Attached files
file | filename |
---|---|
EX-32.2 - EXHIBIT 32.2 - Medite Cancer Diagnostics, Inc. | ex32-02.htm |
EX-32.1 - EXHIBIT 32.1 - Medite Cancer Diagnostics, Inc. | ex32-01.htm |
EX-31.2 - EXHIBIT 31.2 - Medite Cancer Diagnostics, Inc. | ex31-02.htm |
EX-31.1 - EXHIBIT 31.1 - Medite Cancer Diagnostics, Inc. | ex31-01.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
For the quarterly period ended September 30, 2016
|
|
|
☐
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from
to
Commission File number 000-00935
MEDITE CANCER DIAGNOSTICS,
INC.
(Exact name of registrant as specified in its charter)
Delaware
|
36-4296006
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
|
|
|
|
4203
SW 34 th Street, Orlando, FL
|
32811
|
(Address of principal executive offices)
|
(Zip Code)
|
(407) 996-9630
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the
Act:
Title
of each class
|
|
Name
of each exchange on which registered
|
None
|
|
Not
Applicable
|
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (Sec.232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
☒ No ☐ (not required)
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rue 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer ☐
|
Accelerated
Filer ☐
|
|
|
Non-Accelerated
Filer ☐
|
Smaller
Reporting Company ☒
|
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
The
number of shares outstanding of each of the issuer’s classes
of common equity, as of the latest practicable date:
COMMON
STOCK, $0.001 PAR VALUE, At November 14, 2016: 21,269,307
shares
MEDITE Cancer Diagnostics, Inc. and Subsidiaries
Form 10-Q
For the Quarterly Period Ended September 30, 2016
TABLE OF CONTENTS
|
|
Page
|
|
||
|
|
|
F-1
|
||
|
|
|
|
F-1
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
1
|
||
|
|
|
7
|
||
|
|
|
|
||
|
|
|
8
|
||
|
|
|
8
|
||
|
|
|
9
|
||
|
|
|
10
|
||
|
|
|
|
11
|
|
|
|
|
EXHIBIT
INDEX
|
|
|
|
|
|
Exhibit
31.1
|
Section 302
Certification of Chief Executive Officer
|
|
Exhibit
31.2
|
Section
302 Certification of Chief Financial Officer
|
|
Exhibit
32.1
|
Section 906
Certification of Chief Executive Officer
|
|
Exhibit
32.2
|
Section
906 Certification of Chief Financial Officer
|
|
PART I. — FINANCIAL
INFORMATION
MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
(Dollars in thousands except shares and per share
amounts)
|
September
30,
2016
(Unaudited)
|
December
31,
2015
|
Assets
|
|
|
|
|
|
Current
Assets:
|
|
|
Cash
|
$32
|
$587
|
Accounts
receivable, net of allowance for doubtful accounts of $110 and $83
at September 30, 2016 and December 31, 2015,
respectively
|
1,611
|
1,798
|
Inventories,
net
|
4,182
|
3,075
|
Prepaid expenses
and other current assets
|
122
|
186
|
Total current
assets
|
5,947
|
5,646
|
|
|
|
Property and
equipment, net
|
1,870
|
1,941
|
In-process research
and development
|
4,620
|
4,620
|
Trademarks, trade
names
|
1,240
|
1,240
|
Goodwill
|
4,658
|
4,658
|
Other
assets
|
245
|
273
|
Total
assets
|
$18,580
|
$18,378
|
|
|
|
Liabilities and
Stockholders’ Equity
|
|
|
|
|
|
Current
Liabilities:
|
|
|
Secured lines of
credit and current portion of long-term debt
|
$3,398
|
$2,857
|
Notes due to
employees, current portion
|
696
|
202
|
Accounts payable
and accrued expenses
|
3,066
|
3,032
|
Advances –
related parties
|
152
|
70
|
Total current
liabilities
|
7,312
|
6,161
|
|
|
|
Long-term debt, net
of current portion
|
78
|
121
|
Notes due to
employees, net of current portion
|
166
|
725
|
Deferred tax
liability – long-term
|
2,205
|
2,205
|
Total
liabilities
|
9,764
|
9,212
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
Stockholders’
equity :
|
|
|
Preferred stock,
$0.001 par value; 10,000,000 shares authorized; 198,355 shares
issued and outstanding (liquidation value of all classes of
preferred stock $2,510 and $2,442 as of September 30, 2016 and
December 31, 2015, respectively)
|
962
|
962
|
Common stock,
$0.001 par value; 35 million shares authorized, 21,269,307 and
21,055,990 shares issued and outstanding at September 30, 2016 and
December 31, 2015, respectively
|
21
|
21
|
Additional paid-in
capital
|
8,888
|
8,340
|
Treasury
stock
|
(327)
|
(327)
|
ccumulated other
comprehensive loss
|
(377)
|
(609)
|
Retained earnings
(accumulated deficit)
|
(351)
|
779
|
Total
stockholders’ equity
|
8,816
|
9,166
|
|
|
|
Total liabilities
and stockholders’ equity
|
$18,580
|
$18,378
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(Dollars in thousands, except shares and per share
amounts)
|
Three Months
Ended
September 30,
|
|
|
2016
|
2015
|
|
(unaudited)
|
(unaudited)
|
|
|
|
Net
sales
|
$2,339
|
$2,662
|
Cost of
revenues
|
1,336
|
1,493
|
Gross
profit
|
1,003
|
1,169
|
|
|
|
Operating
expenses
|
|
|
Depreciation and
amortization expense
|
53
|
30
|
Research and
development
|
305
|
222
|
Selling, general
and administrative
|
860
|
785
|
Total
operating expenses
|
1,218
|
1,037
|
|
|
|
Operating income
(loss)
|
(215)
|
132
|
|
|
|
Other expense
(income)
|
|
|
Interest
expense
|
170
|
46
|
Other expenses
(income)
|
(72)
|
11
|
Total other
expenses
|
98
|
57
|
|
|
|
Income (loss)
before income taxes
|
(313)
|
75
|
|
|
|
Income tax expense
(benefit)
|
(7)
|
16
|
Net income
(loss)
|
(306)
|
59
|
|
|
|
Preferred
dividend
|
(23)
|
(23)
|
|
|
|
Net loss to common
stockholders
|
$(329)
|
$(36)
|
|
|
|
Condensed
statements of comprehensive loss
|
|
|
Net income
(loss)
|
$(306)
|
$59
|
Other comprehensive
income (loss)
|
|
|
Foreign
currency translation adjustments
|
177
|
(170)
|
|
|
|
Comprehensive
loss
|
$(129)
|
$(111)
|
|
|
|
Loss per
share
|
|
|
Basic and diluted
loss per share
|
$(0.02)
|
$-
|
Weighted average
basic and diluted shares outstanding
|
21,269,307
|
20,484,936
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(Dollars in thousands, except shares and per share
amounts)
|
Nine
Months Ended
September 30,
|
|
|
2016
|
2015
|
|
(unaudited)
|
(unaudited)
|
|
|
|
Net
sales
|
$7,286
|
$7,081
|
Cost of
revenues
|
4,095
|
4,028
|
Gross
profit
|
3,191
|
3,053
|
|
|
|
Operating
expenses
|
|
|
Depreciation and
amortization expense
|
154
|
95
|
Research and
development
|
1,086
|
825
|
Selling, general
and administrative
|
2,635
|
2,191
|
Total operating
expenses
|
3,875
|
3,111
|
Operating
loss
|
(684)
|
(58)
|
|
|
|
Other expenses
(income)
|
|
|
Interest
expense
|
570
|
157
|
Other (income)
expenses
|
(111)
|
61
|
Total other
expenses
|
459
|
218
|
|
|
|
Loss before income
taxes
|
(1,143)
|
(276)
|
|
|
|
Income tax
benefit
|
(13)
|
(9)
|
Net
loss
|
(1,130)
|
(267)
|
|
|
|
Preferred
dividend
|
(69)
|
(69)
|
|
|
|
Net loss to common
stockholders
|
$(1,199)
|
$(336)
|
|
|
|
Condensed
statements of comprehensive loss
|
|
|
Net
loss
|
$(1,130)
|
$(267)
|
Other comprehensive
income (loss)
|
|
|
Foreign
currency translation adjustments
|
232
|
(330)
|
Comprehensive
loss
|
$(898)
|
$(597)
|
|
|
|
Loss per
share
|
|
|
Basic and diluted
loss per share
|
$(.06)
|
$(.01)
|
Weighted average
basic and diluted shares outstanding
|
21,127,811
|
20,051,206
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
MEDITE
CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Dollars in thousands)
|
Nine Months
Ended
September
30,
|
|
|
2016
|
2015
|
|
(unaudited)
|
(unaudited)
|
Cash flows from
operating activities:
|
|
|
Net
loss
|
$(1,130)
|
$(267)
|
Adjustments to
reconcile net loss to net cash used in operating
activities
|
|
|
Depreciation and
amortization
|
154
|
95
|
Amortization of
debt discount and debt issuance costs
|
358
|
-
|
Changes in assets
and liabilities:
|
|
|
Accounts
receivable, net
|
187
|
689
|
Inventories,
net
|
(1,107)
|
(746)
|
Prepaid expenses
and other current assets
|
64
|
(54)
|
Accounts payable
and accrued liabilities
|
334
|
(109)
|
Net cash provided
by (used in) operating activities
|
(1,140)
|
(392)
|
|
|
|
Cash flows from
investing activities:
|
|
|
Purchases of
equipment
|
(25)
|
(19)
|
Decrease in other
assets
|
28
|
(154)
|
Net cash provided
by (used in) investing activities
|
3
|
(173)
|
|
|
|
Cash flows from
financing activities:
|
|
|
Net advances
(repayments) on lines of credit and long-term debt
|
313
|
(791)
|
Repayment of notes
due to employees
|
(62)
|
(228)
|
Proceeds from sale
of common stock, net issuance costs of $28
|
-
|
2,056
|
Net advances
(repayments) from related parties
|
82
|
(25)
|
Net cash provided
by financing activities
|
333
|
1,012
|
|
|
|
Effect of exchange
rates on cash
|
249
|
(330)
|
Net
increase (decrease) in cash
|
(555)
|
117
|
Cash at beginning
of year
|
587
|
230
|
|
|
|
Cash at end of the
period
|
$32
|
$347
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
Cash paid for
interest
|
$140
|
$103
|
Cash paid for
income taxes
|
$8
|
$68
|
|
|
|
Supplemental
schedule of non-cash financing activity:
|
|
|
Conversion of
preferred stock to common stock
|
$-
|
$525
|
Settlement of
liabilities through issuance of common stock
|
$210
|
-
|
Reclassification of
warrant liability to additional paid in
capital
|
$90
|
$-
|
Issuance of
warrants on secured promissory notes classified as additional
paid-in capital and debt discount
|
$248
|
$-
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Tabular data in thousands, except shares and per share
amounts)
Note 1.
|
Organization
|
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.
Note 3.
|
Inventories
|
The
following is a summary of the components of inventories (in
thousands):
|
September
30,
2016
(Unaudited)
|
December
31,
2015
|
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)
|
December
31,
2015
|
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)
|
December
31,
2015
|
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.
Note 7.
|
Common Stock
|
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)
|
December
31,
2015
|
|
Shares Issued
&
|
Shares Issued
&
|
|
Outstanding
|
Outstanding
|
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
|
|
|
|
Weighted
|
|
|
Weighted
|
|
Average
|
|
|
Average
|
Aggregate
|
Remaining
|
|
Options and
|
Exercise
|
Intrinsic
|
Contractual
|
|
Warrants
|
Price
|
Value
|
Life (Years)
|
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):
|
United
States
|
Germany
|
Poland
|
Total
|
||||
|
September
30,
2016
|
December
31,
2015
|
September
30,
2016
|
December
31,
2015
|
September
30,
2016
|
December
31,
2015
|
September
30,
2016
|
December
31,
2015
|
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:
|
United
States
|
Germany
|
Poland
|
Total
|
||||
|
September
30,
2016
|
September
30,
2015
|
September
30,
2016
|
September
30,
2015
|
September
30,
2016
|
September
30,
2015
|
September
30,
2016
|
September
30,
2015
|
Revenues
|
$182
|
$283
|
$2,137
|
$2,340
|
$20
|
$39
|
$2,339
|
$2,662
|
Net income
(loss)
|
$(376)
|
$(708)
|
$70
|
$223
|
$-
|
$(54)
|
$(306)
|
$59
|
|
United
States
|
Germany
|
Poland
|
Total
|
||||
Revenues:
|
September 30,
2016
|
September 30,
2015
|
September 30,
2016
|
September 30,
2015
|
September 30,
2016
|
September 30,
2015
|
September 30,
2016
|
September 30.
2015
|
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:
|
United
States
|
Germany
|
Poland
|
Total
|
||||
|
September
30,
2016
|
September
30,
2015
|
September
30,
2016
|
September
30,
2015
|
September
30,
2016
|
September
30,
2015
|
September
30,
2016
|
September
30,
2015
|
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)
|
|
United
States
|
Germany
|
Poland
|
Total
|
||||
Revenues:
|
September
30,
2016
|
September 30,
2015
|
September
30,
2016
|
September 30,
2015
|
September
30,
2016
|
September 30,
2015
|
September
30,
2016
|
September 30,
2015
|
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.
Caution Regarding Forward-Looking Statements
This
report contains “forward-looking statements” –
that is, statements related to future, not past, events. In this
context, forward-looking statements often address our expected
future business and financial performance and financial condition,
and often contain words such as “expect,”
“anticipate,” “intend,” “plan,”
“believe,” “seek,” “see,” or
“will.” These forward-looking statements are not
guarantees and are subject to known and unknown risks,
uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity,
performance or achievements expressed or implied by such
forward-looking statements. For us, particular uncertainties that
could cause our actual results to be materially different than
those expressed in our forward-looking statements include: our
ability to raise capital; our ability to retain key employees; our
ability to engage third party distributors to sell our products;
economic conditions; technological advances in the medical field;
demand and market acceptance risks for new and existing products,
technologies, and healthcare services; the impact of competitive
products and pricing; U.S. and international regulatory, trade, and
tax policies; product development risks, including technological
difficulties; ability to enforce patents; and foreseeable and
unforeseeable foreign regulatory and commercialization factors, our
ability to develop new products and respond to technological
changes in the markets in which we compete, our ability to obtain
government approvals of our products, our ability to market our
products, changes in third-party reimbursement procedures, and such
other factors that may be identified from time to time in our
Securities and Exchange Commission ("SEC") filings and other public
announcements including those set forth under the caption
“Risk Factors” in Part 1, Item 1A of our Annual Report
on Form 10-K for the year ended December 31, 2015. All subsequent
written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their
entirety by the foregoing. Readers are cautioned not to place undue
reliance on our forward-looking statements, as they speak only as
of the date made. Except as required by law, we assume no duty to
update or revise our forward-looking statements.
Overview of MEDITE Cancer Diagnostics, Inc.
MEDITE
Cancer Diagnostics, Inc. (the “Company”,
“it”, “we”, or “us”), formerly
CytoCore, Inc., specializes
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. Depending upon the type of cancer,
segments within the current target market of approximately $5.8
billion are growing at annual rates between 10% and 30%. To use the
well-established brand of MEDITE and to have a better description
of the Company’s business, the Board approved the name change
to “MEDITE Cancer Diagnostics, Inc.” As a result, the
Company’s trading symbol was changed to
“MDIT”.
In 2015
and 2016 we focused on several growth opportunities including newly
developed and patent pending assays, new laboratory devices and
several marketing projects like the Chinese standardization
projects for histology and cytology. The Company is
optimistic about recent marketing efforts focusing on larger
laboratory chains. 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 available for sale.
After the successful market entrance into China in 2014, the
Company increased its revenue in this market to approximately $1
million in 2015, compared to zero in 2014. The Company’s
delayed financing has impacted the delivery of sales due to
availability of inventory and the needed investment in inventory.
The Company originally anticipated sales in 2016 of approximately
$2 million with the assumption that the timing of the scheduled
capital raise would happen earlier in the year. Due to the delay in
the capital raise, the Company is revising its target to $1.3
million. Total sales for the nine months ended September 30, 2016
were approximately $980,000 compared to $380,000 for the same
period in 2015. The Chinese market is growing quickly,
and by 2016 the Company expects it will be the largest market for
its products. By working with its Chinese distributor, UNIC
Medical, the Company has successfully received China Food and Drug
Administration (“CFDA”) approval for all MEDITE
histology laboratory devices at the end of 2014, and for the
Cytology device in 2015. The UNIC Medical sales team is selling
MEDITE products in China with increasing volumes. Also,
together with UNIC, we are part of a government supported project
to standardize the histology laboratory process in China. UNIC
Medical is using MEDITE equipment and consumables for processing,
and developing new assays.
On May
31, 2016, UNIC received CFDA approval as a Class I in vitro
diagnostic reagent for MEDITE's "SureThin" cell preservation
solution. As China adapts Cytopathology standards across
the country, the Company expects 'Liquid Based Cytology Tests
(LBC)' will be used for the majority of Pap collections for
cervical cancer screening. We are prepared to sell the complete
SureThin products, including the already approved Processor to this
potential market of 485 million women between the ages of 16 and 64
years of age.
MEDITE’s Breast
Cancer Risk Assessment Product is non-invasive, easy, gentle, and
highly sensitive, enabling young women between 20 and 45 years of
age to obtain their individual breast cancer risk assessment. An
automatic and gentle collection device for breast cells together
with a newly developed assay is used to determine a woman’s
risk to develop breast cancer. Knowing the individual
breast cancer risk will provide relief to a majority of young women
who have no elevated risk of developing breast cancer. For those
who have a higher risk, it enables them to monitor that risk closer
for earlier treatment, if needed. The earlier a precancerous or
cancerous situation is detected, the greater the chance for
reducing the fatality rate for these conditions. Product
development of BreastPap continued in 2016, reflecting feedback
from doctors’ test use of prototype units’ and doctors
office feedback to continuously improve the product prior to
launching. During the third quarter, the Company initiated a
co-operation with Leibnitz University of Hannover, Germany, on the
final design and usability of the BreastPap. The project is
scheduled to begin on February 15, 2017. The delay in market
introduction is planned by management due to additional quality
assurance measures being performed by the Company . The
Company’s BreastPap product is a risk assessment tool planned
to detect “abnormal” cells contained in the
women’s breast aspirant. Upon detection of
abnormal cells, women, based upon their physicians’ advice
may be candidates for further diagnostic testing.
The
developed and patent pending self-collection device SoftKit is
targeting the growing POC & POP (point of care or point of
people care) market. Growth in this area is due to consumer driven
health care requirements and the necessity to support and address
incremental patient population needs for screening and on-going
diagnostic tests. SoftKit serves as just such a product, addressing
this market requirement. SoftKit is planned to be sold through
various marketing channels that serve the consumer health and
emerging post-acute care as the influence of clinical labs are
expanded.
The
Company’s cytology product line, revenue grew in Europe
(non-Gyn applications) during 2015 and 2016. The Company is in the
process of preparing an application to the U.S. Food and Drug
Administration (“FDA”) for SureThin Gyn applications
and once approved can compete with some of the dominant suppliers
in this $600 million market.
The
Company brought several other innovative products closer to
marketability during 2015, and continued during the first and
second quarter of 2016 as listed above. Also, in
early 2015, the German priority patent for a fully automated system
used in the histology lab, a “Lab-In-One” unit, was
granted. This technology, if successfully accepted by the market,
has the ability to change the competitive landscape within the
industry.
During
the first quarter, the Company opened a second German manufacturing
facility with approximately 4,000 square feet in
Nussloch. This facility is utilizing the local workforce utilizing
their experience for the specialized skills required for
manufacturing of the newly developed and updated Microtomes product
line and the newly developed Cryostat (instruments used for
sectioning tissue biopsies). During the third quarter
2016, the Company manufactured and delivered from order backlog 12
units. The Company began manufacturing the new Cryostat line during
the third quarter.
The
Company operates in one industry segment for cancer diagnostics
instruments and consumables for histology and cytology
laboratories.
Definition:
|
Histology
- Cancer diagnostics based on the structures of cells in
tissues
|
|
Cytology
- Cancer diagnostics based on the structures of individual
cells
|
Cancerous and
precancerous conditions are defined in terms of structural
abnormalities in cells. For this reason, cytology is widely used
for the detection of such conditions, while histology is typically
used for the confirmation, identification and characterization of
the cellular abnormalities detected by cytology. Other diagnostics
methods, such as marker-based assays, provide additional
information that can supplement, but which cannot replace cytology
and histology. The trend towards more personalized treatment of
cancer increases the need for cytology, histology and assays for
identifying and testing the best treatment alternatives. We believe
that this segment will therefore be increasingly important for
future development of strategies to fight the “cancer
epidemic” (World Health Organization: World Cancer Report
2014), which expects approximately a 50% increase in cancer cases
worldwide within the next 20 years.
This
segment sees a trend toward, and demand for, higher automation for
more throughput in bigger laboratories, process standardization,
digitalization of cell and tissue slides and computer aided
diagnostic systems, while also looking for cost effective
solutions. In the US, the Patient Protection and Affordable Care
Act is a national example for the industry. More people have health
insurance, and therefore can afford early cancer screening, while
at the same time the payers for health care continue looking for
cost reductions.
MEDITE
acts as a one-stop-shop for histology (also known as anatomic
pathology) laboratories either as part of a hospital, as part of a
chain of laboratories or individually. It is one out of only four
companies offering all equipment and consumables for these type of
laboratories worldwide. The MEDITE Brand stands for innovative and
high quality products – most equipment made in Germany
– and competitive pricing.
For the
cytology market, MEDITE offers a wide range of consumable products
and equipment; in particular for liquid-based-cytology, which is an
important tool in cancer screening and detection in the field of
cervical, bladder, breast, lung and other cancer types. We also
developed an innovative new type of easy to use standardized
staining solutions, and a very innovative and effective early
cancer detection marker-based assay. These new developments are
cost effective solutions able to replace more expensive competitive
products, and therefore are also becoming the first choice for the
growing demand in emerging countries.
All of
the Company’s operations during the reporting period were
conducted and managed within this segment, with management teams
reporting directly to our Chief Executive and Operating Officers.
For information on revenues, profit or loss and total assets, among
other financial data, attributable to our operations, see the
unaudited condensed consolidated financial statements included
herein.
Outlook
Due to
promising new products and distributions contracts executed in the
last two years, management believes the profitability and cash-flow
of the business will grow and improve. However, significant
on-going operating expenditures may be necessary to manufacture and
market new and existing products to achieve the accelerated sales
growth targets outlined in the Company’s business plan. To
realize the planned growth potential, management will focus its
efforts on 1) finishing and gaining approval for the products
currently under development and 2) increasing direct sales in the
United Sates and continuing to expand Chinese market sales by
broadening the Company’s collaborations with the local
distributor UNIC. We also will work on continuously optimizing
manufacturing cost to increase our gross margin. Implementation of
our plans will be contingent upon securing substantial additional
debt and/or equity financing. If we are unable to obtain additional
capital or generate profitable sales revenues, we may be required
to curtail product development and other activities.
The
Company believes the combination of MEDITE Enterprise, Inc. with
MEDITE Cancer Diagnostics, Inc.(“Cancer Diagnostics”),
Inc. will expedite the development and marketability of Cancer
Diagnostic’s cytology products which include collection
devices, image analysis software, special stains and immuno-assays.
Currently, the launch of new products, the positive impact from
several new initiatives, and some recently executed distribution
contracts in the United States, Europe and China are primary
factors assisting growth.
Results of Operations
The
following discussion and analysis should be read in conjunction
with the Company’s unaudited condensed consolidated financial
statements presented in Part I, Item 1 of this Quarterly Report and
the notes thereto, and our audited consolidated financial
statements and notes thereto, as well as our Management’s
Discussion and Analysis contained in our Annual Report on Form 10-K
for the year ended December 31, 2015 filed with the SEC on April
12, 2016 and Form 10-K/A filed on September 6, 2016.
Three months ended September 30, 2016 as compared to the three
months ended September 30, 2015 (in thousand USD)
Revenue
Revenue
for the three months ended September 30, 2016, was $2,339 as
compared to $2,662 for the three months ended September 30,
2015. The 12% revenue decrease primarily relates to the
Company’s delays in sales. The Company had over $1 million
dollars in backlog which they were not able to fill during the
period due to cash constraints.
Costs
of Revenue
Cost of
revenues were $1,336, or 57.12% of the revenues for the three
months ended September 30, 2016 as compared to $1,493 or 56.09% of
the revenues for the three months ended September 30,
2015. The cost of revenue for the period was slightly
higher with prior period percentages compared to
revenue. The overall decrease in cost of revenue relates
to higher sales of manufactured instruments with higher gross
margins for the period.
Research and Development
Research and
development expenses are an important part of our business to keep
our existing products competitive, and to develop new innovative
solutions with interesting market potential that will help us grow
future revenues. These expenses include research work for cancer
marker consumables and developing work, including engineering and
industrial design, for histology and cytology laboratories
worldwide. Major parts of these expenses are payroll-related costs
for in-house scientific research, mechanical and electrical
engineering, instrument related software development staff,
prototype expenses and material purchased for R&D.
For the
third quarter 2016, research and development expenses increased to
$305 compared to $222 for the third quarter
2015. During 2016, the Company hired a project manager
to oversee the planned field study for our newly developed cancer
assay in China to shorten the time to market. The new
hire is a German-Chinese PhD in Biochemistry. We expect to continue
to expend considerable effort and resources to continue to grow our
product offerings.
Selling, General and Administrative
For the
third quarter ended September 30, 2016, SG&A expenses were $860
as compared to $785 for the third quarter ended September 30, 2015.
The Company has incurred higher costs related to growing the
business, in anticipation of the equity financing, including hiring
consultants to assist in increasing sales in the United States and
evaluating the needs of the Company during 2016.
Operating Loss
The
operating loss of $215 for the third quarter of ended September 30,
2016 compared to an operating income of $132 for the third quarter
of September 30, 2015 is due primarily to the higher selling,
general and administrative expenses and lower revenues for the
period discussed above.
Interest Expense
Interest expenses
increased by 270% to $170 in the three months ended September 30,
2016 compared to $46 for the three months ended September 30, 2015,
due to interest expense attributed to secured promissory notes
issued at December 31, 2015 and May 25, 2016, which matured on
March 31, 2016 and August 25, 2016, respectively. These
notes bear interest at 15%, or $25 for the three month period ended
September 30, 2016. Further, interest expense includes
$56 of the estimated fair value of warrants issued July through
September 2016 as a penalty due to a default on the secured
promissory notes.. Further, a discount on the May 25, 2016 secured
promissory notes in the amount of $31 was amortized into interest
expense during the three months ended September 30, 2016. The
warrant expense is considered a non-cash settlement on the
defaulted Notes. The effect of the interest, and
fair value of the warrants on the secured promissory notes was an
effective yield of 68% for the three months ended September 30,
2016.
Net Loss
The net
loss for the quarter ended September 30, 2016, totaled $306 as
compared to net income of $59 for the quarter ended September,
2015. As noted above, the primary reasons for the loss in the third
quarter of 2016 was due to lower revenues, increased selling,
general and administrative and interest expense.
Nine months ended September 30, 2016 as compared to the nine months
ended September 30, 2015 (in thousand USD)
Revenue
Revenue
for the nine months ended September 30, 2016, was $7,286 as
compared to $7,081 for the nine months ended September 30, 2015, an
increase of 3%. The increase in revenue was due to an increase in
$619 of both direct and distributor sales of histology equipment
offset by a reduction of, $60 and $354 in histology and cytology
consumables during the nine months ended September 30, 2016,
respectively.
Costs of Revenue
Cost of
revenues were $4,095, or 56.20% of the revenues for the nine months
ended September 30, 2016 as compared to $4,028 or 56.88% of the
revenues for the nine months ended September 30,
2015. The cost of goods sold as a percentage of revenue
are consistent, year over year.
Research and Development
Research and
development expenses are an important part of our business to keep
our existing products competitive, and to develop new innovative
solutions with interesting market potential that will help us grow
future revenues. These expenses include research work for cancer
marker consumables and developing work, including engineering and
industrial design, for histology and cytology laboratories
worldwide. The major components consist of payroll-related costs
for in-house scientific research, mechanical and electrical
engineering, instrument related software development staff,
prototype expenses and material purchased for R&D.
For the
nine months ended September 30, 2016, research and development
expenses increased to $1,086 compared to $825 for the same
period in 2015. During 2016, the Company hired a project
manager to oversee the planned field study for our newly developed
cancer assay in China to shorten the time to market. The
new hire is a German-Chinese PhD in Biochemistry. The Company
continues to place a high priority to its research and development
efforts.
Selling, General and Administrative
For the
nine months ended September 30, 2016, SG&A expenses were $,656
as compared to $2,191 for the nine months ended September 30,
2015. The nine month ended September 30, 2016 compared
to the same period in 2015 expense reflects a recovery of bad debts
of $101 for 2015 compared to $38 expense for the same period in
2016. The 2016 period included approximately $45 of professional
fees attributed to the restatement of the intangible assets and
deferred income tax liability in the financial statements for the
year ended December 31, 2015 and higher professional fees
attributed to increase board fees. The directors fess
were increased from $5,000 a director per quarter to $10,000 a
director per quarter, an increase of $60,000. The Company has
incurred higher costs related to growing the business, in
anticipation of the equity financing, including hiring consultants
to assist in increasing sales in the United States and evaluating
the needs of the Company.
Operating Loss
The
operating loss of $684 for the nine months ended September 30, 2016
compares to an operating loss of $58 for the same period in 2015,
and is directly related to higher general and administrative
expenses relating to higher selling, general and administrative
expenses and higher research and development expenses discussed
above, offset by higher revenue.
Interest Expense
Interest expenses
increased by 263% to $570 in the nine months ended September 30,
2016 compared to $157 for the nine months ended September 30,
2015 due to the amortization of the debt issuance costs and
the debt discount attributed to the secured promissory notes issued
at December 31, 2015 and May 25, 2016, which matured on March 31,
2016 and August 24, 2016, respectively. These notes bear
interest at 15%, or $65 for the 2016 period, and the debt issuance
costs and debt discount totaled $250 for the nine months ended
September 30, 2016 plus the $116 attributed to the warrants issued
for the default. The debt issuance costs of $250 and the $108 of
warrant expense are considered non-cash settlement on these
Notes.
Net Loss
The net
loss for the nine month ended September 30, 2016, totaled $1,130 as
compared to net loss of $267 for the nine month ended September 30,
2015 is due primary to a higher selling, general and administrative
expenses and research and development costs and interest costs
attributed to the secured promissory notes discussed above, offset
by increases revenues.
Liquidity and Capital Resources
Due to
promising new products and distributions contracts executed in the
last two years, management believes the profitability and cash flow
of the business will grow and improve. However, significant
on-going operating expenditures may be necessary to manufacture and
market new and existing products to achieve the accelerated sales
growth targets outlined in the Company’s business plan. To
realize the planned growth potential management will focus its
efforts on 1) finishing and gaining approval for the products
currently under development and 2) increasing direct sales in the
USA and continuing to expand Chinese market sales by broadening the
Company’s collaborations with the local distributor UNIC. We
also will work on continuously optimizing manufacturing cost to
increase our gross margin.
Implementation of
our plans will be contingent upon securing substantial additional
debt and/or equity financing. If we are unable to obtain additional
capital or generate an increase in profitable sales revenues, we
may be required to curtail product development and other
activities. At September 30, 2016, the Company had approximately,
$1.9 million of accrued liabilities which represents unpaid wages
and vacation benefits. At December 31, 2015, the Company refinanced
$927,000 of these liabilities through notes due to employees which
are payable over a three year period and are convertible into
equity at a discount defined in the agreement. At
September 30, 2016, the Company was in default on certain notes
with employees due to missed monthly payments. The Company has
classified all notes, except one note in default as short-term
on the Condensed Balance Sheets. Included in accounts
payable and accrued expenses are accrued salaries and benefit
expenses due to our former Chief Financial Officer, Robert F.
McCullough, Jr. of $1 million. Also, $133,000 is due to Michaela
Ott, currently our COO, and Michael Ott, currently our Chairman of
the Board and Chief Executive Officer of two of our wholly owned
subsidiaries, for unpaid wages and car allowance and vacation.
Michaela Ott has also loaned $102,000 to the Company to be repaid
by December 31, 2016. The Company believes executives and employees
will work with the Company to ease financial strains emanating from
amounts currently due and payable. The Company believes some
portion of these liabilities will be settled in the common stock of
the Company.
The
current level of working capital shortfalls has been partially
financed by additional advances on our credit lines with a German
bank and from recently issued secured promissory notes.
In order to continue growing the business, the Company
is planning to raise additional funds through the sale of equity
securities or convertible debt. The Company is also
investigating additional bank financing with European institutions
which will increase the availability against current collateral of
approximately $5 million. The Company’s security
agreement with its lender has provided borrowings of 35% of our
collateralized assets. The Notes discussed above matured
on June 30, 2016 and were not repaid. Therefore, the
Notes were in default as of April 1, 2016. The Company
agreed to pay the Purchasers 10% of the principal balance of the
Notes in warrants for the months of April through September 2016
and by the date of this filing, October and November
2016. Therefore, for the months of April through
September 2016, the Company issued 300,000 warrants and recorded
interest expense related to the issuance of these warrants,
attributable to the secured promissory notes of approximately
$105,000. On May 25, 2016, the Company issued $150,000 of
additional promissory notes. The May Notes were matured on August
25, 2016. The Company issued warrants for the months of August and
September consistent with the terms of the Notes discussed above
and by the date of this filing, October 2016 warrants. The Company
anticipates that some of the noteholders will convert their
matured notes into convertible debt or equity which the company may
offer near term. The Company is investigating various sources of
debt and equity to assist them in their growth plans and to
refinance their maturing debt obligations.
On May
25, 2016, the Company entered into a Securities Purchase Agreement
(the “May Purchase Agreement”) with two (2) individual
accredited investors (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 “Note(s)”) 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,
as defined in the Note, or the third (3rd ) business day following
the Company’s receipt of funds exceeding one million dollars
($1,000,000) from an equity or debt financing, not including the
financing contemplated under the May Purchase Agreement. The 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”), in accordance with Article 2 set
forth in the Notes. 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 totaling $22,484 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.
In
summary, the Company is working on extending its payment terms
on employee notes, settling with its former CFO, raising additional
equity and refinancing debt and other noteholders. In
addition, the Company has slowed 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. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty. As a result of all these factors and conditions there
is substantial doubt about our ability to continue as a going
concern.
Off-Balance Sheet Arrangements
As of
September 30, 2016, we did not have any relationships with
unconsolidated entities or financial partners, such as entities
often referred to as structured finance or special purpose entities
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As
such, we are not materially exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such
relationships.
Evaluation of Disclosure Controls and Procedures
Our
chief executive officer and our interim chief financial officer,
evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15€ and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended,
the “Exchange Act”) as of the end of the period covered
by this report. Based on that evaluation, our chief executive and
chief financial officers have concluded that our disclosure
controls and procedures were not effective to provide reasonable
assurance that the information we are required to disclose in the
reports filed or submitted by us under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and
accumulated and communicated to our management, including our chief
executive officer and interim chief financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
Part II. Other Information
MEDITE
Lab Solutions, Inc. sold four shipments of CoverTape to
Richard-Allan Scientific Company, the Anatomical Pathology Division
of Thermo Fisher Scientific Inc. Of those shipments, Richard-Allan
refused to pay for $115,275 worth of already-received CoverTape,
asserting that the CoverTape was non-conforming, which assertion
MEDITE emphatically denies, and for which MEDITE has provided
counter-evidence. Richard-Allan also failed to purchase further
quantities as agreed between the parties. After attempting to
resolve the matter through consultation, MEDITE is prepared to
initiate binding arbitration to recover the $115,275 and $1,073,700
contractually available to MEDITE for Richard-Allan's failure to
purchase further quantities under the contract, and $72,000 for
inventory produced specific to the contractual terms. The Company
has reserved a portion of the outstanding balance at December 31,
2015 of $115,275 and of the OEM branded stock of $72,000, pending
final resolution of this matter.
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 and consulting
fees.
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 totaling $22,484
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.
We
issued the foregoing securities in reliance on the safe harbor and
exemptions from registration provided by Section 4(a)(2) and
Regulation D of the Securities Act of 1933, as
amended.
During
the nine months ended September 30, 2015, the Company sold 711,250
shares of common stock to the President of UNIC Medical, a
distributor-customer of the Company, at a per share price of $1.60,
pursuant to Regulation S of the Securities Act of 1933. This person
is a foreign national.
We
issued the foregoing securities in reliance on the safe harbor and
exemptions from registration provided by Regulation S of the
Securities Act of 1933, as amended. No investor who participated in
the offering was a U.S. citizen, and the offering was conducted by
the officers and directors of the Company without the participation
of any underwriters, and no commissions were paid to any
person.
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 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 are in default and due on demand, except one. 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 payment terms.
Exhibit Number
|
|
Description
|
|
|
|
31.1
|
|
Section
302 certification by the principal executive officer pursuant to
Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act
of 2002.
|
|
|
|
31.2
|
|
Section
302 certification by the principal financial officer pursuant to
Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act
of 2002.
|
|
|
|
32.1
|
|
Section
906 certification by the principal executive pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
|
|
|
|
32.2
|
|
Section
906 certification by the principal financial officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002.
|
|
|
|
101.INS
|
|
XBRL
Instance
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Labels
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation
|
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
MEDITE
Cancer Diagnostics, Inc.
|
|
|
Date: November
14, 2016
|
/s/ David E.
Patterson
|
|
David E. Patterson
|
|
Chief Executive Officer
|
|
|
Date:
November 14, 2016
|
/s/.David E.
Patterson
|
|
David
E. Patterson
|
|
Chief Financial Officer
|
-11-