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 and MEDITE Lab
Solutions Inc., Orlando, USA.
In 2017,
the Company made the decision to integrate CytoGlobe into Medite
GmbH. CytoGlobe had been operating as a separate company
focused on cytology products (equipment and consumables) with
separate personnel and financial reporting that was consolidated
into Medite GmbH. As the CytoGlobe brand became less
important over time and customers purchased both cytology and
histology products from Medite, it no longer made sense to keep
CytoGlobe as a separate company. Therefore, it was integrated
from a financial, operational and product portfolio perspective
into Medite GmbH.
MEDITE
is a medical technology company specialized in the development,
manufacturing, and marketing of premium medical devices,
consumables and molecular biomarkers for detection, risk assessment
and diagnosis of cancerous and precancerous conditions and related
diseases. The Company has 69 full and part time employees in the
U.S and Germany, a distribution network to over 80 countries and a
wide range of products for anatomic pathology, histology and
cytology laboratories 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, 2018 and 2017 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, 2018
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, 2017 filed on May 17, 2018 and other filings with the
Securities and Exchange Commission.
In
preparing the accompanying condensed consolidated accompanying
financial statements, management has made certain estimates and
assumptions that affect reported amounts in the condensed
consolidated financial statements and disclosures of contingencies.
Changes in facts and circumstances may result in revised estimates
and actual results may differ from these estimates.
Going Concern
The
accompanying condensed consolidated financial statements have been
prepared in conformity with GAAP, which contemplate continuation of
the Company as a going concern. This contemplates the
realization of assets and the liquidation of liabilities in the
normal course of business. At September 30, 2018, the
Company’s cash balance was $90,000 and its operating losses
for the year ended December 31, 2017 and for the three and nine
months ended September 30, 2018 have used most of the
Company’s liquid assets. These factors raise substantial
doubt about the Company’s ability to continue as a going
concern. However, the Company has approximately $526,000 in working
capital as of September 30, 2018 compared to negative working
capital of approximately $318,000 on December 31,
2017. The Company raised additional cash of $4.2 million
from the issuance of convertible notes payable starting in the
first nine months of 2018 through the date of this filing (see
Notes 4 and 9).
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2018.
In the
future, we may require sources of capital in addition to cash on
hand to continue operations and to implement our strategy. If 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.
Revenue Recognition
The
Company derives its revenue primarily from the sale of medical
products and supplies for the diagnosis and prevention of
cancer.
The
Company recognizes revenue for the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services.
Consumables
revenues consist of single-use products and are recognized at a
point in time following the transfer of control of such products to
the customer, which generally occurs upon shipment. Instruments
revenues typically consist of longer-lived assets that, for the
substantial majority of sales, are recognized at a point in time in
a manner similar to consumables. The Company exercises judgment in
determining the timing of revenue by analyzing the point in time or
the period over which the customer has the ability to direct the
use of and obtain substantially all of the remaining benefits of
the asset. The Company expenses contract costs that would otherwise
be capitalized and amortized over a period of less than one
year.
Shipping and
handling costs are included in cost of goods sold and charged to
the customers based on the contractual terms.
Payments from
customers for most instruments, consumables and services are
typically due in a fixed number of days after shipment or delivery
of the product. For certain international equipment orders a
prepayment is required. The balance of the customer deposits is
reflected in our accrued liabilities and was $15,815 as of
September 30, 2018.
See
Note 8 for revenue disaggregated by type and by geographic region
as well as further information about remaining performance
obligations.
Inventories
Inventories are
stated at the lower of cost or net realizable value. Cost is
determined using the first in first out method (FIFO) and market is
based generally on net realizable value.
Inventories
consists of parts inventory purchased from outside vendors, raw
materials used in the manufacturing of equipment, 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 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 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 for the three and nine month periods ended September 30,
2018 and 2017 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
statements of operations.
Recent Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09,
“Revenue with Contracts from Customers.” ASU 2014-09
supersedes the current revenue recognition guidance, including
industry-specific guidance. The ASU introduces a five-step model to
achieve its core principal of the entity recognizing revenue to
depict the transfer of goods or services to customers at an amount
that reflects the consideration to which the entity expects to be
entitled in exchange for those goods and services. The updated
guidance is effective for public entities for interim and annual
periods beginning after December 15, 2017 with early adoption
permitted for annual reporting periods beginning after December 15,
2016. The Company adopted the modified retrospective transition
method of ASU 2014-09 effective January 1, 2018 and there was no
material change to its current business practices upon
implementation.
In
February 2016, the FASB issued ASU No. 2016-02,
“Leases” (“ASU 2016-02”). The core
principle of ASU 2016-02 is that an entity should recognize on its
balance sheet assets and liabilities arising from a lease. In
accordance with that principle, ASU 2016-02 requires that a lessee
recognize a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the
underlying leased asset for the lease term. The recognition,
measurement, and presentation of expenses and cash flows arising
from a lease by a lessee will depend on the lease classification as
a finance or operating lease. This new accounting guidance is
effective for public companies for fiscal years beginning after
December 15, 2018 (i.e., calendar years beginning on January 1,
2019), including interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the
impact the adoption of ASU 2016-02 will have on the Company’s
consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18, “Statement of
Cash Flows - Restricted Cash (Topic 230)”. This new standard
requires companies to include amounts generally described as
restricted cash and restricted cash equivalents in cash and cash
equivalents when reconciling beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. This guidance
is effective for annual and interim reporting periods beginning
after December 15, 2017 and requires retrospective application. The
Company adopted this standard in the first quarter of 2018 by using
the retrospective method, which required the following disclosures
and changes to the presentation of its consolidated financial
statements: cash and restricted cash reported on the consolidated
statements of cash flows now includes restricted cash of $393,000
and $417,000 as of September 30, 2017 and December 31, 2017,
respectively, as well as previously reported cash.
Note
3.
Inventories
The
following is a summary of the components of inventories (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
$
1,893
|
$
1,220
|
|
Work
in process
|
88
|
44
|
|
Finished
goods
|
1,768
|
1,139
|
|
|
|
|
|
|
$
3,749
|
$
2,403
|
Note
4.
Debt
The
Company’s outstanding debt was as follows as of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
promissory note
|
$
50
|
$
50
|
|
Subordinated
convertible notes payable
|
1,085
|
932
|
|
GPB
Debt Holdings II, LLC Convertible note payable
|
5,356
|
5,356
|
|
2018
convertible notes payable
|
3,431
|
-
|
|
Total
|
9,922
|
6,338
|
|
|
|
|
|
Discount
on convertible notes payable
|
(4,179
)
|
(1,419
)
|
|
Less
current portion of long-term debt
|
(643
)
|
(50
)
|
|
Long-term
debt
|
$
5,100
|
$
4,869
|
GPB Debt Holdings II, LLC (“GPB”) Convertible Note
Payable
On
September 26, 2017, the Company entered into a Securities Purchase
Agreement (“SPA”) with GPB, pursuant to which the
Company issued to GPB (i) a secured convertible promissory note in
the aggregate principal amount of $5,356,400 (the “GPB
Note”) at a purchase price equal to 97.5% of the face value
of the of the original $5 million GPB Note and an additional
discount of 300,000 Euro ($356,400 at September 26, 2017)
considered an additional purchase discount, with the Company
receiving net proceeds of $4.7 million and (ii) a warrant to
purchase an aggregate of 4,120,308 shares of common stock of the
Company (the “Warrant”). The Company allocated the
proceeds received to the GPB Note and the warrants on a relative
fair value basis at the time of issuance. The total debt discount
will be amortized over the life of the GPB Note to interest expense
using the straight line method which approximates the effective
interest method. 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, 2018 was
$114,438 and $343,313, respectively. The GPB Note matures on the
36th month anniversary date following the Closing Date, as defined
in the GPB Note (the “Maturity Date”). The GPB Note is
secured by a senior secured first priority security interest on all
of the assets of the Company and its subsidiaries evidenced by a
security agreement (the “Security Agreement”). Each
subsidiary also entered into a guaranty agreement pursuant to which
the subsidiaries have guaranteed all obligations of the Company to
the GPB. The GPB Note bears interest at a rate of 13.25% per annum
(which interest is increased to 18.25% upon an Event of Default).
The GPB Note is initially convertible at a price of $0.65 (the
“Conversion Price”) into 8,240,615 shares of common
stock. There was no discount related to the conversion feature. The
exercise price of the Warrant has been ratcheted down to the $0.30
per share floor price due to the Company issuing additional equity
securities, and subject to adjustments for stock splits, dividends,
combinations, recapitalizations and the like. The value of the
difference between the fair value of the Warrant using the original
exercise price and the fair value of the Warrant using the reduced
exercise price was insignificant. The GPB Note is being amortized
quarterly at a rate of 10% of the face value of the Note beginning
on month 24, with principal payment of $535,640 due September 30,
2019, December 31, 2019, March 31, 2020 and June 30, 2020, with the
remaining balloon payment of $3,213,840 due on the September 26,
2020 Maturity Date. There is a flat 3% success fee which allows for
the prepayment of the GPB Note and applies to the payment of
principal during the Term through the Maturity Date. The GPB Note
contains customary events of default. The GPB Note contains certain
covenants, such as restrictions on the incurrence of indebtedness,
the existence of liens, the payment of restricted payments,
default, redemptions, and the payment of cash dividends and the
transfer of assets. GPB also has a right of participation for any
Company offering, financing, debt purchase or assignment for 36
months after the closing date. The Company is required to maintain
a 6-month interest reserve of $417,000 in restricted cash. The
shares underlying the GPB Note and the Warrants are to be
registered by the Company through a registration rights agreement
within 60 days and the registration statement is to be declared
effective within 180 days. Failure to file, or to meet other
criteria defined as the event date will required the Company to pay
2% of the registrable securities times the price at the event date
per month, up to 12% in cash payments. On February 5, 2018,
the Company entered into a Forbearance Agreement
(“Forbearance Agreement”) with GBP that provides relief
until July 1, 2018 of the Company’s requirement to maintain
an interest reserve and to complete a registration rights agreement
and provides relief until April 1, 2018 of the Company’s
requirement to make interest payments. According to the
Forbearance Agreement, interest payments must be current by
December 31, 2018.
On June 29, 2018, the Company signed a first
amendment to the Forbearance Agreement with GPB, whereby GPB agreed
to forbear its exercise of registration rights
pursuant to
Section 4.9 of the SPA, and
with respect to the maintenance of
the required interest reserve account pursuant to Section 4.14 of
the SPA,
until September 30,
2018.
On September 25, 2018, the Company entered into a
second amendment to the Forbearance Agreement with GPB, whereby the
Lender agreed to forbear its exercise of registration rights
pursuant to Section 4.9 of the SPA,
until November 30, 2018. The Company is in
compliance with the Forbearance Agreement as of the date of this
filing.
2015 Securities Purchase Agreement
The
Company has an outstanding secured promissory note with a principal
balance of $50,000 and an accrued interest balance of $13,250 that
is not considered in default as the Company received notification
to freeze this account.
2018 Convertible Notes
On
February 6, 2018, the Company established a private placement of
convertible notes and common stock to raise approximately
$1,500,000 and has since amended the amount to raise up to
$3,250,000 as of September 30, 2018. The convertible notes have a
conversion price of $0.075 per share. The investors received shares
of common stock of the Company based on an assumed purchase price
of $0.075 per share and the investor is not required to pay any
additional consideration for the shares of common stock. As of
September 30, 2018 the Company had received gross proceeds of
$3,185,009, converted $245,500 of accrued liabilities and issued
45,740,120 shares of common stock. The convertible notes mature
five years from the closing date, have an interest rate of 12%, are
secured obligations of the Company, senior to other outstanding
indebtedness and are expressly subordinate to the Company’s
SPA with GPB.
Of
the total $3,430,509 received and converted, the Company received
$2,322,500 and converted $223,000 of accrued liabilities into
convertible debt from related parties, including board members, and
issued 33,940,000 shares of common stock.
In
order to account for this instrument, we had to determine if it had
an embedded beneficial conversion feature (“BCF”),
which is measured at the commitment date by allocating a portion of
the proceeds equal to the intrinsic value of that feature (not the
fair value) to APIC. This allocation will result in a discount on
the convertible instrument. The intrinsic value is calculated as
the difference between the effective conversion price and the fair
value of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is
convertible.
If the
intrinsic value of the BCF is greater than the proceeds allocated
to the convertible instrument, the amount of the discount assigned
to the BCF is limited to the amount of proceeds allocated to the
convertible instrument. The net carrying amount should be accreted
from zero to its face value over the term of the convertible
debt.
For the
2018 convertible notes, the BCF was greater than the proceeds,
therefore the convertible notes of $3,430,509 had an initial debt
discount of $3,430,509 using the straight line method which
approximates the effective interest method. Amortization expense of
the debt discount during the three and nine month periods ended
September 30, 2018 was $176,642 and $326,975,
respectively.
Subordinated Convertible Notes
On
September 27, 2017, the Company received $425,000 and issued
$435,897 subordinated convertible debt with an original issue debt
discount of $10,897 and with similar terms as the GPB Note. The
Company issued 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 using
the straight line method which approximates the effective interest
method. 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, 2018 was $8,974 and $26,924,
respectively.
In
December 2017, the Company received $350,000 and issued $358,974
subordinated convertible debt with an original issue debt discount
of $8,974 and with similar terms as the GPB Note. The Company
issued 276,135 warrants to purchase shares of common stock with a
term of 5 years and an exercise price of $0.60 per share, with a
ratchet down side protection of $0.30. The Company allocated the
value of these notes and the warrants on a relative fair value
basis at the time of issuance. The total debt discount will be
amortized over the life of these notes to interest expense. The
estimated relative fair value of the warrants was $28,531.
Amortization expense of the debt discount, which includes original
issue discount and the warrant value, during the three and nine
month periods ending September 30, 2018 was $5,511 and $16,532,
respectively.
In
January 2018, the Company received
$150,000 and issued $153,847 subordinated convertible debt with an
original issue debt discount of $3,847 and with similar terms as
the GPB Note. The Company issued 118,343 warrants to purchase
shares of common stock with a term of 5 years and an exercise price
of $0.60 per share, with a ratchet downside protection of $0.30.
The Company allocated the value of these notes and the warrants on
a relative fair value basis at the time of issuance. The total debt
discount will be amortized over the life of these notes to interest
expense using the straight line method which approximates the
effective interest method. The estimated relative fair value of the
warrants was approximately $28,000. Amortization expense of the
debt discount, which includes original issue discount and the
warrant value, during the three and nine months ended September 30,
2018 was $2,629 and $7,858, respectively. The principal payment of
$57,265 due September 30, 2019, $93,162 due on December 31, 2019,
$108,547 March 31, 2020 and June 30, 2020, $394,872 due September
30, 2020 $230,769 due on the December 31, 2020 and the remaining
$92,308 due on January 2, 2021.
The
exercise prices of all of the warrants issued in connection with
the subordinated convertible notes was reduced to $0.30. The value
of the difference between the fair value of the warrant using the
original exercise prices and the fair value of the warrant using
the reduced exercise prices was insignificant.
Employee Notes Payable
On March 30, 2017, the Company agreed to pay
certain employees approximately $330,000 in connection with a
settlement of outstanding promissory notes and accrued vacations.
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 of $389,000 was amortized in full during 2017. Per the
terms of the agreement, the first payment of $94,000 was paid in
April 2017, the second payment of $94,000 was due 30 days from
signing the agreement and the final payment of $142,000 was due 60
days from signing the agreements, however the remaining payments,
including interest, remained due at September 30, 2018 totaling
$309,000.
In November 2017, the
employees 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. This negotiation was put on hold in
2018 until the Company’s cash situation improved, and
discussions resumed in June. It is expected that a new
agreement will be completed and implemented during
2018.
Note
5.
Related Party
Transactions
Included in
advances – related parties are amounts to the
Company’s former CFO and Chairman of the Board of
$50,000 at September 30, 2018 and December 31, 2017. Also
included in advances – related parties are amounts of 32,105
Euros, ($37,275 as September 30, 2018) to Ms. Michaela Ott,
stockholder and former CEO of the Company, related to two short
term bridge loans. The Company has made arrangements to settle
these obligations evenly over a 24 month period, starting on
October 31, 2017. In addition, the Company settled obligations
related to accrued salaries, vacation and related expenses totaling
$152,000 owed to Mr. 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 starting in October 2017. The
Company signed additional agreements to settle the debt owed from
the US entity when the wages earned versus the German entity. The
Company has paid Ms. Ott $37,275 during the nine months ended
September 30, 2018 related to the amount owed. The balance due to
Ms. Ott at September 30, 2018 is $37,275 related to the wages owed.
During the nine months ended September 30, 2018, the Company has
paid Mr. Ott $9,544 and the remaining balance outstanding at
September 30, 2018 was $41,356. The Company has stopped payments to
Mr. Ott, pending the outcome of legal proceedings (see Note 7
below).
Accrued
salaries, vacation and related expenses at September 30, 2018 and
December 31, 2017, includes amounts for the former CFO of
approximately $1.1 million, which is included in accounts payable
and accrued expenses in the accompanying condensed consolidated
balance sheets. See Note 7 for further discussion regarding the
legal proceedings with the Company’s former CFO.
During
the nine months ended September 30, 2018, the Company entered into
a subordinated convertible note and 2018 convertible notes (see
Note 4). The Company received $2,322,500 of gross proceeds and
converted $223,000 of accrued liabilities from related parties,
including board members, and issued 33,940,000 shares of common
stock.
Note
6.
Stockholders’
Equity
During
the nine months ended September 30, 2018, the Company received
gross proceeds of $3,185,009 and converted $245,500 of accrued
liabilities into convertible notes payable and issued 45,740,120
shares of common stock pursuant to the terms of the 2018
convertible notes (see Note 4).
Of
the total $3,185,009 received and converted, the Company received
$2,322,500 and converted $223,000 of accrued liabilities from
related parties, including board members, and issued 33,940,000
shares of common stock.
Warrants
During
the nine month period ended September 30, 2018, the Company issued
118,343 warrants related to the January 2018 subordinated loan with
a relative fair value of approximately $28,000. The value of
the warrants were determined using the Black-Scholes model, at an
interest free rate of 1.33%, volatility of 402% and a remaining
term of 5 years and a market price of $0.30 during the nine months
ended September 30, 2018 (see Note 4).
On
March 2, 2018, the Company granted 1,062,500 warrants at an
exercise price of $0.075 to TriPoint Global Equities LLC for
services related to the issuance of a private placement of
convertible notes (see Note 4). The estimated fair value is
included in the debt discount of the 2018 convertible notes (see
Note 4).
On
August 3, 2018, the Company granted 50,000 warrants at an exercise
price of $0.075 to TriPoint Global Equities LLC for services
related to the issuance of a private placement of convertible notes
(see Note 4). The estimated fair value is included in the debt
discount of the 2018 convertible notes (see Note 4).
Note 7.
Commitments and Contingencies
Legal Proceedings
On
November 13, 2016, the Company’s former CFO filed a complaint
against the Company and certain officers and directors of the
Company in the United States District Court for the Northern
District of Illinois, Eastern Division, Case No. 1:16-cv-10554,
whereby he is alleging (i) breach of the Illinois Wage and
Protection Act, (ii) breach of employment contract and (iii) breach
of loan agreement. He is seeking monetary damages up to
approximately $1,665,972. The Company has denied the substantive
allegations in the complaint and is vigorously defending the suit.
Management believes that the claims set forth in the complaint
against the Company are without merit. The Company has accrued
wages and vacation of approximately $1.1 million and a $50,000 note
payable to the former CFO at September 30, 2018 and December 31,
2017. The presiding Federal Judge has referred the lawsuit to
mediation. No settlement was reach during the April 2017
meditation. The Company has proactively initiated settlement 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.
On
February 20, 2018, the magistrate judge denied Plaintiff’s
motion. On March 8, 2018, Plaintiff again filed a Motion to Enforce
Settlement Agreement which has been opposed by the Company. On
April 22, the judge ruled in favor of the Company and denied
plaintiff’s motion to compel. The judge also instructed
counsels for the Plaintiff and Defendant to conduct depositions and
prepare pre-trial orders. Depositions have been completed and both
sides have submitted drafts of the pre-trial order. The judge
postponed further action on the case until April 2019. In the
meantime, the Company has continued to reach out to the former CFO
to discuss a possible settlement.
On May
15, 2018, a complaint was filed in the United States District Court
of Northern California against the individual directors of the
Company by Robert McCullough, Jr, and Dr. Zhongxi Zheng. The
Company was named as a Nominal Defendant. The complaint alleges
various claims including Breach of Fiduciary Obligations, Abuse of
Control, Unjust Enrichment, Fraud, Intentional Misrepresentation
and Negligent Representation. The suit seeks certain declaratory
relief, injunctive relief and an accounting. Management believes
these claims are frivolous and without any merit whatsoever, and
are being filed for the sole purpose of harassing the named
Defendants and to leverage a more beneficial settlement in the suit
discussed in the paragraph above. Further, management believes that
the suit was filed in a court having no personal jurisdiction over
any of the named Defendants. The Company and individual directors
will vigorously defend against this suit and seek to have it
dismissed. If successful, Defendants will seek attorneys’
fees and appropriate sanctions. On October 22, 2018 the Company
filed a motion with the court to dismiss the case.
On
June 13, 2018 the former Managing Director of
Medite GmbH filed a complaint in the local court of Hannover,
Germany alleging breach by the Company of his separation agreement
executed in May 2017 and modified in October 2017. The
Company maintains that it was in fact the employee who breached and
nullified the agreement. A hearing was held in Hannover on
July 6, 2018, where the court transferred jurisdiction to the
district court in Hildesheim. The district court has set a
hearing date for December 21, 2018 where the judge will make a
ruling on the case.
On
August 13, 2018, the Company filed a complaint against the former
CEO for breach of executive employment contract, and other related
claims, stemming from unauthorized and undocumented expense
reimbursements and unauthorized bonus pay. The complaint was filed
in the 9
th
judicial circuit in and for Orange County, Florida. On October 15,
2018, the defendant filed a Motion to Dismiss and the Company is in
the process of responding to the Motion to Dismiss.
Note
8.
Segment
Information
The
Company operates in one operating segment. However, the Company has
assets and operations in the United States, Germany and Poland. The
following tables show the breakdown of the Company’s
operations and assets by region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets $
|
$
10,892
|
$
11,179
|
$
6,759
|
$
4,777
|
$
17,651
|
15,956
|
|
Property
and equipment, net
|
85
|
108
|
1,461
|
1,670
|
1,546
|
1,778
|
|
Intangible
assets
|
10,518
|
10,518
|
-
|
-
|
10,518
|
10,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Histology
Equipment
|
$
65
|
$
36
|
$
1,563
|
$
775
|
$
1,628
|
$
811
|
|
Histology
Consumables
|
119
|
82
|
530
|
495
|
649
|
577
|
|
Cytology
Consumables
|
-
|
-
|
117
|
298
|
117
|
298
|
|
Total
Revenues
|
$
184
|
$
118
|
$
2,210
|
$
1,568
|
$
2,394
|
$
1,686
|
|
Net
loss
|
$
(1,087
)
|
$
(830
)
|
$
352
|
$
(775
)
|
$
(735
)
|
$
(1,605
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Histology
Equipment
|
$
175
|
$
220
|
$
3,672
|
$
1,768
|
$
3,847
|
$
1,988
|
|
Histology
Consumables
|
292
|
322
|
1,670
|
1,735
|
1,962
|
2,057
|
|
Cytology
Consumables
|
-
|
-
|
365
|
809
|
365
|
809
|
|
Total
Revenues
|
$
467
|
$
542
|
$
5,707
|
$
4,312
|
$
6,174
|
$
4,854
|
|
Net
loss
|
$
(3,042
)
|
$
(2,067
)
|
$
342
|
$
(2,118
)
|
$
(2,700
)
|
$
(4,185
)
|
|
|
|
|
|
|
|
|
Note
9.
Subsequent
Events
From October 11, 2018 through October 15, 2018,
the Company entered into and closed Securities Purchase Agreements
(collectively the “Purchase Agreements”) with three
accredited investors (“Purchasers”), pursuant to
which the Company agreed to issue to the Purchasers secured
promissory notes in the aggregate principal amount of $870,000 (the
collectively the “Notes”). The Notes mature on the 60th
month anniversary date following the Closing Date, as defined in
the Notes (the “Maturity Date”). Accrued interest shall
be paid in restricted common stock of the Company
calculated
at a value of $0.075 per share and on the basis of a 360-day year
and shall accrue and compound monthly
.
The Notes are secured by security agreements (collectively the
“Security Agreements”) and shall represent a perfected
senior lien on all of the assets of the Company and its
subsidiaries and will be subordinate to the obligation entered into
with GPB and the affiliated subordinate investors on September 26,
2017. The Notes shall bear interest at a rate of 12% per annum. In
addition, and in accordance with the terms of the Purchase
Agreements, the Purchasers were issued an aggregate amount of
11,600,000 shares of the Company’s restricted common stock at
$0.075 per share (the “Shares”). The Purchasers shall
have piggy-back registration rights with respect to the
Shares.
On October
31, 2018, the Board of Directors (the “Board”) of
MEDITE Cancer Diagnostics, Inc. (the “Company”) held a
meeting whereby it accepted the resignation of Stephen Von Rump as
Chief Executive Officer and Director of the Company, effective
immediately. Mr. Von Rump was thereafter appointed by the Board as
Chief Strategy Officer of the Company to serve until his
resignation or termination.
On
October 31, 2018, the Board thereafter, by unanimous consent,
appointed Elmar A. Dave to the position of Chief Executive Officer
of the Company to serve until such time as his removal or
resignation, .Mr. Dave has been engaged by the Company as a
Consultant, and shall continue under the terms of his existing
Consulting Agreement until its expiration, whereby the Company
shall negotiate an Executive Employment Agreement with Mr. Dave
upon terms mutually acceptable to the parties.