| Chief Executive Officer |
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Date: November 14, 2016May 15, 2017 | /s/.David E. Patterson Susan Weisman |
| David E. PattersonSusan Weisman |
| Chief Financial Officer |