UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended June 30, 2017March 31, 2018 |
| | |
| | |
☐ | 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 th34th 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 ☒ 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 ☒ 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 ☒ |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 August 14, 2017: 27,658,820June 21, 2018: 59,372,868 shares
MEDITE Cancer Diagnostics,Diagnostics, Inc.
QUARTERLY REPORT ON FORM 10-Q
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PART I. —
FINANCIALFINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
MEDITE CANCER DIAGNOSTICS,DIAGNOSTICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| | | |
| | | |
| Assets | | |
| | | |
| Current Assets: | | |
| Cash | $410 | $108 |
Accounts receivable, net of allowance for doubtful accounts of $191 and $123, respectively
| 1,054 | 1,346 |
| Inventories | 3,969 | 3,811 |
| Prepaid expenses and other current assets | 189 | 79 |
| Total current assets | 5,622 | 5,344 |
| | | |
| Property and equipment, net | 1,576 | 1,557 |
| In-process research and development | 4,620 | 4,620 |
| Trademarks, trade names | 1,240 | 1,240 |
| Goodwill | 4,658 | 4,658 |
| Other assets | 398 | 351 |
| Total assets | $18,114 | $17,770 |
| | | |
| Liabilities and Stockholders’ Equity | | |
| | | |
| Current Liabilities: | | |
| Accounts payable and accrued expenses | $3,737 | $3,306 |
| Secured lines of credit and current portion of long-term debt | 3,226 | 3,214 |
| Notes due to employees, current portion | 339 | 681 |
| Advances – related party | 154 | 146 |
| Total current liabilities | 7,456 | 7,347 |
| Long-term debt, net of current portion | 32 | 60 |
| Notes due to employees, net of current portion | 90 | 135 |
| Deferred tax liability | 2,205 | 2,205 |
| Total liabilities | 9,783 | 9,747 |
| | | |
| Commitments and contingencies | | |
| | | |
| Stockholders’ equity : | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; 198,355 shares issued and outstanding (liquidation value of all classes of preferred stock $2,579 and $2,533 as of June 30, 2017 and December 31, 2016, respectively) | 962 | 962 |
| Common stock, $0.001 par value; 50,000,000 and 35,000,000 shares authorized, 27,658,820 and 22,421,987 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively | 28 | 23 |
| Additional paid-in capital | 12,090 | 9,366 |
| Stock subscription | 25 | 25 |
| Treasury stock | (327) | (327) |
| Accumulated other comprehensive loss | (483) | (642) |
| Accumulated deficit | (3,964) | (1,384) |
| Total stockholders’ equity | 8,331 | 8,023 |
| | | |
| Total liabilities and stockholders’ equity | $18,114 | $17,770 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
| | Three Months Ended June 30, |
| | | |
| | | |
| Net sales | $1,277 | $2,816 |
| Cost of revenues | 1,228 | 1,546 |
| Gross profit | 49 | 1,270 |
| | | |
| Operating expenses | | |
| Depreciation and amortization expense | 54 | 50 |
| Research and development | 329 | 421 |
| Selling, general and administrative | 1,228 | 918 |
| Total operating expenses | 1,611 | 1,389 |
| Operating loss | (1,562) | (119) |
| | | |
| Other expenses | | |
| Interest expense, net | 67 | 139 |
| Other income, net | (8) | (50) |
| Total other expense, net | 59 | 89 |
| | | |
| Loss before income taxes | (1,621) | (208) |
| | | |
| Income tax provision (benefit) | 4 | (6) |
| Net loss | (1,625) | (202) |
| | | |
| Preferred dividend | (23) | (23) |
| | | |
| Net loss available to common stockholders | $(1,648) | $(225) |
| Loss per share | | |
| Basic and diluted loss per share | $(0.06) | $(0.01) |
| Weighted average basic and diluted shares outstanding | 25,866,163 | 21,058,235 |
| | | |
| Condensed consolidated statements of comprehensive loss | | |
| Net loss | $(1,625) | $(202) |
| Other comprehensive income (loss) | | |
| Foreign currency translation adjustments | 212 | (136) |
| Comprehensive loss | $(1,413) | $(338) |
| | | |
| | | |
| Assets | | |
| | | |
| Current Assets: | | |
| Cash | $153 | $73 |
| Restricted cash | 94 | 417 |
| Accounts receivable, net of allowance for doubtful accounts of $452 and $439 | 643 | 453 |
| Inventories | 2,657 | 2,403 |
| Prepaid expenses and other current assets | 328 | 118 |
| Total current assets | 3,875 | 3,464 |
| | | |
| Property and equipment, net | 1,759 | 1,778 |
| In-process research and development | 4,620 | 4,620 |
| Trademarks, trade names | 1,240 | 1,240 |
| Goodwill | 4,658 | 4,658 |
| Other assets | 256 | 196 |
| Total assets | $16,408 | $15,956 |
| | | |
| Liabilities and Stockholders’ Equity | | |
| | | |
| Current Liabilities: | | |
| Accounts payable and accrued expenses | $3,279 | $3,252 |
| Current portion of long-term debt | 50 | 50 |
| Notes due to employees, current portion | 326 | 326 |
| Advances – related party | 142 | 154 |
| Total current liabilities | 3,797 | 3,782 |
| Long-term debt, net of current portion | 5,157 | 4,869 |
| Notes due to employees, net of current portion | 25 | 45 |
| Deferred tax liability | 1,485 | 1,485 |
| Total liabilities | 10,464 | 10,181 |
| | | |
| Commitments and contingencies | | |
| | | |
| Stockholders’ Equity: | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; 198,355 shares issued and outstanding (liquidation value of all classes of preferred stock $2,647 and $2,624 as of March 31, 2018 and December 31, 2017, respectively) | 962 | 962 |
| Common stock, $0.001 par value; 100,000,000 shares authorized, 47,906,081 and 28,906,081 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively | 48 | 29 |
| Additional paid-in capital | 15,227 | 13,750 |
| Treasury stock | (327) | (327) |
| Accumulated other comprehensive loss | (369) | (444) |
| Accumulated deficit | (9,597) | (8,195) |
| Total stockholders’ equity | 5,944 | 5,775 |
| | | |
| Total liabilities and stockholders’ equity | $16,408 | $15,956 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDITE CANCER DIAGNOCANSCTICS,ER DIAGNOSTICS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Dollars inIn thousands, except sharesshare and per share amounts)
| | Six Months Ended June 30, | |
| | | | Three Months Ended March 31, |
| | | | |
| | | |
| Net sales | $3,168 | $4,947 | $1,505 | $1,891 |
| Cost of revenues | 2,439 | 2,759 | 1,170 | 1,211 |
| Gross profit | 729 | 2,188 | 335 | 680 |
| | | |
| Operating expenses | | |
| Depreciation and amortization expense | 103 | 101 | 71 | 49 |
| Research and development | 754 | 781 | 305 | 425 |
| Selling, general and administrative | 2,010 | 1,775 | 919 | 782 |
| | | |
| Total operating expenses | 2,867 | 2,657 | 1,295 | 1,256 |
| Operating loss | (2,138) | (469) | (960) | (576) |
| | | |
| Other expenses | | |
| Interest expense | 260 | 400 | |
| Other (income) expenses | | |
| Interest expense, net | | 447 | 193 |
| Loss on extinguishment of notes due to employees | 158 | - | - | 158 |
| Other (income) expenses, net | 20 | (39) | |
| Total other expenses, net | 438 | 361 | |
| Other (income) expense, net | | (5) | 28 |
| Total other expense, net | | 442 | 379 |
| | | |
| Loss before income taxes | (2,576) | (830) | (1,402) | (955) |
| | | |
| Income tax provision (benefit) | 4 | (6) | |
| Provision for income taxes | | - |
| Net loss | (2,580) | (824) | (1,402) | (955) |
| | | |
| Preferred dividend | (46) | (23) |
| | | |
| Net loss to common stockholders | $(2,626) | $(870) | |
| | | |
| Net loss available to common stockholders | | $(1,425) | $(978) |
| Loss per share | | |
| Net loss available to common stockholders | | $(1,425) | $(978) |
| Basic and diluted loss per share | $(0.11) | $(0.04) | $(0.04) |
| Weighted average basic and diluted shares outstanding | 24,411,435 | 21,058,235 | 39,174,599 | 22,940,543 |
| | | |
| Condensed consolidated statements of comprehensive loss | | |
| Net loss | (2,580) | (824) | $(1,402) | $(955) |
| Other comprehensive income (loss) | | |
| Foreign currency translation adjustments | 159 | 55 | 75 | (53) |
| | | |
| Comprehensive loss | $(2,421) | $(769) | $(1,327) | $(1,008) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDITE CANCER DIAGNOSTDIAIGCS,NOSTICS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | |
| | | Three Months Ended March 31, |
| | | | | |
| Cash flows from operating activities: | | |
| Net loss | $(2,580) | $(824) | $(1,402) | $(955) |
| Adjustments to reconcile net loss to cash used in operating activities | | |
| Depreciation and amortization | 103 | 101 | 71 | 49 |
| Provision for doubtful accounts | 62 | - | |
| Amortization of debt discounts and debt issuance costs | | 177 | - |
| Stock-based compensation | 63 | - | 43 | 10 |
| Amortization of debt discount and debt issuance costs | - | 219 | |
| Amortization of shares issued for prepaid consulting services | 6 | - | |
| Estimated fair value of warrants issued in connection with secured promissory notes | 162 | 51 | - | 121 |
| Loss on extinguishment of notes due to employees | 158 | - | - | 158 |
| Changes in assets and liabilities: | | |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | 302 | 42 | (176) | 33 |
| Inventories | 114 | (827) | (186) | 183 |
| Prepaid expenses and other assets | (95) | 57 | (263) | (20) |
| Accounts payable and accrued expenses | 313 | 439 | 95 | (224) |
| Net cash used in operating activities | (1,392) | (742) | (1,641) | (645) |
| | | |
| Cash flows from investing activities: | | |
| Purchases of equipment | (27) | (3) | (2) | (16) |
| Increase in other assets | - | (104) | |
| Net cash used in investing activities | (27) | (107) | (2) | (16) |
| | | |
| Cash flows from financing activities: | | |
| Net (repayment) borrowings on lines of credit | (24) | 406 | |
| Net borrowings on lines of credit | | - | 8 |
| Repayment of secured promissory notes | (167) | - | - | (167) |
| Repayment of notes due to employees | (155) | (50) | (21) | (24) |
| Proceeds from related party advances, net | - | 13 | |
| Proceeds from convertible debt, net | | 1,464 | - |
| Repayments on related party advances | | (15) | - |
| Proceeds from sale of common stock, net of issuance costs | 2,000 | - | - | 1,097 |
| Proceeds from common stock subscribed | 25 | - | |
| Net cash provided by financing activities | 1,679 | 369 | 1,428 | 914 |
| | | |
| Effect of exchange rates on cash | 42 | 38 | (28) | (92) |
| Net change in cash | 302 | (442) | |
| Cash at beginning of period | 108 | 587 | |
| | | |
| Cash at end of the period | $410 | $145 | |
| Net change in cash and restricted cash | | (243) | 161 |
Cash and restricted cash at beginning of period | | 490 | 108 |
| Cash and restricted cash at end of the period | | $247 | $269 |
| | | |
| Supplemental disclosure of cash flow information: | | |
| Cash paid for interest | $97 | $89 | $91 | $41 |
| Cash paid for income taxes | $24 | $8 | $- | $13 |
| | | |
| Reconciliation of cash and restricted cash at end of period: | | |
| Cash | | $153 | $269 |
| Restricted cash | | 94 | - |
| | | $247 | $269 |
| Supplemental schedule of non-cash investing and financing activities: | | |
| Reclassification of warrant liability to additional paid in capital | $- | $90 | |
| Settlement of liabilities through issuance of common stock | $- | $275 | |
| Issuance of common stock for services | $25 | $- | |
| Issuance of warrants on secured promissory notes classified as additional paid-in capital and debt discount | $- | $192 | |
| Issuance of common stock subscribed | $25 | $- | |
Conversion of secured promissory note plus accrued interest into common stock | $58 | $- | |
| Common stock issued with debt | | $1,425 | $- |
| Accrued liabilities exchanged for convertible note payable | | $100 | $- |
| Estimated fair value of warrants recorded as debt discount | | $28 | $- |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDITE CANCERCANCER DIAGNOSTICS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular data in thousands, except share and per share amounts)
Note 1. Organization
The Company
MEDITE Cancer Diagnostics, Inc. (“MDIT”, “MEDITE”, “we”, “us” or the “Company”) was incorporated in Delaware in December 1998.
These statements include the accounts of MEDITE Cancer Diagnostics, Inc. and its wholly owned subsidiaries, which consists of MEDITE Enterprise, Inc., MEDITE GmbH, Burgdorf, Germany, MEDITE GmbH, Salzburg, Austria, MEDITE Lab Solutions Inc., Orlando, USA MEDITE sp. z o.o., Zilona-Gora, Poland. In 2017 the Company made the decision to integrate CytoGlobe into Medite GmbH. CytoGlobe had been operating as a separate company focused on cytology products (equipment and consumables) with separate personnel and financial reporting that was consolidated into Medite GmbH. As the CytoGlobe GmbH, Burgdorf, Germany.brand became less important over time and customers purchased both cytology and histology products from Medite, it no longer made sense to keep CytoGlobe as a separate company. Therefore, it was integrated from a financial, operational and product portfolio perspective into Medite GmbH.
MEDITE is a medical technology company specialized in the development, manufacturing, and marketing of molecular biomarkers, premium medical devices, consumables and consumablesmolecular biomarkers for detection, risk assessment and diagnosis of cancerous and precancerous conditions and related diseases. The Company has 7457 employees in fourtwo countries, a distribution network to about 80 countries and a wide range of products for anatomic pathology, histology and cytology laboratories is available for sale.
Note 2. Summary of Significant Accounting Policies
Consolidation, Basis of Presentation and Significant Estimates
The accompanying condensed consolidated financial statements for the periods ended June 30,March 31, 2018 and 2017 and 2016 included herein are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 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, 20172018 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 condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements disclosed in the Report on Form 10-K for the year ended December 31, 20162017 filed on April 14, 2017May 17, 2018 and other filings with the Securities and Exchange Commission.
In preparing the accompanying condensed consolidated accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.
Going Concern
The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Negative working capital at DecemberAt March 31, 20162018, the Company’s cash balance was $2,003 compared to June 30, 2017 of $1,834, an improvement of $169. The Company has reported$153,000 and its operating losses of $2,163 for the year ended December 31, 20162017 and $2,580 for the sixthree months ended June 30, 2017.March 31, 2018 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, the Company has approximately $78,000 in working capital as of March 31, 2018 compared to negative working capital of approximately $318,000 on December 31, 2017. The Company raised additional cash of $2$1.5 million net of offering costs from the saleissuance of 4,310,000 shares of common stock subsequent to December 31, 2016 through June 30, 2017.
The Company has settled three of the five employeeconvertible notes for $330,000 and warrants and paidpayable starting in the first installmentquarter of $94,000 in April 2017. The Company has extended the term of the secured promissory notes and has paid $167,000 of the outstanding balance and one noteholder converted a $50,000 note plus accrued interest into 116,833 shares of common stock at $0.50 per share. 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 $856,950 has stated that they will not be able to refinance the debt however they have provided an extension through September 2017. The rate of interest increased three percent beginning in June 2017.2018 (see Note 4).
The Company has accrued wages and vacation of approximately $1.1 million and a $50,000 note payable to the former CFO at June 30, 2017 and December 31, 2016. The Company believes that more than half of the balance currently outstanding was to be converted into common stock as a condition of the merger agreement at $2.00 a share. See Note 8 for further discussion regarding the legal proceedings with the Company’s former CFO.
The Company owes Ms. Ott 91,136 Euros, ($97,351 as June 30, 2017). The Company has made arrangements to repay this obligations evenly over a 24 month period, starting on October 31, 2017. The Company also settled obligations to Ms. Ott and Mr. Ott for past wages and related expenses of $152,000 through an upfront payment each of $6,750 and a payment plan which settled the amounts owed and established a payment schedule for a period of 18 months starting in October 2017. The upfront payment was not made as of the date of this filing.
The Company’s security agreement with its lender has provided borrowings of 35% of our collateralized assets. The Company continues to work on refinancing this debt to provide additional liquidity.
Management continues to expand its product offerings and has also expanded its sales and distribution channels during 2017.2018.
In the future, we may require sources of capital in addition to cash on hand to continue operations and to implement our strategy. If management is unsuccessful in completing itsour operations do not become cash flow positive, we may be forced to seek equity financing, management will begin negotiating with some of the Company's major vendors and lenders to extend the terms of theirinvestments or debt and also evaluate certain expenses that have been implemented for the Company’s growth strategy. However, therearrangements. No assurances can be no assurancegiven that the Companywe will be successful in these efforts. The condensed consolidatedobtaining such additional financing on reasonable terms, or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results of operations and financial statements do not include any adjustmentscondition. In addition, if funds are available, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that might result from the outcome of this uncertainty.could impair our ability to engage in certain business transactions.
Revenue Recognition
The Company derives its revenue primarily from the sale of medical products and supplies for the diagnosis and prevention of cancer. Product
The company recognizes revenue isfor the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
Consumables revenues consist of single-use products and are recognized whenat a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment. Instruments revenues typically consist of longer-lived assets that, for the substantial majority of sales, are recognized at a point in time in a manner similar to consumables. The Company exercises judgment in determining the timing of revenue by analyzing the point in time or the period over which the customer has the ability to direct the use of and obtain substantially all four of the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) deliveryremaining benefits of the products has occurred or risk of loss transfers to the customer; (3) the selling price of the product is fixed or determinable; and (4) collectability is reasonably assured.asset. The Company generates the majorityexpenses contract costs that would otherwise be capitalized and amortized over a period of its revenue from the sale of inventory. For certain 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.less than one year.
Shipping and handling costs are included in cost of goods sold and charged to the customers based on the contractual terms.
Payments from customers for most instruments, consumables and services are typically due in a fixed number of days after shipment or delivery of the product. For certain international equipment orders a prepayment is required. The balance of the customer deposits is reflected in our accrued liabilities and was $215,088 as of March 31, 2018.
See Note 8 for revenue disaggregated by type and by geographic region as well as further information about remaining performance obligations.
Inventories
Inventories are stated at the lower of cost or market.net realizable value. Cost is determined using the first in first out method (FIFO) and market is based generally on net realizable value.
Inventories consists of parts inventory purchased from outside vendors, raw materials used in the manufacturing of equipment;equipment, work in process and finished goods. Management reviews inventory on a regular basis and determines if inventory is still useable. A reserve is established for the estimated decrease in carrying value for obsolete or excess inventory. Once a reserve is established, it is considered a permanent adjustment to the cost basis of the obsolete or excess inventory.
Foreign Currency Translation
The accounts of the USU.S. parent company are maintained in United States Dollar (“USD”). The functional currency of the Company’s German subsidiaries is the EURO (“EURO”). The accounts of the German subsidiaries were translated into USD in accordance with relevant accounting guidance. All assets and liabilities are translated at the exchange rate on the balance sheet dates, stockholders’ equity was translated at the historical rates and statements of operations transactions are translated at the average exchange rate for each period. The resulting translation gains and losses are recorded in accumulated other comprehensive loss as a component of stockholders’ equity.
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 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 relevant accounting guidance.
Goodwill
Goodwill is recognized for the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. 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 for us) 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.
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 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.
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.
Net Loss Per Share
Basic loss per share is calculated based on the weighted-average number of outstanding common shares. Diluted loss per share is calculated based on the weighted-average number of outstanding common shares plus the effect of dilutive potential common shares, using the treasury stock method and the if-converted method. MEDITE’s calculation of diluted net loss per share excludes potential common shares as of June 30,March 31, 2018 and 2017 and 2016 as the effect would be anti-dilutive (i.e. would reduce the loss per share).
The Company computes its loss applicable to common stock holders by subtracting dividends on preferred stock, including undeclared or unpaid dividends if cumulative, from its reported net loss and reports the same on the face of the condensed consolidated statement of operations.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, 2017 with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company has not yet selected aadopted the modified retrospective transition method of ASU 2014-09 effective January 1, 2018 and is currently evaluating the impact of the updated guidance for the Company’s consolidated financial statements.there was no material change to its current business practices upon implementation.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 is that an entity should recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. This new accounting guidance is effective for public companies for fiscal years beginning after December 15, 2018 (i.e., calendar years beginning on January 1, 2019), including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows - Restricted Cash (Topic 230)”. This new standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and requires retrospective application. The Company adopted this standard in the first quarter of 2018 by using the retrospective method, which required the following disclosures and changes to the presentation of its consolidated financial statements: cash and restricted cash reported on the consolidated statements of cash flows now includes restricted cash of $417,000 as of December 31, 2017, as well as previously reported cash.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the definition of a business”. The amendments in this Update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The guidance in this update is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Management does not anticipate theThe implementation to have ahad no material impact on the Company’s consolidated financial statements.
Note 3. Inventories | | | |
| | | |
| The following is a summary of the components of inventories (in thousands): |
| | | |
| | | |
| | | |
| Raw materials | $1,445 | $1,220 |
| Work in process | 48 | 44 |
| Finished goods | 1,164 | 1,139 |
| | $2,657 | $2,403 |
In January 2017, the FASB also issued ASU 2017-04, “Intangibles - Goodwill and other (Topic 350): Simplifying the test for goodwill impairment”. The amendments in this Update remove the second step of the current goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This guidance is effective for impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on the Company’s consolidated financial statements.
In July 2017, the FASB issued a two-part ASU No. 2017-11, “(Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” The ASU will (1) “change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features” and (2) improve the readability of ASC 480-10 by replacing the indefinite deferral of certain pending content with scope exceptions. The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. This new accounting guidance is effective for public companies for fiscal years beginning after December 15, 2018 (i.e., calendar years beginning on January 1, 2019), including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2017-11 will have on the Company’s consolidated financial statements.
Note 3. Inventories
The following is a summary of the components of inventories (in thousands):
| | | |
| Raw materials | $1,474 | $1,309 |
| Work in process | 142 | 203 |
| Finished goods | 2,353 | 2,299 |
| | $3,969 | $3,811 |
Note 4. Secured Lines of Credit, Long-term Debt and Notes Due to Employees
The Company’s outstanding note payable indebtednessdebt was as follows as of (in thousands):
| | | |
| Hannoversche Volksbank credit line #1 | $1,447 | $1,321 |
| Hannoversche Volksbank credit line #2 | 426 | 397 |
| Hannoversche Volksbank term loan #3 | 95 | 117 |
| Secured Promissory Note | 433 | 650 |
| DZ Equity Partners Participation rights | 857 | 789 |
| Total | 3,258 | 3,274 |
| Less current portion of long-term debt | (3,226) | (3,214) |
| Long-term debt | $32 | $60 |
| | | |
| | | |
| | | |
| Secured promissory note | 50 | 50 |
| Subordinated convertible notes payable | 1,085 | 932 |
| GPB Debt Holdings II, LLC convertible note payable | 5,356 | 5,356 |
| 2018 Convertible notes payable | 1,425 | - |
| Total | 7,916 | 6,338 |
| Discounts on convertible notes payable | (2,709) | (1,419) |
| Less current portion of long-term debt | (50) | (50) |
| Long-term debt | $5,157 | $4,869 |
GPB Debt Holdings II, LLC (“GPB”) Convertible Note Payable
On September 26, 2017, the Company entered into the Purchase Agreement with GPB, pursuant to which the Company issued to GPB (i) a secured convertible promissory note in the aggregate principal amount of $5,356,400 (the “GPB Note”) at a purchase price equal to 97.5% of the face value of the of the original $5 million GPB Note and an additional discount of 300,000 Euro ($356,400 at September 26, 2017) considered an additional purchase discount, with the Company receiving net proceeds of $4.7 million and (ii) a warrant to purchase an aggregate of 4,120,308 shares of common stock of the Company (the “Warrant”). The Company allocated the proceeds received to the GPB Note and the warrants on a relative fair value basis at the time of issuance. The total debt discount will be amortized over the life of the GPB Note to interest expense. The estimated relative fair value of the warrants was $520,052. Amortization expense of the debt discount, which includes original issue discount, loan fees and the warrant value, during the year ended December 31, 2017 and the three months ended March 31, 2018 was $131,822 and $114,438, respectively. The GPB Note matures on the 36th month anniversary date following the Closing Date, as defined in the GPB Note (the “Maturity Date”). The GPB Note is secured by a senior secured first priority security interest on all of the assets of the Company and its subsidiaries evidenced by a security agreement (the “Security Agreement”). Each subsidiary also entered into a guaranty agreement pursuant to which the subsidiaries have guaranteed all obligations of the Company to the GPB. The GPB Note bears interest at a rate of 13.25% per annum (which interest is increased to 18.25% upon an Event of Default). The GPB Note is initially convertible at a price of $0.65 (the “Conversion Price”) into 8,240,615 shares of common stock. There was no discount relate to the conversion feature. The exercise price of the Warrant is subject to a ratchet downside protection with a $0.30 per share floor price in the event the Company issues additional equity securities, and subject to adjustments for stock splits, dividends, combinations, recapitalizations and the like. The GPB Note is being amortized quarterly at a rate of 10% of the face value of the Note beginning on month 24, with the remaining 60% due at the Maturity Date. There is a flat 3% success fee which allows for the prepayment of the GPB Note and applies to the payment of principal during the Term through the Maturity Date. The GPB Note contains customary events of default. The GPB Note contains certain covenants, such as restrictions on the incurrence of indebtedness, the existence of liens, the payment of restricted payments, default, redemptions, and the payment of cash dividends and the transfer of assets. GPB also has a right of participation for any Company offering, financing, debt purchase or assignment for 36 months after the closing date. The Company is required to maintain a 6-month interest reserve of $417,000 in restricted cash. The shares underlying the GPB Note and the Warrants are to be registered by the Company through a registration rights agreement within 60 days and the registration statement is to be declared effective within 180 days. Failure to file, or to meet other criteria defined as the event date will required the Company to pay 2% of the registrable securities times the price at the event date per month, up to 12% in cash payments. On February 5, 2018, the Company entered into a Forbearance Agreement with GBP that provides relief until July 1, 2018 of the Company’s requirement to maintain an interest reserve and to complete a registration rights agreement and provides relief until April 1, 2018 of the Company’s requirement to make interest payments. According to the Forbearance Agreement, interest payments must be current by December 31, 2018.
In July 2006, MEDITE GmbH, Burgdorf, entered into a master credit line #1 with Hannoversche Volksbank. The line of credit was amended in 2012, 2015 and again in 2016, in which the credit line availability is Euro 1.3 million ($1.485 million as of June 30, 2017). 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 3.75 – 8.00% during the period ended June 30, 2017. 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, and a mortgage on the building owned by the Company and is guaranteed by Michaela Ott and Michael Ott, stockholders of the Company.Securities Purchase Agreement
In June 2012, CytoGlobe, GmbH, Burgdorf, entered into a credit line #2 with Hannoversche Volksbank. The line of credit granted a maximum borrowing authority of Euro 400,000 ($457,040 as of June 30, 2017). 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 ranged from 3.90 – 8.00% during the period ended June 30, 2017. 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, stockholders of the Company, and the state of Lower Saxony (Germany) to support high-tech companies in the area.
In November 2008, MEDITE GmbH, Burgdorf, entered into a Euro 400,000 ($457,040 as of June 30, 2017) 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 ($15,871 as of June 30, 2017). The term loan is guaranteed by Michaela Ott and Michael Ott, stockholders 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 with DZ Equity Partners (“DZ”) in the form of a debentureoutstanding note payable with a mezzanine lender who advanced the Company up to Euro 1.5 million, ($1.7 million asprincipal and accrued interest balance of June 30, 2017) in two tranches of Euro 750,000 each ($856,950 as of June 30, 2017). 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 matured on December 31, 2016, however the Notes were$63,250 that is not considered in default until June 1, 2017, whenas the German financial statements were dueCompany received notification to be filed. The Company has initiated discussions with DZ to renegotiate the terms of the agreement or to convert any part of the balance into stock. DZ has extended the maturity date to September 1, 2017. The rate of interest increased three percent, to 15.15% on June 1, 2017.freeze this account.
2018 Convertible Notes
On December 31, 2015,February 6, 2018, the Company entered intoestablished a Securities Purchase Agreement (the “2015 Purchase Agreement”)private placement of convertible notes and common stock to raise approximately $1,500,000, with seven individual accreditedan over-allotment option for an additional $750,000. The convertible notes have a conversion price of $0.075 per share. The investors (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 250,000received shares of the common stock par value $0.001) per share, of the Company (the “Warrant(s)”) withbased on an initial exerciseassumed purchase price of $1.60$0.075 per share subjectand the investor is not required to adjustment and are exercisablepay any additional consideration for a periodthe shares of five years. Oncommon stock. As of March 15, 2016, the Board of Directors approved renegotiated terms to increase the warrants issued to the Purchasers from a total of 250,000 warrants to 500,000 and fixed the exercise price of the warrants to $0.80. The Notes mature on the earlier of the third month anniversary date following the Closing Date, as defined in the Note, or the third business day following the Company’s receipt of funds exceeding one million dollars from an equity or debt financing, not including the financing contemplated under the 2015 Purchase Agreement. The Notes are secured by the Company’s accounts receivable and inventories held in the United States. If the Notes are not redeemed by31, 2018 the Company on maturity, the Purchasers are entitled to receive 10% of the principal balance of the Notes outstanding in warrants for every month that the Notes are not redeemed. On March 31, 2016, these Notes maturedhad received $1,325,000 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 Notes are repaid. During the six month period ended June 30, 2017, the Company issued 50,000 warrants in connection with the default provision and 195,000 warrants in connection with the January 2017 extension provision (see below), which were valued at $11,443 and $59,199, respectively, and recorded it as interest expense in the condensed consolidated statements of operations. The Notes are secured by the Company’s accounts receivable and inventories held in the United States. In January 2017, the Company extended the term of the Notes in default on April 1, 2016 to June 30, 2017 and reduced the price on the warrants issued from $0.80 to $0.50. The Company recorded $64,405 attributed to the repricing of the warrants.
On June 30, 2017, one secured noteholder, an affiliate of a member of our Board of Directors converted a $50,000 secured promissory note for $50,000 plus $8,000$100,000 of accrued interest into 116,833liabilities and issued 19,000,000 shares of common stock. The convertible notes mature five years from the closing date, have an interest rate of 12%, are secured obligations of the Company, senior to other outstanding indebtedness and are expressly subordinate to the Company’s indebtedness with GPB Debt Holdings II, LLC.
Of the total $1,425,000 received and converted, the Company received $950,000 and converted $100,000 of accrued liabilities from related parties, including Board members, and issued 14,000,000 shares of common stock.
In order to account for this instrument, we had to determine if it had an embedded beneficial conversion feature (“BCF”), which is measured at the commitment date by allocating a portion of the proceeds equal to the intrinsic value of that feature (not the fair value) to APIC. This allocation will result in a discount on the convertible instrument. The intrinsic value is calculated as the difference between the effective conversion price and the fair value of the common stock into which the security is convertible, multiplied by the number of shares into which the security is convertible.
If the intrinsic value of the BCF is greater than the proceeds allocated to the convertible instrument, the amount of the discount assigned to the BCF is limited to the amount of proceeds allocated to the convertible instrument. The net carrying amount should be accreted from zero to its face value over the term of the convertible debt.
For this instrument the BCF was greater than the proceeds so therefore the convertible notes of $1,425,000 had an initial debt discount of $1,425,000. Amortization expense of the debt discount during the three month period ended March 31, 2018 was $45,417.
Subordinated Convertible Notes
On September 27, 2017, the Company received $425,000 and issued $435,897 subordinated convertible debt with an original issue debt discount of $10,897 and with similar terms as the GPB Note. The Company issued 50,000335,306 warrants to purchase shares of common stock at a price of $0.50, with a term of five years.5 years and an exercise price of $0.60 per share, with a ratchet down side protection of $0.30. The Company allocated the value of these notes and the warrants on a relative fair value basis at the time of issuance. The total debt discount will be amortized over the life of these notes to interest expense. The estimated relative fair value of the warrants was $42,321. Amortization expense of the debt discount, which includes original issue discount and the warrant value, during the year ended December 31, 2017 and the three months ended March 31, 2018 was $1,351 and $8,975, respectively.
In December 2017, the Company received $350,000 and issued $358,974 subordinated convertible debt with an original issue debt discount of $8,974 and with similar terms as the GPB Note. The Company issued 276,135 warrants to purchase shares of common stock with a term of 5 years and an exercise price of $0.60 per share, with a ratchet down side protection of $0.30. The Company allocated the value of these notes and the warrants on a relative fair value basis at the time of issuance. The total debt discount will be amortized over the life of these notes to interest expense. The estimated relative fair value of the warrants was $28,531. Amortization expense of the debt discount, which includes original issue discount and the warrant value, during the year ended December 31, 2017 and the three month period ending March 31, 2018 was $0 and $5,511 respectively.
On December 31, 2015,In January 2018, the Company recordedreceived $150,000 and issued $153,847 subordinated convertible debt with an original issue debt discount of $3,847 and with similar terms as the GPB Note. The Company issued 118,343 warrants to purchase shares of common stock with a term of 5 years and an exercise price of $0.60 per share, with a ratchet downside protection of $0.30. The Company allocated the value of these notes and the warrants on a relative fair value basis at the time of issuance. The total debt discount related towill be amortized over the issuancelife of warrants attributed to the Notes of approximately $90,000. The discount was amortizedthese notes to interest expense. The estimated relative fair value of the warrants was approximately $28,000. Amortization expense of the debt discount, which includes original issue discount and the warrant value, during the sixthree months ended June 30, 2016. We did not have any discount amortization for the period ended June 30, 2017.March 31, 2018 was $2,600.
On May 25, 2016, the Company entered into a Securities Purchase Agreement (the “May Purchase Agreement”) with two 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 common stock, of the Company (the “May Warrant(s)”). 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 $0.80/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 $0.80 per share and (ii) a warrant to purchase one half additional share of common stock, with an initial exercise price equal to $0.80 per share (the “Follow On Warrant”). The May Notes are secured by the Company’s accounts receivable and inventories held in the United States. The Company recorded a debt discount of $51,000 related to the relative fair value of the warrants on the date of the May Purchase Agreement, which was amortized to interest expense in the consolidated statement of operations during the year ended December 31, 2016. If the May Notes are not redeemed by the Company on maturity, the Purchasers are entitled to receive 10% of the principal balance of the Notes outstanding in warrants for every month that the Notes are not redeemed. On August 25, 2016, these Notes matured and were not repaid. Therefore the Notes were in default on August 26, 2016. The Company agreed to pay the Purchasers 10% of the principal balance of the May Notes in warrants until the May Notes are repaid. In January 2017, the Company extended the term of the Notes in default to June 30, 2017 and reduced the price on the warrants issued from $0.80 to $0.50. During the three and six month period ended June 30, 2017, the Company issued 35,000 and 80,000 warrants in connection with the January 2017 extension provision, which were valued at $9,948 and $27,058 and recorded it as interest expense in the consolidated statements of operations.
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 (“Employee 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.Payable
On March 30, 2017, the Company negotiatedagreed to pay certain employees approximately $330,000 in connection with a settlement with three current employees that holdof outstanding promissory notes in the amount of $580,000 plusand accrued vacation. The agreement supersedes all prior agreements with the group and was effective December 31, 2016.vacations. The Company isissued 1,029,734 warrants to pay these employees approximately $330,000,purchase common stock at $0.50 a share with a term of 5 years. The fair value of the warrants of $389,000 was amortized in full during 2017. Per the terms of the agreement, the first payment of $94,000 was paid in April 2017, the second payment of $94,000 was due 30 days from signing the agreement and the final payment of $142,000 was due 60 days from signing the agreementagreements, however the remaining payments remained due at JuneMarch 31, 2018.In November 2017, the employees agreed to renegotiate the March 30, 2017. The employees are working2017 agreement in good faith with the Company regardingas to a future payment plan mutually agreeable by all parties. This negotiation was put on hold in 2018 until the timing of the payments discussed above. The Company issued 1,029,734 warrants to purchase common stock at $0.50Company’s cash situation improved, and discussions resumed in June. It is expected that a share with a term of 5 years. The fair value of the warrants issued of $389,000 for the six months ended June 30, 2017, was valued based on the Black Scholes model based on a stock price of $0.70, an interest free rate of 1.33%new agreement will be completed and volatility of 50%. The settlement was accounted for as an extinguishment under the applicable accounting guidance. The Company recorded a loss on extinguishment on notes due to employees of $158,000.implemented during 2018.
Note 5. Related Party Transactions
Included in advances – related parties are amounts owed to the Company’s former CFO and Chairman of the Board of $50,000 at June 30, 2017March 31, 2018 and December 31, 2016.2017. Also included in advances – related parties are amounts owedof 49,162 Euros, ($60,573 as March 31, 2018) to Ms. Ott of 20,000 Euros, ($22,852 as June 30, 2017) and 75,000 Euros ($85,695 as of June 30, 2017) related to two short term bridge loans. The Company has made arrangements to settle these obligations to Ms. Ott evenly over a 24 month period, starting on October 31, 2017. In addition, the Company settled obligations related to accrued salaries, vacation and related expenses totaling $152,000 owed to Mr. and Ms. Ott. The Company will make an upfront payment to each Mr. and Ms. Ott of $6,750 and will pay the remaining amount owed over a period of 18 months starting in October 2017. The loans noted above are interest-free loans.Company signed additional agreements to settle the debt owed from the US entity when the wages earned versus the German entity. The Company plans to continues to pay Mr. and Mrs.has paid Michaela Ott $13,978 for the agreed upon severance payments however the upfront payment was not paid as of June 30, 2017. Total severance payments totaled $118,810, of which $71,418 were accrued at June 30, 2017. Mr. Ott and Ms. Ott remain as Directors of the Company and continue to work with the Company.
On June 30, 2017, one secured noteholder, an affiliate of a member of our Board of Directors, converted a $50,000 secured promissory note plus accrued interest into 116,833 shares of common stock. The Company issued 50,000 warrants to purchase shares of common stock at a price of $0.50, with a term of five years. See further discussion related to secured promissory notes in Note 4 above.
On February 12, 2016, one of the Purchasers of a $100,000 secured promissory note and holder of 50,000 (increased to 100,000 warrants as of Decemberthree months ended March 31, 2016) warrants to purchase shares of common stock at the time of his election, was elected to the Board of Directors to serve as Director and Chairman of the Company’s audit committee. Total warrants due to this director2018 related to the above secured promissory notes for original issuance, modifications, default periodamount owed. The balance due to Michaela Ott at March 31, 2018 is $60,573 related to the wages owed. During the three months ended March 31, 2018, the Company has paid Michael Ott $9,544 and the modification periodremaining balance outstanding at June 30, 2017March 31, 2018 was 240,000 warrants to purchase common stock.$41,356.
At June 30, 2017Accrued salaries, vacation and related expenses at March 31, 2018 and December 31, 2016, the Company has accrued $65,000 and $55,000, respectively to the above Director and Chairman of the audit committee for services for 2016 as a member of the Board of $35,000 and an additional $20,000 and $30,000 for audit committee services2017, includes amounts for the year ended December 31, 2016 and for the six months ended June 30, 2017, respectively.
Includedformer CFO of approximately $1.1 million, which is included in accounts payable and accrued expense includes $35,408 due to its CFO’s company for past services performed as a consultant toexpenses in the Company.
The Company has accrued wages and vacation of approximately $1.1 million payable to the former CFO at June 30, 2017 and December 31, 2016. The Company believes that more than half of theaccompanying condensed consolidated balance currently outstanding was to be converted into common stock as a condition of the merger agreement at $2.00 a share.sheets. See Note 87 for further discussion regarding the legal proceedings with the Company’s former CFO.
Note 6. Common Stock
Effective April 28, 2017, theThe Company increased the authorized sharesreceived $950,000 and converted $100,000 of accrued liabilities from 35,000,000 to 50,000,000.
During the six months ended June 30, 2017, the Companyrelated parties, including Board members, and issued 4,310,00014,000,000 shares of common stock for $2,155,000, less $153,000 of issuance costs. In connection with(see Note 4).
Note 6. Stockholders’ Equity
Common stock during the issuance of common stock,three months ended March 31, 2018, the Company issued 2,155,000 warrantsa private placement of convertible notes and common stock to purchaseraise approximately $1,500,000, with an over-allotment option for an additional $750,000 (see Note 4). As of March 31, 2018, the Company had received $1,325,000 and converted $100,000 of accrued liabilities and issued 19,000,000 shares of common stock at $0.50, for a term of 5 years. We also issued 50,000 shares from stock subscriptions of $25,000 at December 31, 2016stock.
Of the total $1,425,000 received and issued 25,000 warrants on the same terms and conditions. At June 30, 2017,converted, the Company received $25,000 stock subscription for the purchase$950,000 and converted $100,000 of 50,000accrued liabilities from board members, and issued 14,000,000 shares of common stock and 25,000 warrants. During the six months ended June 30, 2016, the Company issued 292,167 shares to settle certain liabilities totaling $274,870.
The Board appointed two officers on May 4, 2017, who received 350,000 shares of restricted common stock with a three year vesting schedule. In addition, on April 26, 2017, the Company appointed an officer who received 200,000 shares of restricted common stock with a three year vesting schedule. On June 9, 2017 the Company issued 160,000 shares of restricted common stock with a vesting schedule through December 31, 2019. Amortization associated with restricted stock to officers and management is $52,668 and $63,085 for the three and six months ended June 30, 2017, respectively. In addition, the Company issued 50,000 shares to an investor relations firm in June 2017 at a value of $0.50 per share for services through September 30, 2017. For the three and six months ended June 30, 2017, the Company recorded $6,250 included in selling, general and administrative expenses for professional fees for investor relations expense.
Note 7. Options,Preferred Stock and Warrants
A summary of the Company’s preferred stock as of June 30, 2017 and December 31, 2016 is as follows.
| | | |
| | | |
| Offering | | |
| 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 E convertible, 10% cumulative dividend | 19,022 | 19,022 |
| Total Preferred Stock | 198,355 | 198,355 |
As of June 30, 2017 and December 31, 2016, the Company had cumulative preferred undeclared and unpaid dividends of $1,457,370 and $1,411,946, respectively. In accordance with the relevant accounting guidance, these dividends were added to the net loss in the net loss per share calculation.
Options
The Company’s 2017 Employee/Consultant Common Stock Compensation Plan for the issuance of up to 3,000,000 options to grant common stock to the Company’s employees, directors and consultants was adopted pursuant to the written consent of holders of a majority of The Company’s common stock obtained as on March 7, 2017 and was considered approved on April 21, 2017. At June 30, 2017, no options have been issued from the plan.
Warrants outstanding
| | | Weighted Average Exercise Price | Aggregate Intrinsic Value | Weighted Average Remaining Contractual Life (Years) |
| Outstanding at December 31, 2016 | 1,396,161 | $1.08 | — | 4.11 |
| Granted | 4,256,150 | 0.50 | — | 5.00 |
| Exercised | — | — | — | — |
| Expired | — | — | — | — |
| Outstanding at June 30, 2017 | 5,652,311 | $0.62 | — | 4.54 |
During the three and six month period ended June 30, 2017,March 31, 2018, the Company issued 130,000 and 325,000118,343 warrants in connectionrelated to the January 2018 subordinated loan with the default provisionsa relative fair value of the Notes and the May Notes, which were valued at $40,980 and $97,700.approximately $28,000. The value of the warrants were determined using the Black-Scholes model, at an interest free rate of 1.33%, volatility of 50%402% and a remaining term of 5 years and a market price of between $0.50 to $0.80$0.30 during the three and six months ended June 30, 2017.March 31, 2018 (see Note 4).
In January 2017,On March 2, 2018, the Company reached an agreement with all secured promissory noteholders, to extend the maturity of the secured promissory notes to June 30, 2017, whereby thegranted 1,062,500 warrants were repriced from $0.80 a share to $0.50 a share. The notes continue to bear interest at 15% and the secured promissory noteholders continue to receive warrants amounting to 10% of the principal balance, as long as the notes remain outstanding. The Company repriced all warrants issued totaling 1.2 million warrants amounting to a $64,405 incremental value using the Black-Scholes model on January 16, 2017, the date of the amendments at a current market price of $0.36 a share, at an interest free rate of 1.33% and a remaining terms ranging from 4 years to 4 years and 11.5 months.
During the six months ended June 30, 2017, the Company issued 4,310,000 shares of common stock for $2,155,000, less $153,000 of issuance costs. In connection with the issuance of common stock, the Company issued 2,155,000 warrants to purchase shares of common stock at $0.50, for a term of 5 years. We also issued 50,000 shares from stock subscriptions of $25,000 at December 31, 2016 and issued 25,000 warrants on the same terms and conditions. On January 16, 2017 the Company also amended the original equity raise closed on December 7, 2016 and issued an additional 411,915 warrants to purchase shares of common stock at an exercise price of $0.50,$0.075 to TriPoint Global Equities LLC for a term of 5 years. The Company issued 263,250 warrants to purchase common stock to brokersservices related to the above transaction for 2017.issuance of a private placement of convertible notes (see Note 4). The estimated fair value is included in the debt discount of the 2018 convertible notes (see Note 4).
Note 8.7. Commitments and Contingencies
Legal Proceedings
On November 13, 2016, the Company’s former CFO filed a complaint against the Company and certain officers and directors of the Company in the United States District Court for the Northern District of Illinois, Eastern Division, Case No. 1:16-cv-10554, whereby he is alleging (i) breach of the Illinois Wage and Protection Act, (ii) breach of employment contract and (iii) breach of loan agreement. He is seeking monetary damages up to approximately $1,665,972. The Company has denied 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 $50,000 note payable to the former CFO at JuneSeptember 30, 2017 and December 31, 2016. The Company believes that more than half of the balance currently outstanding was to be converted into common stock as a condition of the merger agreement at $2.00 a share.2017. The presiding Federal Judge has referred the lawsuit to mediation. No settlement was reach during the April 2017 meditation. The Company has proactively initiated settlement offersoffer. In August 2017, the parties reached a Settlement Term Sheet whereby a final forbearance and settlement agreement must be filed with no progress from the former CFO. Themagistrate judge. On November 8, 2017 the Plaintiff filed a motion to compel settlement with a meeting before a magistrate judge highly recommended that both parties work towards a settlement and scheduled an update meeting in Septemberon November 14, 2017.
On February 20, 2018, the magistrate judge denied Plaintiff’s motion. On March 8, 2018, Plaintiff again filed a Motion to Enforce Settlement Agreement which has been opposed by the Company. On April 22, the judge ruled in favor of the Company and denied plaintiff’s motion to compel.
On May 15, 2018, a complaint was filed in the United States District Court of Northern California against the individual directors of the Company by Robert McCullough, Jr, and Dr. Zhongxi Zheng. The Company was named as a Nominal Defendant. The complaint alleges various claims including Breach of Fiduciary Obligations, Abuse of Control, Unjust Enrichment, Fraud, Intentional Misrepresentation and Negligent Representation. The suit seeks certain declaratory relief, injunctive relief and an accounting. Management believes these claims are frivolous and without any merit whatsoever, and are being filed for the sole purpose of harassing the named Defendants and to leverage a more beneficial settlement in the suit discussed in the paragraph above. Further, management believes that the suit was filed in a court having no personal jurisdiction over any of the named Defendants, The Company and individual directors will vigorously defend against this suit and seek to have it immediately dismissed. If successful, Defendants will seek attorneys’ fees and appropriate sanctions.
Note 9.8. 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):
| | | | | | | | |
| | | | | | | | | | | | | | | |
| Assets | $11,819 | $11,268 | $6,181 | $6,264 | $114 | $238 | $18,114 | $17,770 | |
| | 2018 | 31, 2017 | 2018 | 31, 2017 | 2018 | 31, 2017 |
| | $10,858 | $11,179 | $5,550 | $4,777 | $16,408 | $15,956 |
| Property & equipment, net | 60 | 68 | 1,516 | 1,487 | - | 2 | 1,576 | 1,557 | 99 | 108 | 1,660 | 1,670 | 1,759 | 1,778 |
| Intangible assets | 10,518 | - | 10,518 | 10,518 | - | 10,518 |
| | | | | | | | |
| For the three months ended | | | | | | | | | |
| | |
| | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 |
| Revenues: | | |
| Histology Equipment | $38 | $119 | $220 | $1,564 | $5 | $- | $263 | $1,683 | $28 | $146 | $688 | $768 | $716 | $914 |
| Histology Consumables | 136 | 24 | 667 | 644 | - | 3 | 803 | 671 | 92 | 104 | 588 | 573 | 680 | 677 |
| Cytology Consumables | - | 136 | 211 | 326 | - | 211 | 462 | - | 109 | 300 | 109 | 300 |
| Total Revenues | $174 | $279 | $1,098 | $2,534 | $5 | $3 | $1,277 | $2,816 | $120 | $250 | $1,385 | $1,641 | $1,505 | $1,891 |
| Net loss | $(667) | $(487) | $(921) | $333 | $(37) | $(48) | $(1,625) | $(202) | $(949) | $(570) | $(453) | $(385) | $(1,402) | $(955) |
| | | | | |
| For the six months ended | | | | | | | | |
| Revenues: | | | | | | | | |
| Histology Equipment | $184 | $215 | $980 | $2,564 | $13 | $8 | $1,177 | $2,787 |
| Histology Consumables | 240 | 70 | 1,240 | 1,157 | - | 7 | 1,480 | 1,234 |
| Cytology Consumables | - | 268 | 511 | 655 | - | 3 | 511 | 926 |
| Total Revenues | $424 | $553 | $2,731 | $4,376 | $13 | $18 | $3,168 | $4,947 |
| Net loss | $(1,237) | $(977) | $(1,137) | $244 | $(206) | $(91) | $(2,580) | (824) |
Note 10.9. Subsequent Events
On July 10, 2017, all Note Holders,On April 26, 2018, the Company consummated the closing of Securities Purchase Agreements (the “Purchase Agreements”) with the exceptiontwo accredited investors, both of a single individual Note Holder who holds two Notes and has elected not to waive default, agreed to further extend the repaymentwhom are directors of the Notes until July 31, 2017. TheCompany (“Purchasers”), pursuant to which the Company issued 66,666 warrants to purchase sharesthe Purchasers secured promissory notes in the aggregate principal amount of common stock at $0.50 a share for$610,000 (the “Notes”) in consideration of an aggregate of $580,000 in cash, and $30,000 of which constitutes the default provision. No further warrants will be issued on these defaulted Notes. No additional consideration is being givenconversion of accrued liabilities owed by the Company for this extension by the consenting Note Holders. On August 11, 2017, the above Note Holders agreed to further extend the repaymentone of the Purchasers. The Notes until August 31, 2017.
On August 1, 2017mature on the 60th month anniversary date following the Closing Date, as defined in the Notes (the “Maturity Date”). Accrued interest shall be paid in restricted common stock of the Company received written consent calculated at a value of $0.075 per share and on the basis of a 360-day year and shall accrue and compound monthly. The Notes are secured by security agreements (the “Security Agreements”) and shall represent perfected senior liens on all of the holdersassets of the majorityCompany and its subsidiaries and will be subordinate to the obligation entered into with GPB Debt Holdings II, LLC and the affiliated subordinate investors on September 26, 2017. The Notes shall bear interest at a rate of 12% per annum. In addition, and in accordance with the terms of the Purchase Agreements, the Purchasers are to be issued and outstanding8,133,334 shares of our Common Stock, to amend the 2017 Employee/Consultant Common Stock Compensation Plan and to file a Certificate of Amendment to our Certificate of Incorporation (the “Certificate of Incorporation”) to increase the Company’s authorizedrestricted common stock par value $0.001based on an assumed purchase price at $0.075 per share (the “Common Stock”“Shares”), from 50,000,000 shares. The Purchasers shall have piggy-back registration rights with respect to 100,000,000 shares,the Shares.
Under the same terms as described above, on May 9, 2018, the Company consummated the closing of Securities Purchase Agreements (the “Amendment”“Purchase Agreements”) with two accredited investors, pursuant to which the Company issued to the Purchasers secured promissory notes in the aggregate principal amount of $250,000 (the “Notes”) in consideration of an aggregate of $250,000 in cash, and keep the authorizedPurchasers are to be issued an aggregate of 3,333,333 shares of preferred stock, par value $0.001 per share (the “Preferred Stock”), unchanged.
On March 7, 2017 the Company filed a $4,250,000 Form D to issue up to 8.5 million shares ofrestricted common stock and approximately 2.2 million warrants to issue common stockbased upon an assumed purchase price at $0.50 a$0.075 per share. The Company has extended this offering through September 29, 2017.
Item 2. MManagemenatnagement’s’s Discussion and Analysis of Financial Condition and Results of Operations
CautionCautionary Statement Regarding Forward-Looking Statements
This reportdocument 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-lookingForward-looking statements by their nature address matters that 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.degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:include, but are not limited to: our ability to raise capital; our ability to retain key employees; our ability to engage third party distributors to sell our products; economic conditions; technological advances in the medical field; demand and market acceptance risks for new and existing products, technologies, and healthcare services; the impact of competitive products and pricing; USU.S. and international regulatory, trade, and tax policies; product development risks, including technological difficulties; ability to enforce patents; and foreseeablenumerous other matters of national, regional and unforeseeable foreign regulatoryglobal scale, including those of a political, economic, business and commercialization factors,competitive nature. These uncertainties may cause our abilityactual future results 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 timematerially different than those expressed 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.forward-looking statements. 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 cautionedWe do 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 dutyundertake to update or revise our forward-looking statements.
Overview of MEDITE Cancer Diagnostics, Inc.
MEDITE Cancer Diagnostics, Inc. (the “Company”, “MEDITE”, “it”, “we”, or “us”), formerly CytoCore, Inc., specializes in the marketingdevelops, manufactures, markets and selling ofsells MEDITE corebranded products (instruments and consumables), manufacturing, developmentin the areas of new solutions in histology and cytology and marketing of molecular biomarkers.cytology. 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%. The well-established brand of MEDITE Cancer Diagnostics is well receivedwidely known and remains a professional description of the Company’s business. The Company’s trading symbol is “MDIT”.
In 2016 and 2017 wethe Company focused on implementation of several growth opportunities including enhanced distribution of core products through focused sales and distribution channel(s),channels, newly developed and patent pendingpatented 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 and other important strategic relationships.introduction of the SureCyte C1 fluorogenic stain worldwide. The Company has approximately 7464 employees in fourtwo countries, a distribution network to aboutin over 80 countries and a wide range of products for anatomic pathology, histology and cytology laboratories available for sale.
AfterOn June 13, 2018 the successful market entrance into China in 2014, the Company’s revenues (sales credits) in this market are approximately $(35,390) and $29,610Company successfully completed its major 3-year audit for the threeISO 9001 quality standard, and six months ended June 30, 2017 comparedits certification was renewed for another 3 years. This is a direct result of our renewed focus on product and process quality over the past year.
China is an important market to $507,000the Company and $692,000 for the three and six months ended June 30, 2016. Saleswe have been impacted by the manufacturingaddressed several product quality issues addresseddescribed under Revenue and Results of Operations discussed elsewhere within this filing. TheReport. China is an important market to the Company hasand in 2017 we addressed most of theseveral product quality, service and training issuesissues. Sales in China. The Company sent a technician to China for approximately four weeks to retrain and reviewwere negligible during the policies and procedures relating tofirst quarter of 2018, but the products being serviced by UNIC in China. We also addressed various issues, product related and warranty issues related to prior deliveries. The Company has received $800,000booked over $200,000 so far in orders for China which they believe they can complete by the fourth quarter. Total salessecond quarter and the outlook for the year ended December 31, 2016 were approximately $1 million comparedis to $897,000 for the same period in 2015. The Chinese market iscontinue growing quickly, and the Company expects it will be one of two largest markets 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 and are anticipating increased sales in China 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 launching 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.that trend.
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 adopts 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 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 US 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) revenue was lower in Europe during 2016the first quarter of 2018 because product was not available to ship to meet demand, due to working capital constraints and 2017 related to a competitive threat that management believes has been alleviated.late delivery from suppliers. The Company is in the process of moving forward the submission of an application to the US Food and Drug Administration (“FDA”) for SureThin Gyn applications. Once approved we canThe Company will be able to 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 of 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 Management believes will provide sources for improved sales channels. MEDITE will launch SureThin in the US to independent labs using the LDT (Laboratory Directed Tests) protocol in CLIA approved sites as early as third quarter while continuing to work through the FDA path.moving forward.
The developed and US patented self-collection device SoftKit is targetingtargets the growing POC & POP (point(Point of care or point of people care)Care) market. Growth in this area is due to consumer drivenconsumer-driven health care requirements and the necessity to support and address incremental patient population needs for screening and on-goingongoing 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 SoftKitspace. The Company is targeted at the uterine cancer/HPV screening market. The next phase of testing will include cervical screening. We are currently developing a study plan with a major research center in the Midwest, with the goal of submitting for FDA approval during 2018.approval.
Management believes that 2017 developments allows usallowed the Company to more fully leverage the products and biomarker solutions from the original CytoCore component of MEDITE. The first entry will beis the introduction of the SureCyte+SureCyte C1 (fluorogenic)fluorogenic instant stain, offering tremendous opportunities for lab efficiencies and enhanced patient care,care. C1 is the first of many new offeringofferings under the SureCyte brand. We arebrand that will ultimately include algorithms for computer-assisted analysis and advanced assays for micro-environment analysis. The Company is currently conducting informal studies with several labs in the USAU.S. and preparingEurope and is also conducting a formal study with a hospital in China in partnership with our partner, UNIC,UNIC. CI has recently received the CE Mark in the EU.
As part of early SureCyte marketing activities, the Company is working with numerous U.S. and European Key Opinion Leaders (KOLs) and clinical sites to test the C1 stain, provide feedback on the overall product line plans, and to create white papers and publish articles in highly-recognized peer-reviewed journals and conferences.
The Company brought several other innovative products closer to marketability during 2016, and continued during 2017 as listed above. The above technologies, 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 Germanwill begin manufacturing facility with approximately 4,000 square feet in Nussloch. This facility is utilizing the local workforce and their experience for the specialized skills required for manufacturing of the newly developed and updated Microtome product line and the newly developed Cryostat (instruments used for sectioning tissue biopsies). The Company began manufacturing theits new Cryostatcryostat line during the firstsecond quarter of 20172018 and anticipates the first pre serial series to be available before the end of the second quarter.has already taken some customer orders. This enhanced microtome and cryostat production facilityproduct line 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 onethe industry segment for cancer screening, diagnostics instruments and consumables for histology and cytology laboratories.
| Definition: | Histology - Cancer diagnostics based on the structures of cells in tissues |
| | Cytology - Cancer screening and 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 diagnosticsdiagnostic 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 believeThe Company believes 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 about 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 aidedcomputer-aided diagnostic systems, while also lookingand in general a search for cost effectivemore 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 laboratories worldwide. The MEDITE brand stands for innovative and high qualityhigh-quality products – most equipment is 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-cytologyliquid-based cytology which is an important tool in cancer screening and detection in the field of cervical, bladder, breast, lung and other cancer types. It also developed an innovative, easy to use standardized staining solutions, and a very innovative and effective early cancer detection marker-based 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 teamsteam reporting directly to ourthe Chief Executive Office. For information on revenues, profit or loss and total assets, among other financial data, attributable to our operations, see the consolidated financial statements included herein. Further during these 2016 and 2017 periods wethe Company 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 distributionsdistribution contracts executed in the lastrecent years, management believes the profitability and cash-flow of the business will grow and improve. However, significantSignificant on-going manufacturing issues have been identified and addressed, and additional 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 directIncreasing sales in the USU.S. to optimize the excellent sales/distribution channels invigorateavailable there and 3.) Invigorate the distribution networks for the EU/ROW and continue to expand Chinese market sales by broadening the Company’s collaborationscollaboration with the local distributor UNIC. WeThe Company also will work on continuously optimizing manufacturing capacity and planning to increase our gross margin. Implementation of ourthese plans will beare contingent upon securing substantial additional debt and/or equity financing.financing, which was partly completed through May 2018 (see Subsequent Events). If the 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 are primarily are generated in Euro currency. While in 2016For the three months ended March 31, 2018 the average USD/EuroEUR-USD exchange rate was 1.106821.22921 compared to 1.0655 for the sixthree months ended June 30, 2016, comparedMarch 31, 2017 (ODNDA) a significant increase. The stronger Euro is favorable to 1.0821 in and June 30, 2017 a decrease of 0.02472, however the conversion rate at December 31, 2016 was 1.05204 and 1.1426 at June 30, 2017, respectively. MEDITE’s sales in USD were lower on a year over year basis as approximatelyrevenue reporting since 90% of our sales currently occursthe Company’s revenue is 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 salesEuro, but also increases COGS for products sold in the USU.S. and other countries such as China whose currencyconducting business in USD (including China). Overall, the stronger Euro is not peggedfavorable to the Euro.
The Company believes the combination of MEDITE Enterprise, Inc. with CytoCore, Inc. expedited 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 US, Europe and China are some primary positive factors assisting growth.
A major market movement for MEDITE is its recent acceptability into several US key opinion leader clinical sites as well a strategic sales, distribution and launch partners that will create immediate use and purchasing sites, whitepapers and recognition required for MEDITE to reach its next level of growth in its new product introductions. Similar approaches are in place in China and scheduled for the EU.revenue reporting.
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, 20162017 filed with the SEC on April 14, 2017.
Three months ended June 30, 2017March 31, 2018 as compared to the three months ended June 30, 2016March 31, 2017 (in thousandthousands USD)
RevenueNet Sales
RevenueNet sales for the three months ended June 30, 2017,March 31, 2018, was $1,277$1,505 as compared to $2,816$1,891 for the three months ended June 30, 2016. Due to some seasonalityMarch 31, 2017. Net sales decreased by $386 or 20.4 % as a result of a decreased by $195 in equipment sales and a $191 decrease in Cytology consumable sales during the first quarter of 2018. This was the result of funding issues early in the industry, usually the first halfquarter of the year is weaker because many larger customers buy their lab equipment during the last 4 to 5 months of the year. The Company increased sales in the cytology 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 into 2017, cytology products were not readily available for sale. MEDITE manufactured lab equipment decreased during 2017, compared to the same period in 2016. The sales for the second quarter were impacted2018. Sales by the identification by the new management team of manufacturing, quality, installation and service issues that were addressed during the period. The new management team undertook a purposeful slowdown of production in order to fully address these issues. Sales revenues included customer credits for returns, allowances and adjustments associated with the manufacturing quality and services issues discussed above. The credits totaled $258 for the three month period ended June 30, 2017. New sales for the 2017 quarter were $1,535. The Company and its new management team took a hard look at the product offering and the endemic problems associated with certain products to make the necessary changes in the manufactured products. During the period, the Company slowed down its delivery of certain products to ensure that issues identified were solved. Service staff attended to equipment in various regions and reengineered certain equipment as needed. Sales increased slowly but steadily from April through June and the Company anticipates that the quality issues have been identified and closely monitored to ensure that all quality standards are in place and have been enforced. Our sales team has communicated with our regional distribution channels the changes that have been implemented and they are working with the Company to create incremental sales. The Company had a backlog of sales at June 30, 2017 was $335.trending upward each month this year.
Costs of Revenue
Cost of revenues were $1,228,$1,170, or 96%78% of the revenues for the three months ended June 30, 2017,March 31, 2018, as compared to $1,546,$1,211, or 55%64% of the revenues for the three months ended June 30, 2016.March 31, 2017. The cost of revenue consisted of higher manufacturing and fixed costs during 20172018 due delays in sourcing parts quality and some installation issues discussed above. The Company has historically experienced cost of revenue as a percentage of revenue of between 58% and 65%. Manufacturing and service costs were not absorbed for the period in 2017, as the Company purposefully slowed down production for April 2017 and gradually increased production in May and June. The service personnel were focused on reinstallation of equipment, identifying solutions to prior installation, retraining our distributors’ installers and evaluating what products went back to the development department for reengineering.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 first quarter 2017,2018, research and development expenses decreased to $329$305 compared to $421$425 for the first quarter 2016.2017. The Company focused all its attention duringreduced the quarter as it related to the manufacturing and service issue in Germany. The former Cytocore research and development team continued to pursue its new products anticipated to be rolled outnumber of R&D staff by two employees in the third and fourthfirst quarter of 2017.2018.
Selling, General and Administrative
For the first quarter 2017,2018, SG&A expenses were $1,228$919 as compared to $918$782 for the first quarter 2016. Professional2017. The first quarter 2018 included increased professional fees were lower forand increased financing fees resulting from the quarter ended June 30, 2017 specifically related to lower audit fees for the 2016 audit and timingresult of the completionincreased convertible debt financing for GPB Debt Holdings II, LLC (“GPB”) convertible notes payable and 2018 convertible notes (see Note 4 of the audit through April 2017. Included in selling, general and administrative expenses for the three months ended June 30, 2017 was the non-cash impact related to the issuance of common stock to management and the amortization of the cost over the vesting period of up to three years totaling $53 for the three months ended June 30, 2017. The Company increased its allowance for bad debt by $62 for the three months ended June 30, 2017 associated with the related receivables identified above under revenues. Salary and wages increased during the three months ended June 30, 2017, as the Company completed its hiring of its management team in April and May of 2017. Severance payments through September 30, 2017 were $119 for the three months ended June 30, 2017 related to the agreements signed with Michael and Michaela Ott on May 5, 2017.
Operating Loss
The operating loss of $1,562 for the first quarter of 2017, compares to $119 for the first quarter of 2016, and is directly related to lower sales for the period, lower gross margins, higher selling, general and administrative expenses offset by lower development costs discussed above.accompanying condensedconsolidated financial statements).
Operating Loss
The operating loss of $960 for the first quarter of 2018 compares to MEDITE’s operating loss of $576 for the first quarter of 2017 and is directly related to lower sales for the period offset by lower research and development costs discussed above.
Interest Expense
Interest expenses decreasedincreased by 52%132% to $67$447 in the three months ended June 30, 2017,March 31, 2018, compared to $139$193 for the three months ended June 30, 2016, due toMarch 31, 2017. The increase in interest expense in was the amortizationresult of the increased convertible debt issuance costsfinancing for GPB convertible notes payable and the amortization2018 convertible notes (see Note 4 of the debt discount attributed to the secured promissory notes issued on May 25, 2016, which matured on August 26, 2016. These notes bear interest at 15%, or $24 for the 2017 period compared to $19 for the 2016 period and the amortization of the debt issuance costs and debt discount totaled $54 for the three months ended June 30, 2016. The 2017 period did not have any amortization of the debt issuance costs. During the three months ended June 30, 2017 the Company recorded $31 and $10 to interest expense related to the fair value of 130,000 warrants issued related to the extension feature in secured promissory notes issued on December 31, 2015 and May 25, 2016, respectively. The effect of the interest, debt issuance costs and debt discount, repricing and the penalty warrants on the secured promissory notes was an effective yield of 49% and 68% for the three months ended June 30, 2017 and 2016, respectively.accompanying condensed consolidated financial statements).
Net Loss
The net loss for the quarter ended June 30, 2017,March 31, 2018, totaled $1,625,$1,402, as compared to net loss of $202$955 for the quarter ended June 30, 2016.March 31, 2017. The loss for 20172018 directly related to lower sales and net margins for the period and higher selling, general and administrative expenses, offset by lower research and development costs discussed above.
Sixmonths ended June 30, 2017 as compared to the six months ended June 30, 2016 (in thousand USD)
Revenue
Revenue for the six months ended June 30, 2017, was $3,168 as compared to $4,947 for the six months ended June 30, 2016. Due to some seasonality in the industry, usually the first quarter of the year is weaker because many larger customers buy their larger equipment during the last 4 to 5 months of the year. The Company increased sales in the cytology 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 into 2017, cytology products were not available for sale. MEDITE manufactured lab equipment decreased during 2017, compared to the same period in 2016. The sales for the first six months were impacted by the identification by the new management team of manufacturing, quality, installation and service issues that were addressed during the period. The new management team undertook a purposeful slowdown of production in order to fully address these issues. Sales revenues included customer credits for returns, allowances and adjustments associated with the manufacturing quality and services issues discussed above. The credits totaled $286 for the six month period ended June 30, 2017. New sales for the 2017 period were $3,454. The Company and its new management team took a hard look at the product offering and the endemic problems associated with certain products to make the necessary changes in the manufactured products. During the period, the Company slowed down its delivery of certain products to ensure that issues identified were solved. Service staff attended to equipment in various regions and reengineered certain equipment as needed. Sales increased slowly but steadily from April through June and the Company anticipates that the quality issues have been identified and closely monitored to ensure that all quality standards are in place and have been enforced. Our sales team has communicated with our regional distribution channels the changes that have been implemented and they are working with the Company to create incremental sales. The Company had a backlog of sales at June 30, 2017 was $335.
Costs of Revenue
Cost of revenues were $2,439, or 77% of the revenues for the six months ended June 30, 2017, as compared to $2,759, or 56% of the revenues for the six months ended June 30, 2016. The cost of revenue consisted of higher manufacturing and fixed costs during 2017 due delays in sourcing parts, quality and installation issues discussed above. The Company has historically experienced cost of revenue as a percentage of revenue of between 58% and 65%. Manufacturing and service costs were not absorbed for the period in 2017, as the Company purposefully slowed down production for April 2017and gradually increased production in May and June. The service personnel were focused on reinstallation of equipment, identifying solutions to prior installation, retraining their distributors’ installers and evaluating what products went back to the development department for reengineering.
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 six month ended June 30, 2017, research and development expenses decreased to $754 compared to $781 for the same period in 2016. The Company expensed approximately $138 of development expense for the six months ended June 30, 2017. The Company focused all its attention for the period as it related to the manufacturing and service issue in Germany. The former Cytocore research and development team continued to pursue its new products anticipated to be rolled out in the third and fourth quarter of 2017.
Selling, General and Administrative
For the six months ended June 30, 2017, SG&A expenses were $2,010 as compared to $1,775 for the same period in 2016. Professional fees were lower for the quarter ended June 30, 2017 specifically related to lower audit fees for the 2016 audit. Included in selling, general and administrative expenses for the six months ended June 30, 2017 was the non-cash impact related to the issuance of common stock to management and the amortization of the cost over the vesting period of up to three years totaling $63 for the six months ended June 30, 2017. The Company increased its allowance for bad debt by $62 for the six months ended June 30, 2017 associated with the related receivables identified above under revenues. Salary and wages increased during the six months ended June 30, 2017, as the Company completed its hiring of its management team in April and May of 2017. Severance payments through September 30, 2017 were $119 for the six months ended June 30, 2017 related to the agreements signed with Michael and Michaela Ott on My 5, 2017. The Company also incurred legal fees of $23 associated with the legal issues identified under Legal in Note 8.
Operating Loss
The operating loss of $2,138 for the six months ended June 30, 2017, compares to $469 for the same period in 2016, and is directly related to lower sales and margin for the period and higher selling, general and administrative expense discussed above.
Interest Expense
Interest expenses decreased by 35% to $260 in the six months ended June 30, 2017, compared to $400 for the six months ended June 30, 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, which matured on June 30, 2016. These notes bear interest at 15%, or $42 for the 2017 period compared to $40 for the 2016 period and the amortization of the debt issuance costs and debt discount totaled $220 for the six months ended June 30, 2016. The 2017 period had amortization of the debt issuance costs of $0. During the six months ended June 30, 2017 the Company recorded $64 for interest expense related to repricing of the warrants related to the secured promissory notes. For the six months ended June 30, 2017 and 2016, Company recorded $98 and $54, respectively, for the fair value of warrants issued related to the penalty and refinancing feature in secured promissory notes. The effect of the interest, debt issuance costs and debt discount, repricing and the penalty warrants on the secured promissory notes was an effective yield of 72% and 118% for the six months ended June 30, 2017 and 2016, respectively.
Net Loss
The net loss for the six months period ended June 30, 2017, totaled $2,580, as compared to net loss of $824 for the six months ended June 30, 2016. The loss for 2017 directly related to lower sales and margin for the period and higher selling, general and administrative expenses discussed above. Decreased interest costs, resulted from the amortization of the debt issuance cost and debt discount with the secured promissory notes of $220 in 2016 offset by 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 changes with increased focus on the various sales channels and manufacturing and quality systems, management anticipates the profitability and cash flow of the business will improve. However, significant on-going manufacturing issues have been identified and addressed and additional 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.) increasingincrease direct sales in the USA through multiple focused sales distribution channels continue to increase EU/ROW distribution 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. Specific forecasting is monitored continually by the Company to improve purchasing and through put management.
For the sixthree months ended June 30, 2017,March 31, 2018, we used net cash in operations of approximately $1,392$1,641 compared to $742$645 for the same period in 2016.2017. During 2017,2018, cash used in operations consisted of loss from operations, offset by non-cash transactions for warrants issued related to secured promissory notes, loss on extinguishmentamortization of notes due to employees, also net changes in accounts receivables, inventoriesdebt discounts and accounts payables and accrued expenses. During 2016, cash used in operations consisted of loss from operations, offset by non-cash transactions for warrants issued related to secured promissory notes and also net changes in accounts receivable, inventory and accounts payable and accrued expense.debt issuance costs.
For the sixthree months ended June 30, 2017,March 31, 2018, net cash used in investing activities were $27$2 compared to $107$16 for the same period in 2016.2017. The improvement in this activity relates to lower other asset purchases of equipment in 20172018 compared to 2016.2017.
For the sixthree months ended June 30, 2017,March 31, 2018, financing activities provided $1,679$1,428 compared $369to $914 provided by financing activities for the same period in 2016.2017. On February 6, 2018, the Company established a private placement of convertible notes and common stock to raise approximately $1,500,000, with an over-allotment option for an additional $750,000. The convertible notes have a conversion price of $0.075 per share. The investors received shares of the Company sold 4.3 millionbased on an assumed purchase price of $0.075 per share and the investor is not required to pay any additional consideration for the common stock. As of March 31, 2018 the Company had received $1,325,000 and converted $100,000 of accrued liabilities and issued 19,000,000 shares of common stock for $2.0 million duringstock. The convertible notes mature five years from the six month period ended June 30, 2017, netclosing date, have an interest rate of $15312%, are secured obligations of issuance costs. The Company borrowed $406 for the six months ended June 30, 2016 compared to repayments of $24 for the same period in 2017. In addition, during the 2017 period the Company repaid $155 of notes duesenior to employeesother outstanding indebtedness and $167 of secured promissory notes.are expressly subordinate to the Company’s indebtedness with GPB.
The Company mustaccompanying condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. At June 30, 2017,March 31, 2018, the Company’s cash balance was $410$153,000 and its operating losses for the six months ended June 30, 2017 and the year ended December 31, 2016,2017 and for the three months March 31, 2018 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, the Company has approximately $78,000 in working capital has improved byas of March 31, 2018 compared to negative working capital of approximately $169 from$318,000 on December 31, 2016.
2017. The Company has settled threeraised additional cash of $1.5 million from the issuance of convertible notes payable starting in the first quarter of 2018 (see Note 4 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. The balances owed to these employees remains outstanding as of the date of this filing however, these employees continue to work with the Company.
During the six months ended June 30, 2017, the Company paid $167 on secured promissory notes and a noteholder converted a note and accrued interest with a balance of $50 into 116,833 shares of common stock, reducing the outstanding balance to $433. 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 $857 at June 30, 2017, has stated that they will not be able to refinance the debt. The default rate of interest will increase three percent.
The Company has accrued wages and vacation of approximately $1.1 million and a $50 note payable to the former CFO at June 30, 2017 and December 31, 2016. The Company believes that more than half of the balance currently outstanding was to be converted into common stock as a condition of the merger agreement at $2.00 a share. 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 at June 30, 2017. The payments are to be made in 18 installments starting on October 31, 2017.
The Company owes Ms. Ott, 91 Euros, ($104 as June 30, 2017)accompanying condensed consolidated financial statements). The Company has established a payment plan whereby the balances owed will be repaid beginning on October 31, 2017, over a 24 months period.
The Company’s security agreement with its lender has provided borrowings of 35% of our collateralized assets. The Company continues to seek to refinance this debt to provide additional liquidity.
Management continues to expand its product offerings and has also expanded its sales and distribution channels during 2017.2018.
If management is unsuccessful in completing its equity financing, theymanagement will begin negotiating with some of theirthe Company's 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.
The Company intends to continue growing, using current working capital, however the growth
Off-Balance Sheet Arrangements
As of June 30, 2017,March 31, 2018, 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. Controlsntrols 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 haveOfficer has 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.
Part II. Other InOfther Informationormation
Item 1. Legal Proceedings.Proceedings.
On November 13, 2016, the Company’s former CFO filed a complaint against the Company and certain officers and directors of the Company in the United States District Court for the Northern District of Illinois, Eastern Division, Case No. 1:16-cv-10554, whereby he is alleging (i) breach of the Illinois Wage and Protection Act, (ii) breach of employment contract and (iii) breach of loan agreement. He is seeking monetary damages up to approximately $1,665,972. The Company has denied 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 $50,000 note payable to the former CFO at JuneSeptember 30, 2017.2017 and December 31, 2016. The Company believes that more than half ofpresiding Federal Judge has referred the balance currently outstandinglawsuit to mediation. No settlement was to be converted into common stock as a condition ofreach during the merger agreement at $2.00 a share.
On April 26, 2017 mediation with a court appointed Magistrate Judge occurred. The mediation ended with detail of settlement parameters. The Magistrate dismissed the meeting with specific instructions to both sides to settle the lawsuit.meditation. The Company has proactively offeredinitiated settlement offers with no progress fromoffer. In August 2017, the former CFO. If neededparties reached a September 7, 2017 update meetingSettlement Term Sheet whereby a final forbearance and settlement agreement must be filed with the Magistrate Judge is scheduled. Both sidesmagistrate judge. On November 8, 2017 the Plaintiff filed a motion to compel settlement with a meeting before a magistrate judge on November 14, 2017.
On February 20, 2018, the magistrate judge denied Plaintiff’s motion. On March 8, 2018, Plaintiff again filed a Motion to Enforce Settlement Agreement which has been opposed by the Company. On April 22, the judge ruled in favor of the Company and denied plaintiff’s motion to compel.
On May 15, 2018, a complaint was filed in the United States District Court of Northern California against the individual directors of the Company by Robert McCullough, Jr, and Dr. Zhongxi Zheng. The Company was named as a Nominal Defendant. The complaint alleges various claims including Breach of Fiduciary Obligations, Abuse of Control, Unjust Enrichment, Fraud, Intentional Misrepresentation and Negligent Representation. The suit seeks certain declaratory relief, injunctive relief and an accounting. Management believes these claims are frivolous and without any merit whatsoever, and are being filed for the sole purpose of harassing the named Defendants and to leverage a more beneficial settlement in the suit discussed in the paragraph above. Further, management believes that the suit was filed in a court having no personal jurisdiction over any of the named Defendants, The Company and individual directors will continuevigorously defend against this suit and seek to work towards an equitable settlement prior to September 7, 2017.have it immediately dismissed. If successful, Defendants will seek attorneys’ fees and appropriate sanctions.
Item 2. UnUnregisrtegisteredered Sales of Equity Securities and Use of Proceeds.
On March 7, 2017February 6, 2018, the Company filedestablished a $4,250,000 Form Dprivate placement of convertible notes and common stock to issue upraise approximately $1,500,000, with an over-allotment option for an additional $750,000. The convertible notes have a conversion price of $0.075 per share. The investors received shares of the Company based on an assumed purchase price of $0.075 per share and the investor is not required to 8.5 millionpay any additional consideration for the common stock. As of March 31, 2018 the Company had received $1,325,000 and converted $100,000 of accrued liabilities and issued 19,000,000 shares of common stock and approximately 2.2 million warrants to issue common stock at $0.50 a share. From January through June 30, 2017stock. The convertible notes mature five years from the closing date, have an interest rate of 12%, are secured obligations of the Company received $2.16 million proceeds forsenior to other outstanding indebtedness and are expressly subordinate to the sale of 4.31 million shares of common stock at a purchase price of $0.50,Company’s indebtedness with 50% of the shares issued, and 2.16 million warrants to purchase common shares at $0.50, with a term of 5 years. The Company incurred $153,000 of cash commissions and issued 263,250 warrants associated with the sale of these securities.GPB.
Item 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:
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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”).
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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 June 30, 2017, the Company paid approximately $167,000 of the outstanding Notes.
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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.
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The exercise price on the Warrants were adjusted from $0.80 to $0.50.
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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.
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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.
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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.
On August 25, 2016, the 2016 Notes matured and were not repaid. Therefore the 2016 Notes were in default on August 26, 2016.
On July 10, 2017, all Note Holders, with the exception of a single individual Note Holder who holds two (2) Notes and has elected not to waive default, agreed to further extend the repayment of the Notes until July 31, 2017. No additional consideration is being given by the Company for this extension by the consenting Note Holders. On August 11, 2017, the above Note Holders agreed to further extend the repayment of the Notes until August 31, 2017.
On May 31, 2017, Medite GmbH (“Medite”), a wholly-owned subsidiary of MEDITE Cancer Diagnostics, Inc. (the “Company”) entered in an agreement with VR Equity Partner GmbH (formerly DZ Equity Partners) to extend the payment date of a credit facility in the outstanding principal amount of EUR 750,000 until September 1, 2017. In consideration for the extension, Medite shall pay an interest increase on the outstanding principal balance of three percent (3%).
Item 3. Defaults upon Senior Securities. On February 5, 2018 the Company entered into a Forbearance Agreement with GBP that provides relief until July 1, 2018 of the Company’s requirement to maintain an interest reserve and to complete a registration rights agreement and provides relief until April 1, 2018 of the Company’s requirement to make interest payments. According to the Forbearance Agreement, interest payments must be current by December 31, 2018.
| Exhibit | | |
| Number | | Description |
| | | |
10.1 | | Form of First Amendment to Amended and Restated Securities Purchase Agreement |
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| | 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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| | 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. |
| | | |
| | Section 906 certification by the principal executive pursuant to 18 USC.U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
| | | |
| | Section 906 certification by the chief financial officer pursuant to 18 USC.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 |
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: August 14, 2017June 22, 2018 | /s/ David PattersonStephen Von Rump |
| | David PattersonStephen Von Rump |
| | Chief Executive Officer |
| | |
Date: August 14, 2017June 22, 2018 | /s/ Susan WeismanStephen Von Rump |
| | Susan WeismanStephen Von Rump |
| | Chief Financial Officer |