N
OTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Tabular data in thousands, except shares and per share
amounts)
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.
(former CytoCore, Inc.) and its wholly owned subsidiaries, which
consists of MEDITE Enterprise, Inc., MEDITE GmbH, Burgdorf,
Germany, MEDITE GmbH, Salzburg, Austria, MEDITE Lab Solutions Inc.
(formerly MEDITE Inc.), Orlando, USA, MEDITE sp. z o.o.,
Zilona-Gora, Poland and CytoGlobe, GmbH, Burgdorf,
Germany.
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 78 employees in three countries, a
distribution network to about 70 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, 2016 and 2015 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 significant inter-company
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, 2016 or for any other period. Certain information and
footnote disclosures normally included in the consolidated
financial statements prepared in accordance with accounting
principles generally accepted in the United States have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The Company believes that the
disclosures are adequate to make the interim information presented
not misleading. These consolidated financial statements should be
read in conjunction with the Company’s audited consolidated
financial statements disclosed in the Report on Form 10-K for the
year ended December 31, 2015 filed on April 12. 2016 and the
Company’s Form 10-K/A filed on September 6, 2016 and other
filings with the Securities and Exchange Commission.
In
preparing the accompanying financial statements, management has
made certain estimates and assumptions that affect reported amounts
in the financial statements and disclosures of contingencies.
Changes in facts and circumstances may result in revised estimates
and actual results may differ from these estimates.
Going Concern
The
accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a
going concern. This contemplates the realization of
assets and the liquidation of liabilities in the normal course of
business. At September 30, 2016, the Company’s
cash balance was $32,000 and its operating losses for the year
ended December 31, 2015 and for the nine months ended September 30,
2016 have used most of the Company’s liquid assets and the
negative working capital has grown by approximately $.8 million
from December 31, 2015 to September 30,
2016. Consequently, there is substantial doubt about the
Company’s ability to continue as a going
concern. The Company believes some portion of the
liabilities with employees will be settled in
stock. Management is actively seeking forms of debt and
equity financing. The Company is currently negotiating with
certain parties whose obligations are due in the next twelve months
to extend payment terms beyond one year. The Company is working on
extending its payment terms on employee notes, raising additional
equity and refinancing debt and other notes. In
addition, the Company may need to slow the pace of some of their
new product rollouts. If management is unsuccessful in
obtaining new forms of debt or equity financing, they will begin
negotiating with some of their major vendors and lenders to extend
the terms of their debt and also evaluate certain expenses that
have been implemented for the Company’s growth
strategy. However, there can be no assurance that
the Company will be successful in these efforts. The 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 its German subsidiaries,
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. The Company’s revenues are primarily concentrated
in the United States, Europe, primarily in Germany and Poland, and
China.
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
inventory.
Foreign Currency Translation
The
accounts of the U.S. parent company are maintained in United States
Dollar (“USD”). The functional currency of the
Company’s German subsidiaries is the EURO
(“EURO”). The accounts of the German subsidiaries were
translated into USD in accordance with Financial Accounting
Standards Board (FASB) ASC Topic 830, “
Foreign Currency Matters
.” In
accordance with FASB ASC Topic 830, all assets and liabilities were
translated at the exchange rate on the balance sheet dates,
stockholders’ equity was translated at the historical rates
and statements of operations transactions were 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 or Disposal of Long-Lived Assets Including Finite Lived
Intangibles
At each
balance sheet date or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable, management of the Company evaluates the recoverability
of such assets. An impairment loss is recognized if the amount of
undiscounted cash flows is less than the carrying amount of the
asset, in which case the asset is written down to fair value. The
fair value of the asset is measured by either quoted market prices
or the present value of estimated expected future cash flows using
a discount rate commensurate with the risks involved. Unless events
or circumstances have changed significantly, we generally do not
re-test at year end assets acquired from a business combination in
the year of acquisition.
Impairment of Indefinite Lived Intangible Assets Other Than
Goodwill
The
Company has the option first to assess qualitative factors to
determine whether the existence of events and circumstances
indicates that it is more likely than not that the indefinite-lived
intangible asset is impaired. If, after assessing the totality of
events and circumstances, the Company concludes that it is not more
likely than not that the indefinite-lived intangible asset is
impaired, then the entity is not required to take further action.
However, if the Company concludes otherwise, then it is required to
determine the fair value of the indefinite-lived intangible asset
and perform the quantitative impairment test by comparing the fair
value with the carrying amount in accordance with Financial
Accounting Standards Board Codification Subtopic
350-30.
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.
Fair Value of Financial Instruments
The
carrying value of accounts receivable, accounts payable, accrued
expenses and secured lines of credit and long-term debt approximate
their respective fair values due to their short maturities.
The Company issued
warrants during the period ended September 30, 2016. These were
recognized at their fair value using Level 3 inputs. We
have not determined the fair value of the Notes Due to Employees or
Advances – related parties.
Accounting
standards define fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an
exit price). We measure our assets and liabilities using inputs
from the following three levels of the fair value
hierarchy:
Level 1
inputs are unadjusted quoted prices in active markets for identical
assets or liabilities that we have the ability to access at the
measurement date.
Level 2
inputs include quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than
quoted prices that are observable for the asset or liability (i.e.,
interest rates, yield curves, etc.), and inputs that are derived
principally from or corroborated by observable market data by
correlation or other means (market corroborated
inputs).
Level 3
includes unobservable inputs that reflect our assumptions about
what factors market participants would use in pricing the asset or
liability. We develop these inputs based on the best information
available, including our own data.
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. MEDITE’s calculation of diluted net
loss per share excludes potential common shares as of September 30,
2016 and 2015 as the effect would be anti-dilutive (i.e. would
reduce the loss per share).
In accordance
with SEC Accounting Series Release 280, 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 its statement of operations.
Recent Accounting Pronouncements
In May
2016, the FASB issued ASU 2016-12, “Revenue from Contracts
with Customers (Topic 606), Narrow Scope Improvements and Practical
Expedients.” The amendments in ASU 2016-12 affect only the
narrow aspects of Topic 606 that are outlined in ASU 2016-12. The
effective date and transition requirements for the amendments in
this Update are the same as the effective date and transition
requirements of Update 2014-09, which is discussed below. The
Company is currently evaluating the impact of the updated guidance
on its consolidated financial statements
In April
2016, the FASB issued ASU 2016-10 “Revenue from Contracts
with Customers: Identifying Performance Obligations and
Licensing.” The amendments in this Update affect entities
with transactions included within the scope of Topic 606. The scope
of that Topic includes entities that enter into contracts with
customers to transfer goods or services (that are an output of the
entity’s ordinary activities) in exchange for consideration.
The effective date and transition requirements for the amendments
in this Update are the same as the effective date and transition
requirements of Update 2014-09, which is discussed below. The
Company is currently evaluating the impact of the updated guidance
on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, “Compensation
– Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting.” The areas for
simplification in this Update involve several aspects of the
accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity
or liabilities, and classification on the statement of cash flows.
The updated guidance is effective for public entities for fiscal
years beginning after December 15, 2016. The Company is currently
evaluating the impact of the updated guidance, but the Company does
not believe that the adoption of ASU 2016-09 will have a
significant impact on its 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.
November
2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU
2015-17) “Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes”. ASU 2015-17
simplifies the presentation of deferred income taxes by eliminating
the separate classification of deferred income tax liabilities and
assets into current and noncurrent amounts in the consolidated
balance sheet statement of financial position. The amendments in
the update require that all deferred tax liabilities and assets be
classified as noncurrent in the consolidated balance sheet. The
amendments in this update are effective for annual periods
beginning after December 15, 2016, and interim periods therein
and may be applied either prospectively or retrospectively to all
periods presented. Early adoption is permitted. We early
adopted this standard in the fourth quarter of 2015 on a
retrospective basis.
In July
2015, the FASB issued ASU 2015-11, Inventory (Topic 330):
“Simplifying the Measurement of Inventory”. The
amendments require an entity to measure in scope inventory at the
lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is unchanged for inventory
measured using LIFO or the retail inventory method. The amendments
do not apply to inventory that is measured using last-in, first-out
(LIFO) or the retail inventory method. The amendments apply to all
other inventory, which includes inventory that is measured using
first-in, first-out (FIFO) or average cost. The Company does not
expect this amendment to have a material impact on its condensed
consolidated financial statements.
In
April 2015, the FASB issued ASU No. 2015-03 - “Interest
- Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs” (“ASU No.
2015-03”), which changes the presentation of debt issuance
costs in financial statements. ASU No. 2015-03 requires an entity
to present such costs on the balance sheet as a direct deduction
from the related debt liability rather than as an asset.
Amortization of the costs is reported as interest expense. The
standard’s core principle is that debt issuance costs related
to a note are reflected in the balance sheet as a direct deduction
from the face amount of that note and amortization of debt issuance
costs is reported in interest expense. ASU No. 2015-03 is effective
for annual and interim periods beginning after December 15,
2015, and interim periods within those fiscal years. Early adoption
is allowed for all entities for financial statements that have not
been previously issued. Entities would apply the new guidance
retrospectively to all prior periods (i.e., the balance sheet for
each period is adjusted). The Company adopted this ASU
No. 2015-03 in its December 31, 2015 consolidated financial
statements. Accordingly, $20,000 of debt issuance costs
have been presented on the balance sheet as a direct deduction from
the related debt liability as of December 31, 2015. There were no
debt issuance costs during the nine months ended September 30,
2016.
In
August 2014, the FASB issued ASU 2014-15, Presentation of Financial
Statements-Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern. The amendments in ASU 2014-15 are intended to define
management’s responsibility to evaluate whether there is
substantial doubt about an organization’s ability to continue
as a going concern and to provide related footnote disclosures. The
amendments in this standard are effective for annual periods ending
after December 15, 2016, and interim periods within annual periods
beginning after December 15, 2016. We are evaluating the effect, if
any; adoption of ASU No. 2014-15 will have on our condensed
consolidated financial statements.
In May
2014, the FASB issued ASU 2014-09, “Revenue with Contracts
from Customers.” ASU 2014-09 supersedes the current revenue
recognition guidance, including industry-specific guidance. The ASU
introduces a five-step model to achieve its core principal of the
entity recognizing revenue to depict the transfer of goods or
services to customers at an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods and services. The updated guidance is effective for public
entities for interim and annual periods beginning after December
15, 2017. Early adoption is permitted for annual
reporting periods beginning after December 15, 2016. The Company is
currently evaluating the impact of the updated guidance on the
Company’s consolidated financial statements.
The
following is a summary of the components of inventories (in
thousands):
|
September
30,
2016
(Unaudited)
|
|
Raw
materials
|
$
2,003
|
$
1,170
|
Work in
progress
|
194
|
142
|
Finished
Goods
|
2,036
|
1,763
|
Reserve for
obsolete inventory
|
(51
)
|
-
|
|
$
4,182
|
$
3,075
|
During
the nine months ended September 30, 2016, the Company recorded a
reserve for obsolete inventory of approximately
$51,000. No amounts were reserved for obsolete inventory
as of December 31, 2015
Note 4.
|
Property and Equipment
|
The following is a summary of the components of property and
equipment as of (in thousands):
|
September
30,
2016
(Unaudited)
|
|
Land
|
$
215
|
$
209
|
Buildings
|
1,193
|
1,158
|
Machinery and
equipment
|
1,220
|
1,196
|
Office furniture
and equipment
|
240
|
232
|
Vehicles
|
54
|
53
|
Computer
equipment
|
91
|
87
|
Construction in
progress
|
231
|
225
|
Less: Accumulated
depreciation
|
(1,374
)
|
(1,219
)
|
|
$
1,870
|
$
1,941
|
Note 5.
|
Secured Lines of Credit, Long-Term Debt, and Notes Due to
Employees
|
The
Company’s outstanding notes payable indebtedness was as
follows as of (in thousands):
|
September30,
2016
(Unaudited)
|
|
Hannoversche
Volksbank credit line #1
|
$
1,399
|
$
1,120
|
Hannoversche
Volksbank credit line #2
|
445
|
383
|
Hannoversche
Volksbank term loan #1
|
-
|
61
|
Hannoversche
Volksbank term loan #2
|
-
|
24
|
Hannoversche
Volksbank term loan #3
|
141
|
182
|
Secured Promissory
Notes
|
650
|
500
|
DZ Equity Partners
Participation rights
|
841
|
818
|
Total
|
3,476
|
3,088
|
Discount on secured
promissory notes and debt issuance costs
|
-
|
(110
)
|
Less current
portion of long-term debt
|
(3,398
)
|
(2,857
)
|
Long-term
debt
|
$
78
|
$
121
|
In July
2006, MEDITE GmbH, Burgdorf, entered into a master line of credit
agreement #1 with Hannoversche Volksbank with maximum borrowings of
Euro 1.1 million ($1.2 million as of September 30, 2016 which were
reduced to Euro 1.1 million ($1.2 million as of September 30,
2016). The credit line was increased to Euro 1.3 million ($1.5
million as of September 30, 2016) in September 2016 without stated
maturity date. Borrowings on the master line of credit
agreement #1 bears interest at a variable rate based on Euribor
(Euro Interbank Offered Rate) depending on the type of advance
elected by the Company and defined in the agreement. Interest rates
depending on the type of advance elected ranged from 3.77 –
8.00% during the period ended September 30, 2016 and the year ended
December 31, 2015. The line of credit is collateralized by the
accounts receivable and inventory of MEDITE GmbH, Burgdorf, and a
mortgage on the buildings 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 line of credit
agreement #2 with Hannoversche Volksbank. The line of credit
granted a maximum borrowing authority of Euro 400,000 ($448,880 as
of September 30, 2016). 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 3.77 – 8.00% during the period ended September
30, 2016 and the year ended December 31, 2015. The line of credit
has no stated maturity date. The line of credit is collateralized
by the accounts receivable and inventory of CytoGlobe GmbH,
Burgdorf and is guaranteed by Michaela Ott and Michael Ott,
stockholders of the Company, and the state of Lower Saxony
(Germany) to support high-tech companies in the area.
In
December 2006, MEDITE GmbH, Burgdorf, entered into a Euro 500,000
($561,100 as of September 30, 2016) term loan agreement #1 with
Hannoversche Volksbank with an interest rate of 3.4% per annum. The
loan has been paid in full as of September 2016. The term loan was
guaranteed by Michaela Ott and Michael Ott, stockholders of the
Company, and a mortgage on the property of the
Company.
In June
2006, MEDITE GmbH, Burgdorf, entered into a Euro 400,000 ($448,880
as of September 30, 2016) term loan #2 with Hannoversche Volksbank
with an interest rate of 3.6 % per annum. The loan was paid back in
full as of June 2016. The term loan was guaranteed by Michaela Ott
and Michael Ott, stockholders of the Company, and was
collateralized by subordinated assignments of all of the
receivables and inventories of MEDITE GmbH, Burgdorf and also had a
subordinated pledge of share term life insurance
policies.
In November 2008, MEDITE GmbH, Burgdorf, entered
into a Euro 400,000 ($448,880 as of September 30, 2016) 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 ($15,587 as
of September 30, 2016). 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 in the form of a debenture
with a mezzanine lender who advanced the Company up to Euro 1.5
million, ($1.7 million as of September 30, 2016) in two tranches of
Euro 750,000 each, ($841,650 as of September 30, 2016). The first
tranche was paid to the Company at closing with the second tranche
being conditioned on MEDITE GmbH, Burgdorf and its subsidiaries
hitting certain performance targets. Those targets were not met and
the second tranche was never called. The debenture pays interest at
the rate of 12.15% per annum and matures at the time the German
financial statements for the year ended December 31, 2016 are
issued, anticipated to be May 31, 2017.
On
December 31, 2015, the Company entered into a Securities Purchase
Agreement (the “2015 Purchase Agreement”) with seven
(7) individual accredited investors, one which serves on the
Company’s Board of Directors and is the chairman of the
Company’s Audit Committee (collectively the
“Purchasers”), pursuant to which the Company agreed to
issue to the Purchasers secured promissory notes in the aggregate
principal amount of $500,000 with interest accruing at an annual
rate of 15% (the “Note(s)”) and warrants to purchase up
to an aggregate amount of 250,000 shares of the common stock, par
value $0.001) per share, of the Company (the
“Warrant(s)”). See Note 8 for further discussion on
warrants issued on the Notes. The Notes matured on
March 31, 2016 and were not repaid. Therefore, the Notes were in
default on April 1, 2016. The Company agreed to pay the
Purchasers 10% of the principal balance of the Notes in warrants
until the principal balance is repaid. See Note 8 for further
discussion on Warrants issued on the Notes. The Notes are
secured by the Company’s accounts receivable and inventories
held in the United States.
On May
25, 2016, the Company entered into a Securities Purchase Agreement
(the “May Purchase Agreement”) with two (2) individual
accredited investors, one of which who serves on the
Company’s Board of Directors (collectively
the “May Purchasers”), pursuant to which the Company
agreed to issue to the May Purchasers secured promissory notes in
the aggregate principal amount of $150,000 (the “May
Note(s)”) with an interest rate of 15% and warrants to
purchase up to an aggregate amount of 150,000 shares of the common
stock, par value $0.001 per share, of the Company (the “May
Warrant(s)”). The Notes mature on the earlier of the third
(3rd) month anniversary date following the Closing Date or August
25, 2016 and were not repaid. The May Notes may be converted into
Units issued pursuant to the Company’s private financing of
up to $5,000,000 (the “Follow On Offering”) Units at a
price of $.80/Unit (the “Units”) consisting of: (i)
a 2 year unsecured convertible note, which converts into
shares of common stock at an initial conversion price of $.80 per
share and (ii) a warrant to purchase one half additional share of
common stock, with an initial exercise price equal to $.80 per
share (the “Follow On Warrant”). The May Notes are
secured by the Company’s accounts receivable and inventories
held in the United States.
The
Company engaged TriPoint Global Equities, LLC (the
“Agent”) as placement agent in connection with the sale
of securities in the offering (the “Offering”) and
agreed to pay the Agent (i) cash commissions equal to three percent
(3%) of the gross proceeds ($4,500) received by the Company; and
(ii) warrants to purchase such number of securities equal to three
percent (3%) of the aggregate number of shares of common stock
issuable in connection with the Offering (the “Agent
Warrant(s)”). The Agent’s Warrants will have the same
terms and conditions as the May Warrants purchased by the May
Purchasers. At September 30, 2016, a total of 4,500 warrants were
issued to TriPoint (See Note 8 for further discussion on
warrants).
In
November 2015 and February 2016, the Company entered into
promissory notes totaling $927,000 with certain employees to repay
wages earned prior to December 31, 2014 not paid (“Notes Due
to Employees"). The Notes Due to Employees are to be
paid monthly through September 2019, with no interest due on the
outstanding balances. The monthly amounts increase over
the payment term. The amounts due become immediately due and
payable if payments are more than ten days late either one or two
consecutive months as defined in the agreement with the
employee. At September 30, 2016, all Notes Due to
Employees, except one, are in default and due on demand. Therefore,
the Notes Due to Employees in default are presented as current in
the condensed consolidated balance sheets. Certain
employees may convert any of the amounts owed during the duration
of the note to equity at a discounted price as defined in the
agreement. The Company is currently negotiating with the employees
whose notes are in default to extend the payment
terms.
Note
6.
|
Related Party Transactions
|
Included in
advances – related parties are amounts owed to the
Company’s former CFO and former CEO and Chairman of the
Board of $50,000 and $70,000 at September 30, 2016 and December 31,
2015, respectively. The Company paid $20,000 during the three and
nine months ended September 30, 2016,
respectively. At September 30, 2016 and
December 31, 2015, the Company owes the former CFO approximately $1
million and $937,000 of unpaid wages and accrued vacation,
respectively, which is included in accounts payable and accrued
expenses in the accompanying condensed balance
sheets. Also included in advances – related
parties is 20,000 Euros, ($22,444 as of September 30, 2016) and
$80,000 related to two short term bridge loans made to the Company
by its former CEO and current COO of the Company. This
is an interest-free loan and is to be repaid by the Company before
December 31, 2016.
The
former CEO and current COO Michaela Ott together with Michael Ott,
Chairman of the Board and Chief Executive officer of the
Company’s wholly owned subsidiaries Medite Enterprise Inc.
and Medite GmbH provided an additional $950,000 in a non-interest
bearing short term advance at the end of the first quarter 2015 to
the Company. This advance was made pending the share placement and
was due on demand and repaid in second quarter of
2015. Included in accounts payable and accrued expenses
at September 30, 2016 and at December 31, 2015, are amounts owed to
both the Michaela and Michael Ott totaling approximately $133,000
and $90,000, respectively, of accrued wages and car
allowances.
During
the nine month period ended September 30, 2016, the Company issued
213,317 shares of common stock to certain members of the Board of
Directors and other unrelated parties as consideration for
$210,000 of accrued director fees and consulting fees.
Note 8.
|
Preferred Stock and Warrants
|
A
summary of the Company’s preferred stock as of
September 30, 2016 and December 31, 2015 is as
follows.
|
September
30,
2016
(unaudited)
|
|
|
|
|
|
|
|
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, 2016 and December 31, 2015, the Company had
cumulative preferred undeclared and unpaid dividends. In accordance
with the Financial Accounting Standard Board’s Accounting
Standards Codification 260-10-45-11, “Earnings
per Share
”, these dividends were
added to the net loss in the net loss per share
calculation.
Summary of Preferred Stock Terms
Series A Convertible Preferred Stock
Liquidation
Value:
|
$4.50
per share, $212,625
|
Conversion
Price:
|
$10,303
per share
|
Conversion
Rate:
|
0.00044—Liquidation
Value divided by Conversion Price ($4.50/$10,303)
|
Voting
Rights:
|
None
|
Dividends:
|
None
|
Conversion
Period:
|
Any
time
|
Series B Convertible Preferred Stock
Liquidation
Value:
|
$4.00
per share, $375,000
|
Conversion
Price:
|
$1,000
per share
|
Conversion
Rate:
|
0.0040—Liquidation
Value divided by Conversion Price ($4.00/$1,000)
|
Voting
Rights:
|
None
|
Dividends:
|
10%—Quarterly—Commencing
March 31, 2001
|
Conversion
Period:
|
Any
time
|
Cumulative
dividends in arrears at September 30, 2016 were $586,288
|
Series C Convertible Preferred Stock
Liquidation
Value:
|
$3.00
per share, $115,000
|
Conversion
Price:
|
$600
per share
|
Conversion
Rate:
|
0.0050—Liquidation
Value divided by Conversion Price ($3.00/$600)
|
Voting
Rights:
|
None
|
Dividends:
|
10%—Quarterly—Commencing
March 31, 2002
|
Conversion
Period:
|
Any
time
|
Cumulative
dividends in arrears at September 30, 2016 were $171,538
|
Series D Convertible Preferred Stock
Liquidation
Value:
|
$10.00
per share, $525,000
|
Conversion
Price:
|
$1,000
per share
|
Conversion
Rate:
|
.01—Liquidation
Value divided by Conversion Price ($10.00/$1,000)
|
Voting
Rights:
|
None
|
Dividends:
|
10%—Quarterly—Commencing
April 30, 2002
|
Conversion
Period:
|
Any
time
|
Cumulative
dividends in arrears at September 30, 2016 were $0
|
The
Series D Convertible Preferred Stock, including all outstanding
accrued dividends of $656,250, was converted to 12,100 shares of
the Company’s common stock during the year ended December 31,
2015.
Series E Convertible Preferred Stock
Liquidation
Value:
|
$22.00
per share, $418,488
|
Conversion
Price:
|
$800.00
per share
|
Conversion
Rate:
|
.0275—Liquidation
Value divided by Conversion Price ($22.00/$800)
|
Voting
Rights:
|
Equal
in all respects to holders of common shares
|
Dividends:
|
10%—Quarterly—Commencing
May 31, 2002
|
Conversion
Period:
|
Any
time
|
Cumulative
dividends in arrears at September 30, 2016 were $631,548
|
Warrants outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2015
|
400,808
|
$
2.29
|
—
|
5.18
|
Granted
|
734,500
|
$
0.80
|
—
|
5.00
|
Exercised
|
—
|
—
|
—
|
—
|
Expired
|
—
|
—
|
—
|
—
|
Outstanding at
September 30, 2016
|
1,135,308
|
$
1.15
|
—
|
4.58
|
In
connection with the secured promissory notes issued on December 31,
2015, as discussed in Note 5, the Company issued an aggregate of
250,000 warrants to purchase shares of common stock with a par
value of $0.001 for $1.60 per shares. The exercise price
and number of warrants were subject to a change as defined in the
agreement. The warrants are exercisable for a period of
five (5) years. On March 15, 2016, the Board of
Directors agreed to renegotiated terms with the warrant holders to
remove the anti-dilution and price protection features in the
warrant agreement and fixed the exercise price at $.80. The
warrants issued with the Notes were increased from 250,000 to
500,000.
At
March 15, 2016 and December 31, 2015, the Company determined the
fair value of the warrants issued with the secured promissory notes
and renegotiated terms using the Black Scholes pricing model and
the following assumptions: an interest free rate of
1.75%, volatility of 50% and a remaining term of 5 years. Based on
information known at March 15, 2016 and December 31, 2015, the
Company priced the warrants with an assumed stock and exercise
price of $0.80. The fair value of the warrants initially
issued with the secured promissory notes and renegotiated terms
were both determined to be approximately $90,000 or aggregate value
of $180,000. The aggregate fair value amount of $180,000
has been fully amortized into interest expense at June 30,
2016.
The
secured promissory notes issued December 31, 2015 as discussed in
Note 5 matured on March 31, 2016 and were not
repaid. Therefore, the secured promissory notes were in
default as of the April 1, 2016. The Company agreed to
pay the Purchasers 10% of the $500,000 principal balance in
warrants for the months of April 2016 until September
2016. Therefore, for these months, the Company issued an
aggregate 300,000 warrants and recorded interest expense related to
the issuance of these warrants, attributable to the secured
promissory notes of approximately $105,000. The Company
continues to be in default and anticipates issuing additional
warrants attributed to this default until such time as the Company
can repay the debt or complete the contemplated offering discussed
below under Subsequent Events (See Note 10).
In connection
with the secured promissory notes issued on May 25, 2016, as
discussed in Note 5, the Company issued an aggregate of 150,000
warrants to purchase shares of common stock with a par value of
$0.001 for $0.80 per shares. The warrants
are exercisable for a period of five (5) years.
At May
25, 2016, the Company determined the fair value of the warrants
issued with the secured promissory notes using the Black Scholes
pricing model and the following assumptions: an interest
free rate of 1.33%, volatility of 50% and a remaining term of 5
years. Based on information known at May 25, 2016, the Company
priced the warrants with an assumed stock and exercise price of
$0.80. At May 25, 2016, the fair value of the warrants of
$51,000 was recorded as a discount on the related secured
promissory notes and additional paid-in capital. During the
three months and nine months ended September 30, 2016 $31,000 and
$51,000 of the discount on debt has been amortized into interest
expense, respectively. The aggregate fair value amount
of $51,000 warrants for all the notes has been fully amortized into
interest expense at September 30, 2016. The secured promissory
notes issued May 25, 2016 as discussed in Note 5 matured on August
25, 2016 and were not repaid. Therefore, the secured
promissory notes were in default as of the August 26,
2016. The Company agreed to pay the Purchasers 10% of
the $150,000 principal balance in warrants for the months of
August 2016 through September 2016. Therefore, for these
months, the Company issued an aggregate 30,000 warrants and
recorded interest expense related to the issuance of these
warrants, attributable to the secured promissory notes of
approximately $11,000. The Company continues to be in default
and anticipates issuing additional warrants attributed to this
default until such time as the Company can repay the debt or
complete the contemplated offering (See Also Note 10).
Note 9.
|
Commitments and Contingencies
|
The
Company leases 12 vehicles for sales and service employees,
delivery and other purposes with varying expiration date through
September 2019. The current minimum monthly payment for these
vehicle leases is $5,961
The
Company has several operation leases for office, laboratory and
manufacturing space. The Company’s operating lease for one of
its German facilities can be cancelled by either party with a 3
months’ notice, its Poland facility can be terminated by
either party with a six month notice. Monthly rent payments for the
German and Poland facilities are Euro 6,200 ($6,950 as of September
30, 2016) and PLN 6,240 ($1,646 as of September 30, 2016),
respectively. The Company’s laboratory facility in Chicago,
IL terminates June 30, 2018 and requires monthly payments of
$1,175. The Company also sublease its former Chicago laboratory
facility for $3,948 per month. The lease for this facility
terminates October 31, 2016 and requires monthly rent payments of
$4,526. The Company’s Orlando facility has escalating rents
ranging from $2488 to $2,563 per month and terminates July 31,
2018. The total aggregate monthly lease payments (net of the
sublease) required on these leases is $12,837.
The
Company signed a note with its current accountants in the amount of
approximately $185,000 for audit and review services provided
through June 30, 2016. The Company agreed to pay an
initial installment of $30,000 upon signing the agreement and
$10,000 a month commencing September 2016. The remaining balance is
due upon the initiation of the December 31, 2016 audit and no later
than December 31, 2016. All amounts owed to the
Company's accountants as of September 30, 2016 have been
included in accounts payable and accrued expenses on the
consolidated balance sheets. The total amount due on the note is
$155,000 at September 30, 2016 and an additional $38,000 for
quarterly filings and fees outstanding as of September 30,
2016.
Note 10.
|
Subsequent Events
|
On
October 26, 2016, the Board of Directors (the “Board”)
of the Company held a meeting whereby it accepted the resignation
of Michaela Ott as Chief Executive Officer of the Company,
effective immediately. Michaela Ott was then appointed by a
unanimous vote of the Board to the position of Chief Operating
Officer of the Company upon the same terms and conditions as her
current employment, to serve until her resignation or
removal.
Further, the Board
also accepted the resignation of Michael Ott as Chief Operating
Officer of the Company, effective immediately. Mr. Ott shall remain
the Chief Executive Officer of the Company’s wholly owned
subsidiaries, MEDITE Enterprises, Inc., and MEDITE GmbH, and
CytoGlobe, GmbH.
The Board
further accepted the resignation of Robert F. McCullough, Jr. as
Chairman of the Board and unanimously elected Michael Ott to the
position of Chairman of the Board to serve until such time as his
resignation or removal.
On November
5, 2016, The Board of the Company held a special meeting and
dismissed Robert F. McCullough, Jr. from his position as Chief
Financial Officer, Secretary and Treasurer.
The
Board, by unanimous consent, appointed David E. Patterson to the
position of Chief Executive Officer and Director of the Company to
serve until such time as his removal or resignation. Pursuant to
Mr. Patterson’s Executive Employment Agreement with the
Company, the Commencement Date of Mr. Patterson’s appointment
shall be October 31, 2016. He shall receive an annual base salary
of $120,000. He shall also be granted 250,000 restricted shares
valued at $85,000 of the Company’s common stock
(the “Shares”). The Shares will vest
in
three (3) equal installments on each of the first three
annual anniversary dates of Mr. Patterson’s appointment, so
long as he remains employed by the Company through each such
vesting date. Mr. Patterson shall also be entitled to annual
performance bonuses, benefits and vacation in accordance with the
Company’s current policy.
The
Board further unanimously voted to appoint David E. Patterson to
the position of Director of the Company to serve until his
resignation or removal.
On
November 12, 2016, the Board of the Company held a meeting whereby
it appointed our Chief Executive Officer, David E, Patterson, to
the position of Chief Financial Officer/Treasurer/Secretary to
serve on an interim basis until a suitable permanent replacement is
appointed.
On
November 2, 2016, the Company filed a Form D Notice of Exempt
Offering of Securities for up to $3,000,000. The Company received
$306,000, as an initial funding of this offering at $0.50 a share,
613,830 shares of common stock issued. The offering is subject to a
up to 7.5% commission paid to their broker/dealers. plus warrants
of 7.5% coverage at $0.50 conversion price per share, with a term
of 5 years. The Company has an agreement with one broker/dealer to
provide 7% commission paid in cash to them plus warrants of 50%
coverage at $0.50 conversion price per share, with a term of 5
years. Total cash commissions paid was $22,484. As of November 14,
2016, these shares have not yet been issued but will be issued
shortly after this filing.
The
Notes discussed in Note 5 above for $500,000 matured on March 31,
2016 and $150,000 matured on August 25, 2016, respectively and were
not repaid. Therefore, the Notes were in defaults as of the date of
this filing. The Company agreed to pay the Purchasers 10% of the
principal balance of the Notes in warrants for the months of
October and November 2016 with an aggregate total of 115,000. The
Company recorded a discount related to the issuance of these
warrants attributed to the secured promissory note default of
approximately $40. The Company determined the fair value of the
warrants issued with the secured promissory notes using the Black
Scholes pricing model and the following assumptions: an
interest free rate of 1.33%, volatility of 50% and a remaining term
of 5 years. Based on information known at each default period, the
Company priced the warrants with an assumed stock and exercise
price of $0.80. This discount will be amortized into interest
expense during the period of default. As of the date of this
filing, the Company had not issued the October warrants totaling
15,000 to the $150,000 secured promissory note holders or the
November warrants totaling 50,000 to the $500,000 secured
promissory note holders.
Note 11.
|
Segment Information
|
The
Company operates in one operating segment. However, the Company has
assets and operations in the United States, Germany and Poland. The
following tables show the breakdown of the Company’s
operations and assets by region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
$
11,416
|
$
11,826
|
$
6,911
|
$
6,357
|
$
253
|
$
195
|
$
18,580
|
$
18,378
|
Property and
equipment, net
|
$
72
|
$
84
|
$
1,795
|
$
1,853
|
$
3
|
$
4
|
$
1,870
|
$
1,941
|
Intangible
assets
|
$
10,518
|
$
10,518
|
$
-
|
$
-
|
$
-
|
$
-
|
$
10,518
|
$
10,518
|
Revenue
Segment Information Three Months Ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
182
|
$
283
|
$
2,137
|
$
2,340
|
$
20
|
$
39
|
$
2,339
|
$
2,662
|
Net income
(loss)
|
$
(376
)
|
$
(708
)
|
$
70
|
$
223
|
$
-
|
$
(54
)
|
$
(306
)
|
$
59
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Histology
Equipment
|
$
68
|
$
-
|
$
1,337
|
$
1,225
|
$
0
|
$
1
|
$
1,405
|
$
1,226
|
Histology Consumables
|
26
|
39
|
613
|
667
|
20
|
33
|
659
|
739
|
Cytology
Consumables
|
88
|
244
|
187
|
448
|
0
|
5
|
275
|
697
|
Total
Revenues
|
$
182
|
$
283
|
$
2,137
|
$
2,340
|
$
20
|
$
39
|
$
2,339
|
$
2,662
|
Included
in Germany are sales of Histology Equipment to China for the three
months ended September 30, 2016 of approximately $295 compared to
$81 for the same period in 2015.
Revenue
Segment Information Nine Months Ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
735
|
$
928
|
$
6,513
|
$
6,114
|
$
38
|
$
39
|
$
7,286
|
$
7,081
|
Net income
(loss)
|
$
(1,353
)
|
$
(552
)
|
$
314
|
$
339
|
$
(91
)
|
$
(54
)
|
$
(1,130
)
|
$
(267
)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Histology
Equipment
|
$
283
|
$
292
|
$
3,901
|
$
3,280
|
$
8
|
$
1
|
$
4,192
|
$
3,573
|
Histology Consumables
|
96
|
152
|
1,770
|
1,768
|
27
|
33
|
1,893
|
1,953
|
Cytology
Consumables
|
356
|
484
|
842
|
1,066
|
3
|
5
|
1,201
|
1,555
|
Total
Revenues
|
$
735
|
$
928
|
$
6,513
|
$
6,114
|
$
38
|
$
39
|
$
7,286
|
$
7,081
|
Included
in Germany are sales of
Histology
Equipment
to China for the nine months ended September 30,
2016 of approximately $980 compared to $380 for the same period in
2015.