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 and CytoGlobe, GmbH, Burgdorf,
Germany.
MEDITE
is a medical technology company specialized in the development,
manufacturing, and marketing of molecular biomarkers, premium
medical devices and consumables for detection, risk assessment and
diagnosis of cancerous and precancerous conditions and related
diseases. The Company has 74 employees in four 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, 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, 2017
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, 2016 filed on April 14, 2017 and other filings with
the Securities and Exchange Commission.
In
preparing the accompanying condensed consolidated 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 December 31, 2016
was $2,003 compared to June 30, 2017 of $1,834, an improvement of
$169.
The Company has reported losses of $2,163 for the year
ended December 31, 2016 and $2,580 for the six months ended June
30, 2017. These factors raise substantial doubt about the
Company’s ability to continue as a going concern.
The Company raised additional cash
of $2 million net of offering costs from the sale 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 employee notes for $330,000
and warrants and paid the first installment 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.
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.
If
management is unsuccessful in completing its equity financing,
management will begin negotiating with some of the 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.
Revenue Recognition
The
Company derives its revenue primarily from the sale of medical
products and supplies for the diagnosis and prevention of cancer.
Product revenue is recognized when all four of the following
criteria are met: (1) persuasive evidence that an arrangement
exists; (2) delivery of the products has occurred 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. The Company generates the majority 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.
Shipping
and handling costs are included in cost of goods sold and charged
to the customers based on the contractual terms.
Inventories
Inventories
are stated at the lower of cost or market. 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; 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 US 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, 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 a transition method and is
currently evaluating the impact of the updated guidance for the
Company’s consolidated financial statements.
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
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 the
implementation to have a material impact on the Company’s
consolidated financial statements.
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):
|
June
30,
2017
(Unaudited)
|
|
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 indebtedness was as
follows as of (in thousands):
|
June
30,
2017
(Unaudited)
|
|
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
|
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.
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 debenture with a mezzanine lender who advanced the Company up to
Euro 1.5 million, ($1.7 million as 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 not considered in default
until June 1, 2017, when the German financial statements were due
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.
On
December 31, 2015, the Company entered into a Securities Purchase
Agreement (the “2015 Purchase Agreement”) with seven
individual accredited 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 250,000 shares of the common stock, par
value $0.001) per share, of the Company (the
“Warrant(s)”) with an initial exercise price of $1.60
per share, subject to adjustment and are exercisable for a period
of five years. On 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 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 March 31, 2016, these Notes matured 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 of 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.
On
December 31, 2015, the Company recorded a discount related to the
issuance of warrants attributed to the Notes of approximately
$90,000. The discount was amortized to interest expense
during the six months ended June 30, 2016. We did not have any
discount amortization for the period ended June 30,
2017.
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 (“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.
On
March 30, 2017, the Company negotiated a settlement with three
current employees that hold notes, in the amount of $580,000 plus
accrued vacation. The agreement supersedes all prior agreements
with the group and was effective December 31, 2016. The Company is
to pay these employees approximately $330,000, 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 agreement however the
remaining payments remained due at June 30, 2017. The employees are
working with the Company regarding the timing of the payments
discussed above. The Company issued 1,029,734 warrants to purchase
common stock at $0.50 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% 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.
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, 2017 and December 31, 2016. Also included
in advances – related parties are amounts owed 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. The Company plans to
continues to pay Mr. and Mrs. Ott 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 December 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 director related to the
above secured promissory notes for original issuance,
modifications, default period and the modification period at June
30, 2017 was 240,000 warrants to purchase common
stock.
At June
30, 2017 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
services for the year ended December 31, 2016 and for the six
months ended June 30, 2017, respectively.
Included in
accounts payable and accrued expense includes $35,408 due to its
CFO’s company for past services performed as a consultant to
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 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.
Note
6.
Common
Stock
Effective April 28,
2017, the Company increased the authorized shares from 35,000,000
to 50,000,000.
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. At June 30, 2017,
the Company received $25,000 stock subscription for the purchase of
50,000 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.
|
June 30,
2017
(unaudited)
|
|
|
|
|
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, the Company
issued 130,000 and 325,000 warrants in connection with the default
provisions of the Notes and the May Notes, which were valued at
$40,980 and $97,700. The value of the warrants were
determined using the Black-Scholes model, at an interest free rate
of 1.33%, volatility of 50% and a remaining term of 5 years and a
market price of between $0.50 to $0.80 during the three and six
months ended June 30, 2017.
In
January 2017, the Company reached an agreement with all secured
promissory noteholders, to extend the maturity of the secured
promissory notes to June 30, 2017, whereby the 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, for
a term of 5 years. The Company issued 263,250 warrants to purchase
common stock to brokers related to the above transaction for
2017.
Note 8.
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 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. 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 offers with no progress from the former CFO.
The magistrate judge highly recommended that both parties work
towards a settlement and scheduled an update meeting in September
2017.
Note
9.
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
|
Property
& equipment, net
|
60
|
68
|
1,516
|
1,487
|
-
|
2
|
1,576
|
1,557
|
Intangible
assets
|
10,518
|
10,518
|
-
|
-
|
-
|
-
|
10,518
|
10,518
|
|
|
|
|
|
For the three months ended
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Histology
Equipment
|
$
38
|
$
119
|
$
220
|
$
1,564
|
$
5
|
$
-
|
$
263
|
$
1,683
|
Histology
Consumables
|
136
|
24
|
667
|
644
|
-
|
3
|
803
|
671
|
Cytology
Consumables
|
-
|
136
|
211
|
326
|
-
|
-
|
211
|
462
|
Total
Revenues
|
$
174
|
$
279
|
$
1,098
|
$
2,534
|
$
5
|
$
3
|
$
1,277
|
$
2,816
|
Net
loss
|
$
(667
)
|
$
(487
)
|
$
(921
)
|
$
333
|
$
(37
)
|
$
(48
)
|
$
(1,625
)
|
$
(202
)
|
|
|
|
|
|
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.
Subsequent
Events
O
n July 10, 2017, all Note Holders, with
the exception of a single individual Note Holder who holds two
Notes and has elected not to waive default, agreed to further
extend the repayment of the Notes until July 31, 2017. The Company
issued 66,666 warrants to purchase shares of common stock at $0.50
a share for the default provision. No further warrants will be
issued on these defaulted Notes. 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
August 1, 2017 the Company received written consent of the holders
of the majority of the issued and outstanding 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 authorized
common stock, par value $0.001 per share (the “Common
Stock”), from 50,000,000 shares to 100,000,000 shares, (the
“Amendment”) and keep the authorized 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 of common stock and approximately 2.2 million warrants to
issue common stock at $0.50 a share. The Company has extended this
offering through September 29, 2017.