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 September 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
We have
incurred significant operating losses and negative cash flows from
operations. The Company incurred net losses of approximately $1.6
million and $0.3 million and $4.2 million and $1.1 million for the
three and nine months ended September 30, 2017 and 2016,
respectively, and had an accumulated deficit of approximately $5.6
million and $1.4 million as of September 30, 2017 and December 31,
2016, respectively. In addition, operating activities used cash of
approximately $1.9 million and $1.1 million for the nine months
ended September 30, 2017 and 2016, respectively. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern.
The
Company raised additional cash of $2.3 million, net of offering
costs from the sale of 5,060,000 shares of common stock subsequent
to December 31, 2016 through September 30, 2017. Management is
actively seeking additional equity financing
On September 26, 2017, the Company entered into a
securities purchase agreement (the “Purchase
Agreement”) with GPB Debt Holdings II,
LLC (“GPB”), pursuant to which the Company issued
to GPB a secured convertible promissory note and received gross
proceeds of $4.9 million. The Company is required to make
interest-only payments for the first 23 months after September 26,
2017 with quarterly principal payments beginning on month 24 at a
rate of 10% of the face value of the Note with the remaining 60%
due on September 26, 2020. The proceeds were used to pay
(i)
the outstanding balance of various credit facilities due to
Hannoveresche Volksbank in the amount of $2.3 million, (ii) the
outstanding balance of a settlement with VR Equity in the amount of
$0.5 million and (iii) the outstanding balance on secured
promissory notes in the amount of $0.3 million. In addition, issued
subordinated notes to 3 other investors for net proceeds of $0.4
million with similar terms as the Purchase Agreement. See Note 4
for additional details of the transactions.
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2017. Management believes it
will be able to reduce its operating losses through an increase in
its revenues and reduction in manufacturing costs through process
efficiencies. No assurances can be given that management will be
successful in meeting its revenue targets and reducing its
operating loss.
The
condensed consolidated financial statements included herein have
been prepared on a going concern basis, which contemplates
continuity of operations and the realization of assets and the
repayment of liabilities in the ordinary course of business.
Management evaluated the significance of the Company’s
operating loss and determined that the Company’s current
operating plan and sources of capital would be sufficient to
alleviate concerns about the Company’s ability to continue as
a going concern.
In the
future, we may require sources of capital in addition to cash on
hand to continue operations and to implement our strategy. If our
operations do not become cash flow positive, we may be forced to
seek equity investments or debt arrangements. No assurances can be
given that we will be successful in obtaining 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
condition. 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 could impair our ability to engage in
certain business transactions.
Restricted Cash
The
Company is required to maintain restricted cash balances equal to 6
months of interest payments on the secured convertible promissory
note to GPB.
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 September 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. The Company includes
convertible securities into their
EPS calculation when reporting net income through
the "if-converted" method whereby the securities are assumed
converted and an earnings per incremental share is
computed.
Convertible
securities outstanding for the entire period are assumed converted
at the beginning of the period. Convertible securities issued
during the period are treated as if they were converted at the date
of issuance. The earnings per incremental share is the after-tax
foregone interest expense divided by the number of shares of common
stock that would have been issued from the conversion weighted for
the period they would have been outstanding.
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 will implement ASU 2014-09 effective January 1,
2018 and does not believe that there will be a 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 is currently assessing the impact that adopting ASU
2016-18 will have on its consolidated financial statements and
related disclosures.
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 Non-controlling
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
completed a transaction with a down round feature and has chosen to
early adopt ASU 2017-11 for the current period.
Note
3.
Inventories
The
following is a summary of the components of inventories (in
thousands):
|
September
30,
2017
(Unaudited)
|
|
Raw
materials
|
$
1,315
|
$
1,309
|
Work
in process
|
145
|
203
|
Finished
goods
|
2,164
|
2,299
|
|
$
3,624
|
$
3,811
|
Note
4.
Debt
The
Company’s outstanding debt was as follows as of (in
thousands):
|
September
30,
2017
(Unaudited)
|
|
Hannoversche
Volksbank credit line #1
|
$
-
|
$
1,321
|
Hannoversche
Volksbank credit line #2
|
-
|
397
|
Hannoversche
Volksbank term loan #3
|
-
|
117
|
Secured
promissory note
|
83
|
650
|
DZ
Equity Partners Participation rights
|
-
|
789
|
GPB
convertible note payable
|
5,356
|
-
|
Subordinated
convertible notes payable
|
573
|
-
|
Total
|
6,012
|
3,274
|
Less:
|
|
|
Loan
Fees and Original Issue Discount
|
(1,470
)
|
-
|
Less
current portion of debt, net
|
(83
)
|
(3,214
)
|
Long-term
debt
|
$
4,459
|
$
60
|
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) attributed to the purchase and
settlement of the 750,000 Euro ($890,325 at September 26, 2017)
note with
VR Equity Partners formerly DZ Equity Partners
(“DZ”)
by GPB and
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 three and nine months ended September 30, 2017 was
$6,358.
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 b y 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 Notes contain certain covenants, such as
restrictions on the incurrence of indebtedness, the existence of
liens, the payment of restricted payments, 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 $354,862.
The shares
underlying the convertible debt 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.
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. Borrowings on the master line of
credit agreement #1 bore 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 September 30, 2017. 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 was guaranteed by Michaela Ott and Michael
Ott, stockholders of the Company. This master credit line was
repaid with the proceeds of the GPB Note and the collateral and
guarantees released.
In June
2012, CytoGlobe, GmbH, Burgdorf, entered into a credit line #2 with
Hannoversche Volksbank. Borrowings on the master line of credit
agreement #2 bore 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 September
30, 2017. The line of credit was collateralized by the accounts
receivable and inventory of CytoGlobe GmbH, Burgdorf and was
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. This credit line was repaid with
the proceeds of the GPB Note and the collateral and guarantees
released.
In
November 2008, MEDITE GmbH, Burgdorf, entered into a Euro 400,000
($472,510 as of September 30, 2017) term loan #3 with Hannoversche
Volksbank with an interest rate of 4.7% per annum. The term loan
was guaranteed by Michaela Ott and Michael Ott, stockholders of the
Company, and was collateralized by a partial subordinated pledge of
the receivables and inventory of MEDITE GmbH, Burgdorf. This term
loan was repaid with the proceeds of the GPB Note and the
collateral and guarantees released.
In
March 2009, the Company entered into a participation rights
agreement with DZ in the form of a debenture with a mezzanine
lender who advanced the Company up to Euro 1.5 million, ($1.8
million as of September 30, 2017) in two tranches of Euro 750,000
each ($885,960 as of September 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 bore interest at the
rate of 12.15% per annum. The rate of interest increased three
percent, to 15.15% on June 1, 2017. GPB purchased the participation
rights agreement with DZ and settled the debt owed by the Company
and included the balance in the GPB Note.
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 common stock 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 nine month period ended
September 30, 2017, the Company issued 50,000 warrants in
connection with the default provision and 270,000 warrants in
connection with the January 2017 extension provision (see below),
which were valued at $11,443 and $76,083, 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. One
noteholder did not extend the term of the notes and the Company
defaulted on July 1, 2017 and received 33,333 warrants to purchase
shares of common stock which the Company valued at that date at
$8,741.
Using
the proceeds from the GPB Note, the Company repaid $166,667 of
outstanding Notes. In addition, Notes totaling $133,333 converted
into subordinated convertible notes at a purchase price of 97.5% of
the Face Value of the $136,752 notes with substantially the same
terms as the GPB Note. In connection, the Company issued 105,194
warrants to purchase 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 exercise price per share floor. 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 $13,277.
Amortization expense of the debt discount, which includes original
issue discount and the warrant value, during the three and nine
months ended September 30, 2017 was insignificant.
Another
Note with a principal and accrued interest balance of $63,250
remains unpaid and is not considered in default as the Company
received notification to freeze this account. The remaining Notes
with an aggregate balance of $83,333 will be repaid once the
Company receives final paperwork from the investors for
authorization for repayment. The accrued interest on the remaining
Notes of $25,250 is expected to be converted into 50,500 shares of
common stock.
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 nine month periods ended September 30, 2017,
the Company issued 0 and 80,000 warrants in connection with the
January 2017 extension provision, which were valued at $0 and
$27,058 and recorded it as interest expense in the consolidated
statements of operations. One noteholder did not extend the term of
the notes and the Company defaulted on July 1, 2017 and issued
33,333 warrants to purchase shares of common stock which the
Company valued at that date at $8,741 and recorded the amount as
interest expense. One noteholder converted a $50,000 note plus
accrued interest of $8,417 into 116,833 shares of common stock on
June 30, 2017.
Accrued
interest of $101,917 associated with the Notes and the May Notes
was converted into 203,834 shares of common stock at a value of
$0.50 per share during the three months ended September 30,
2017.
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 335,306 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 $42,321.
Amortization expense of the debt discount, which includes original
issue discount and the warrant value, during the three and nine
months ended September 30, 2017 was insignificant.
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 entered into a settlements 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 was 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 agreements
however the remaining payments remained due at September 30, 2017.
In November 2017, the employees have agreed to renegotiate the
March 30, 2017 agreement in good faith with the Company as to a
future payment plan mutually agreeable by all parties. 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 nine months ended September 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 payable 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 September 30, 2017 and December 31, 2016. Also
included in advances – related parties are amounts owed to
Michaela Ott, stockholder and former CEO of the Company, of 20,000
Euros, ($23,626 as September 30, 2017) and 75,000 Euros ($88,596 as
of September 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
Michael Ott, stockholder and former COO of the Company and Ms. Ott.
The Company made 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 scheduled to start in October 2017. The Company
is reviewing additional agreements to settle the debt owed from the
US entity where the wages were earned versus the German entity. The
Company is working with Mr. and Ms. Ott to get these payments paid
as of the date of this filing due to the changes requested by
Michaela and Michael Ott.
The
loans noted above are interest-free loans. The Company paid Mr. and
Ms. Ott the agreed upon severance payments however the upfront
payment was paid in November 2017. Total severance payments totaled
$118,810. 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 of $8,417 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.
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
September 30, 2017 was 260,000 warrants to purchase common stock.
On September 27, 2017, the remaining balance of $66,667 was
converted into a subordinated convertible note discussed in Note 4
of $68,376 subordinated convertible debt and received 52,597
warrants to purchase shares of common stock at $0.60 a share. The
Company issued 48,000 shares of common stock for $24,000 of accrued
interest at $0.50. See relative fair value and additional
discussion in Note 4.
At
September 30, 2017 and December 31, 2016, the Company has accrued
$70,000 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 for audit
committee services for the year ended December 31, 2016 and $15,000
for the audit committee services for the nine months ended
September 30, 2017.
Included in
accounts payable and accrued expense includes $18,508 due to its
current CFO’s company for past services performed as a
consultant to the Company at September 30, 2017.
The
Company has accrued wages and vacation of approximately $1.1
million payable to the former CFO at September 30, 2017 and
December 31, 2016. In August 2017, the Company offered a settlement
for the legal matter with a settlement term sheet whereby a formal
settlement agreement and forbearance agreement must be entered with
the court. Pursuant to the settlement proposal, the Company is to
issue a combination of stock, warrants and payments over a period
of up to three years. 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. 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.
During
the nine months ended September 30, 2017, the Company issued
5,060,000 shares of common stock for $2,530,000, less $186,000 of
issuance costs. In connection with the issuance of common stock,
the Company issued 2,530,000 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. During the nine
months ended September 30, 2016, the Company issued 292,167 shares
to settle certain liabilities totaling $274,870.
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 had
extended this offering through September 29, 2017.
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, including shares issued in 2016,
is $50,484 and $113,569 for the three and nine months ended
September 30, 2017, respectively. In addition, the Company issued
50,000 shares of common stock 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 nine months ended September 30, 2017,
the Company recorded $18,750 and $25,000, respectively included in
selling, general and administrative expenses for professional fees
for investor relations expense.
Accrued
interest of $101,917 associated with the Notes and the May Notes
was converted into 203,834 shares of common stock at a value of
$0.50 per share. See Note 4 for additional discussions. 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 $8,417 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. See
additional discussion in Note 4.
In
September 2017, the Company issued 182,927 of shares of common
stock valued at $75,000 for compensation to its broker related to
the GPB Note. The value was recorded as a debt discount, see Note
4.
Note
7.
Options,
Preferred Stock and
Warrants
A
summary of the Company’s preferred stock as of September 30,
2017 and December 31, 2016 is as follows.
|
September
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 September 30, 2017 and December 31, 2016, the Company had
cumulative preferred undeclared and unpaid dividends of $1,480,082
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 (the “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 of March 7, 2017 and was considered approved on
April 21, 2017. The Company amended the Plan on August 1, 2017
and was considered approved on September 1, 2017 to include certain
technical changes and increased the shares from 3,000,000 to
5,000,000. At September 30, 2017, the Company issued 2.1 million of
non-qualified stock options with a term of 10 years, with a strike
price above the market on the date of issuance of $0.50, to vest
one-third upon issuance, one-third at the beginning of the calendar
year of service, or January 1, 2018 and one-third on January 1,
2019, to the Board of Directors valued at $520,307 using the Black
Scholes Model. Included in selling, general and administrative in
the accompanying condensed consolidated statement of operations and
comprehensive loss for the period is $173,436 for the three and
nine months ended September 30, 2017, related to the non-qualified
options issued to the Board of Directors.
|
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
Weighted
Average Remaining Contractual Life (Years)
|
Outstanding
at December 31, 2016
|
-
|
$
-
|
—
|
-
|
Granted
|
2,100,000
|
0.50
|
—
|
10.00
|
Exercised
|
—
|
—
|
—
|
—
|
Expired
|
—
|
—
|
—
|
—
|
Outstanding
at September 30, 2017
|
2,100,000
|
$
0.50
|
—
|
10.00
|
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
|
9,746,123
|
0.55
|
—
|
4.79
|
Exercised
|
—
|
—
|
—
|
—
|
Expired
|
—
|
—
|
—
|
—
|
Outstanding
at September 30, 2017
|
11,142,284
|
$
0.59
|
—
|
4.53
|
During
the three and nine month periods ended September 30, 2017, the
Company issued 141,667 and 466,666 warrants in connection with the
default provisions of the Notes and the May Notes, which were
valued at $34,365 and $132,065. 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
nine months ended September 30, 2017.
On
September 26, 2017, the Company closed on a loan with GPB discussed
in Note 4. The Company issued 4,120,308 warrants with a relative
fair value of $520,052 and an initial exercise price of $0.60 per
share (the “Exercise Price”). The Exercise Price 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 Warrants is
exercisable for a period of five years (the “Term”) and
provides for cashless exercise it at the time of exercise a
registration statement registering the underlying securities is not
available. The Warrant is not to be exercisable until 6 months
after the closing date. In connection with the GPB Note, The
Company issued 375,000 warrants to purchase common stock at $0.60
to its broker related to the GPB Note on similar terms as provided
to GPB. The estimated fair value of the warrants was $52,421, which
was recorded as a debt discount.
On
September 27, 2017, the Company closed on subordinated loans,
including Notes converted into subordinated loans discussed in Note
4 with similar terms and conditions. The Company issued an
aggregate of 440,500 of warrants with a relative fair value of
$55,598, with an initial exercise price of $0.60 per share (the
“Exercise Price”). The Exercise Price 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 Company is required to maintain
a 6 month interest reserve of $37,938. In connection with the
loans, the Company issued 24,375 warrants to purchase common stock
at $0.60 to its broker. The estimated fair value of the warrants
was $3,407, which was recorded as a debt discount.
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 nine months ended September 30, 2017, the Company issued
5,060,000 shares of common stock for $2,530,000, less $186,000 of
issuance costs. In connection with the issuance of common stock,
the Company issued 2,530,000 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 176,625 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 September 30, 2017 and December 31,
2016. 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 offer.
In August 2017, the parties reached a Settlement Term Sheet whereby
a final forbearance and settlement agreement must be filed with the
magistrate judge. On November 8, 2017 the Plaintiff filed a motion
to compel settlement with a meeting before a magistrate judge on
November 14, 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
|
$
12,928
|
$
11,268
|
$
6,055
|
$
6,264
|
$
45
|
$
238
|
$
19,028
|
$
17,770
|
Property
& equipment, net
|
52
|
68
|
1,511
|
1,487
|
-
|
2
|
1,563
|
1,557
|
Intangible
assets
|
10,518
|
10,518
|
-
|
-
|
-
|
-
|
10,518
|
10,518
|
|
|
|
|
|
For the three months
ended
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Histology
Equipment
|
$
36
|
$
68
|
$
763
|
$
1,337
|
$
12
|
$
-
|
$
811
|
$
1,405
|
Histology
Consumables
|
82
|
26
|
495
|
613
|
-
|
20
|
577
|
659
|
Cytology
Consumables
|
-
|
88
|
298
|
187
|
-
|
-
|
298
|
275
|
Total
Revenues
|
$
118
|
$
182
|
$
1,556
|
$
2,137
|
$
12
|
$
20
|
$
1,686
|
$
2,339
|
Net
loss
|
$
(830
)
|
$
(376
)
|
$
(884
)
|
$
70
|
$
109
|
$
-
|
$
(1,605
)
|
$
(306
)
|
|
|
|
|
|
For
the nine months ended
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Histology
Equipment
|
$
220
|
$
283
|
$
1,743
|
$
3,901
|
$
25
|
$
8
|
$
1,691
|
$
4,192
|
Histology
Consumables
|
322
|
96
|
1,735
|
1,770
|
-
|
27
|
2,354
|
1,893
|
Cytology
Consumables
|
-
|
356
|
809
|
842
|
-
|
3
|
809
|
1,201
|
Total
Revenues
|
$
542
|
$
735
|
$
4,287
|
$
6,513
|
$
25
|
$
38
|
$
4,854
|
$
7,286
|
Net
loss
|
$
(2,067
)
|
$
(1,353
)
|
$
(2,021
)
|
$
314
|
$
(97
)
|
$
(91
)
|
$
(4,185
)
|
(1,130
)
|
Note
10.
Subsequent
Events
On
October 16, 2017 the Company filed a Form D to issue up to $6.9
million of convertible secured promissory notes and approximately
5.3 million warrants to issue common stock at $0.60 a
share.
On
November 5, 2017, the Board of Directors (the “Board”)
of the Company held a meeting whereby David E. Patterson informed
the Board of his decision to retire as Chief Executive Officer of
the Company, and resign his position as Chairman of the Board and
Board member of the Company, all effective immediately. Mr.
Patterson shall receive three equal monthly payments with each
payment being equal to his monthly salary, and all future
restricted stock grants in the amount of 166,667 shares pursuant to
his employment agreement shall fully vest as of January 1, 2018,
and be issued in consideration for assisting the Company through a
transition period.
Thereafter, Stephen
Von Rump was appointed by a unanimous vote of the Board to the
position of Chief Executive Officer of the Company upon the same
terms and conditions as his current employment, to serve until his
resignation or removal.
The
Board thereafter, by unanimous consent, appointed current Board
member, William Austin Lewis IV, to the position of Chairman of the
Board of Directors of Company to serve until such time as his
removal or resignation.
On November 12,
2107, the Board of Directors of the Company held a meeting whereby
they appointed Joel Kanter, age 61, to the position of Director to
serve until such time as his resignation or termination. Mr.
Kanter’s appointment fills the vacancy created by the
resignation of David E. Patterson.