Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2018
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File number 000-00935
MEDITE CANCER DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware
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36-4296006
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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4203 SW 34th Street, Orlando, FL
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32811
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(Address of principal executive offices)
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(Zip Code)
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(407) 996-9630
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the
Act:
Title
of each class
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Name
of each exchange on which registered
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None
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Not
Applicable
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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 (§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 ☐
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Accelerated
Filer ☐
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Non-Accelerated
Filer ☐
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Smaller
Reporting Company ☒
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Emerging
growth company ☐
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If an
emerging growth company, indicate by check mark if the Registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
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 June 21, 2018: 59,372,868
shares
QUARTERLY REPORT ON FORM 10-Q
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8
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PART I. — FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
MEDITE CANCER DIAGNOSTICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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March
31,
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December
31,
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2018
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2017
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Assets
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(unaudited)
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Current
Assets:
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Cash
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$153
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$73
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Restricted
cash
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94
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417
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Accounts
receivable, net of allowance for doubtful accounts of $452 and
$439
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643
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453
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Inventories
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2,657
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2,403
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Prepaid
expenses and other current assets
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328
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118
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Total
current assets
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3,875
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3,464
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Property
and equipment, net
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1,759
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1,778
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In-process
research and development
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4,620
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4,620
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Trademarks,
trade names
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1,240
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1,240
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Goodwill
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4,658
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4,658
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Other
assets
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256
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196
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Total
assets
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$16,408
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$15,956
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Liabilities
and Stockholders’ Equity
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Current
Liabilities:
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Accounts
payable and accrued expenses
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$3,279
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$3,252
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Current
portion of long-term debt
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50
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50
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Notes
due to employees, current portion
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326
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326
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Advances
– related party
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142
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154
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Total
current liabilities
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3,797
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3,782
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Long-term
debt, net of current portion
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5,157
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4,869
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Notes
due to employees, net of current portion
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25
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45
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Deferred
tax liability
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1,485
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1,485
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Total
liabilities
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10,464
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10,181
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Commitments
and contingencies
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Stockholders’
Equity:
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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 $2,647 and $2,624 as of March 31, 2018 and December
31, 2017, respectively)
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962
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962
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Common
stock, $0.001 par value; 100,000,000 shares authorized, 47,906,081
and 28,906,081 shares issued and outstanding as of March 31, 2018
and December 31, 2017, respectively
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48
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29
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Additional
paid-in capital
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15,227
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13,750
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Treasury
stock
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(327)
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(327)
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Accumulated
other comprehensive loss
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(369)
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(444)
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Accumulated
deficit
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(9,597)
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(8,195)
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Total
stockholders’ equity
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5,944
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5,775
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Total
liabilities and stockholders’ equity
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$16,408
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$15,956
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
MEDITE CANCER DIAGNOSTICS, INC.
AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
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Three
Months Ended March 31,
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2018
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2017
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Net
sales
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$1,505
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$1,891
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Cost
of revenues
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1,170
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1,211
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Gross
profit
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335
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680
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Operating
expenses
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Depreciation
and amortization expense
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71
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49
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Research
and development
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305
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425
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Selling,
general and administrative
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919
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782
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Total
operating expenses
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1,295
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1,256
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Operating
loss
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(960)
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(576)
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Other
(income) expenses
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Interest
expense, net
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447
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193
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Loss
on extinguishment of notes due to employees
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-
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158
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Other (income)
expense, net
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(5)
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28
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Total
other expense, net
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442
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379
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Loss
before income taxes
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(1,402)
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(955)
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Provision
for income taxes
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-
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-
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Net
loss
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(1,402)
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(955)
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Preferred
dividend
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(23)
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(23)
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Net
loss available to common stockholders
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$(1,425)
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$(978)
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Loss
per share
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Net
loss available to common stockholders
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$(1,425)
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$(978)
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Basic
and diluted loss per share
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$(0.04)
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$(0.04)
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Weighted
average basic and diluted shares outstanding
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39,174,599
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22,940,543
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Condensed
consolidated statements of comprehensive loss
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Net
loss
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$(1,402)
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$(955)
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Other
comprehensive income (loss)
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Foreign
currency translation adjustments
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75
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(53)
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Comprehensive
loss
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$(1,327)
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$(1,008)
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
MEDITE CANCER DIAGNOSTICS,
INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
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Three
Months Ended March 31,
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2018
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2017
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Cash
flows from operating activities:
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Net
loss
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$(1,402)
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$(955)
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Adjustments
to reconcile net loss to cash used in operating
activities
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Depreciation
and amortization
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71
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49
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Amortization
of debt discounts and debt issuance costs
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177
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-
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Stock-based
compensation
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43
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10
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Estimated
fair value of warrants issued in connection with secured promissory
notes
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-
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121
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Loss
on extinguishment of notes due to employees
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-
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158
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(176)
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33
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Inventories
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(186)
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183
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Prepaid
expenses and other assets
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(263)
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(20)
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Accounts
payable and accrued expenses
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95
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(224)
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Net
cash used in operating activities
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(1,641)
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(645)
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Cash
flows from investing activities:
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Purchases
of equipment
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(2)
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(16)
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Net
cash used in investing activities
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(2)
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(16)
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Cash
flows from financing activities:
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Net
borrowings on lines of credit
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-
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8
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Repayment
of secured promissory notes
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-
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(167)
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Repayment
of notes due to employees
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(21)
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(24)
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Proceeds
from convertible debt, net
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1,464
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-
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Repayments
on related party advances
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(15)
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-
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Proceeds
from sale of common stock, net of issuance costs
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-
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1,097
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Net
cash provided by financing activities
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1,428
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914
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Effect
of exchange rates on cash
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(28)
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(92)
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Net
change in cash and restricted cash
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(243)
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161
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Cash
and restricted cash at beginning of period
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490
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108
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Cash
and restricted cash at end of the period
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$247
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$269
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Supplemental
disclosure of cash flow information:
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Cash
paid for interest
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$91
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$41
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Cash
paid for income taxes
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$-
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$13
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Reconciliation
of cash and restricted cash at end of period:
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Cash
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$153
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$269
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Restricted
cash
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94
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-
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$247
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$269
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Supplemental
schedule of non-cash investing and financing
activities:
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Common
stock issued with debt
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$1,425
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$-
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Accrued
liabilities exchanged for convertible note payable
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$100
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$-
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Estimated
fair value of warrants recorded as debt discount
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$28
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$-
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
MEDITE CANCER DIAGNOSTICS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Tabular data in thousands, except share and per share
amounts)
Note
1.
Organization
The Company
MEDITE
Cancer Diagnostics, Inc. (“MDIT”, “MEDITE”,
“we”, “us” or the “Company”)
was incorporated in Delaware in December 1998.
These statements include the accounts of MEDITE
Cancer Diagnostics, Inc. and its wholly owned subsidiaries, which
consists of MEDITE Enterprise, Inc., MEDITE GmbH, Burgdorf,
Germany, MEDITE Lab Solutions Inc., Orlando, USA.
In 2017 the Company made the decision
to integrate CytoGlobe into Medite GmbH. CytoGlobe had been
operating as a separate company focused on cytology products
(equipment and consumables) with separate personnel and financial
reporting that was consolidated into Medite GmbH. As the
CytoGlobe brand became less important over time and customers
purchased both cytology and histology products from Medite, it no
longer made sense to keep CytoGlobe as a separate company.
Therefore, it was integrated from a financial, operational and
product portfolio perspective into Medite GmbH.
MEDITE
is a medical technology company specialized in the development,
manufacturing, and marketing of premium medical devices,
consumables and molecular biomarkers for detection, risk assessment
and diagnosis of cancerous and precancerous conditions and related
diseases. The Company has 57 employees in two countries, a
distribution network to about 80 countries and a wide range of
products for anatomic pathology, histology and cytology
laboratories is available for sale.
Note
2.
Summary of
Significant Accounting Policies
Consolidation, Basis of Presentation and Significant
Estimates
The
accompanying condensed consolidated financial statements for the
periods ended March 31, 2018 and 2017 included herein are unaudited
and have been prepared in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”) and include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. Such
consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the
financial position and results of operations as of and for the
periods indicated. All such adjustments are of a normal recurring
nature. These interim results are not necessarily indicative of the
results to be expected for the fiscal year ending December 31, 2018
or for any other period. Certain information and footnote
disclosures normally included in the consolidated financial
statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes that the disclosures are
adequate to make the interim information presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with the Company’s audited consolidated financial
statements disclosed in the Report on Form 10-K for the year ended
December 31, 2017 filed on May 17, 2018 and other filings with the
Securities and Exchange Commission.
In
preparing the accompanying condensed consolidated accompanying
financial statements, management has made certain estimates and
assumptions that affect reported amounts in the condensed
consolidated financial statements and disclosures of contingencies.
Changes in facts and circumstances may result in revised estimates
and actual results may differ from these estimates.
Going Concern
The
accompanying condensed consolidated financial statements have been
prepared in conformity with GAAP, which contemplate continuation of
the Company as a going concern. This contemplates the
realization of assets and the liquidation of liabilities in the
normal course of business. At March 31, 2018, the
Company’s cash balance was $153,000 and its operating losses
for the year ended December 31, 2017 and for the three months March
31, 2018 have used most of the Company’s liquid assets. These
factors raise substantial doubt about the Company’s ability
to continue as a going concern. However, the Company has
approximately $78,000 in working capital as of March 31, 2018
compared to negative working capital of approximately $318,000 on
December 31, 2017. The Company raised additional cash of
$1.5 million from the issuance of convertible notes payable
starting in the first quarter of 2018 (see Note 4).
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2018.
In the
future, we may require sources of capital in addition to cash on
hand to continue operations and to implement our strategy. If our
operations do not become cash flow positive, we may be forced to
seek equity investments or debt arrangements. No assurances can be
given that we will be successful in obtaining such additional
financing on reasonable terms, or at all. If adequate funds are not
available on acceptable terms, or at all, we may be unable to
adequately fund our business plans and it could have a negative
effect on our business, results of operations and financial
condition. In addition, if funds are available, the issuance of
equity securities or securities convertible into equity could
dilute the value of shares of our common stock and cause the market
price to fall, and the issuance of debt securities could impose
restrictive covenants that could impair our ability to engage in
certain business transactions.
Revenue Recognition
The
Company derives its revenue primarily from the sale of medical
products and supplies for the diagnosis and prevention of
cancer.
The
company recognizes revenue for the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services.
Consumables
revenues consist of single-use products and are recognized at a
point in time following the transfer of control of such products to
the customer, which generally occurs upon shipment. Instruments
revenues typically consist of longer-lived assets that, for the
substantial majority of sales, are recognized at a point in time in
a manner similar to consumables. The Company exercises judgment in
determining the timing of revenue by analyzing the point in time or
the period over which the customer has the ability to direct the
use of and obtain substantially all of the remaining benefits of
the asset. The Company expenses contract costs that would otherwise
be capitalized and amortized over a period of less than one
year.
Shipping and
handling costs are included in cost of goods sold and charged to
the customers based on the contractual terms.
Payments from
customers for most instruments, consumables and services are
typically due in a fixed number of days after shipment or delivery
of the product. For certain international equipment orders a
prepayment is required. The balance of the customer deposits is
reflected in our accrued liabilities and was $215,088 as of March
31, 2018.
See
Note 8 for revenue disaggregated by type and by geographic region
as well as further information about remaining performance
obligations.
Inventories
Inventories are
stated at the lower of cost or net realizable value. Cost is
determined using the first in first out method (FIFO) and market is
based generally on net realizable value.
Inventories
consists of parts inventory purchased from outside vendors, raw
materials used in the manufacturing of equipment, work in process
and finished goods. Management reviews inventory on a regular basis
and determines if inventory is still useable. A reserve is
established for the estimated decrease in carrying value for
obsolete or excess inventory. Once a reserve is established, it is
considered a permanent adjustment to the cost basis of the obsolete
or excess inventory.
Foreign Currency Translation
The
accounts of the U.S. parent company are maintained in United States
Dollar (“USD”). The functional currency of the
Company’s German subsidiaries is the EURO
(“EURO”). The accounts of the German subsidiaries were
translated into USD in accordance with relevant accounting
guidance. All assets and liabilities are translated at the exchange
rate on the balance sheet dates, stockholders’ equity was
translated at the historical rates and statements of operations
transactions are translated at the average exchange rate for each
period. The resulting translation gains and losses are recorded in
accumulated other comprehensive loss as a component of
stockholders’ equity.
Research and Development
All
research and development costs are expensed as incurred. Research
and development costs consist of engineering, product development,
testing, developing and validating the manufacturing process, and
regulatory related costs.
Acquired In-Process Research and Development
Acquired in-process
research and development (“IPR&D”) that the Company
acquires through business combinations represents the fair value
assigned to incomplete research projects which, at the time of
acquisition, have not reached technological feasibility. The
amounts are capitalized and are accounted for as indefinite-lived
intangible assets, subject to impairment testing until completion
or abandonment of the projects. Upon successful completion of each
project, MEDITE will make a determination as to the then useful
life of the intangible asset, generally determined by the period in
which the substantial majority of the cash flows are expected to be
generated, and begin amortization. The Company tests IPR&D for
impairment at least annually, or more frequently if impairment
indicators exist, by first assessing qualitative factors to
determine whether it is more likely than not that the fair value of
the IPR&D intangible asset is less than its carrying amount. If
the Company concludes it is more likely than not that the fair
value is less than the carrying amount, a quantitative test that
compares the fair value of the IPR&D intangible asset with its
carrying value is performed. If the fair value is less than the
carrying amount, an impairment loss is recognized in operating
results.
Impairment of Indefinite Lived Intangible Assets Other Than
Goodwill
The
Company has the option first to assess qualitative factors to
determine whether the existence of events and circumstances
indicates that it is more likely than not that the indefinite-lived
intangible asset is impaired. If, after assessing the totality of
events and circumstances, the Company concludes that it is not more
likely than not that the indefinite-lived intangible asset is
impaired, then the entity is not required to take further action.
However, if the Company concludes otherwise, then it is required to
determine the fair value of the indefinite-lived intangible asset
and perform the quantitative impairment test by comparing the fair
value with the carrying amount in accordance with relevant
accounting guidance.
Goodwill
Goodwill is
recognized for the excess of cost of an acquired entity over the
amounts assigned to assets acquired and liabilities assumed in a
business combination. Goodwill is tested for impairment at
the reporting unit level (operating segment or one level below an
operating segment) on an annual basis (December 31 for us) and
between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a
reporting unit below its carrying value. These events or
circumstances could include a significant change in the business
climate, legal factors, operating performance indicators,
competition, or sale or disposition of a significant portion of a
reporting unit.
Application of the
goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and
liabilities to reporting units, assignment of goodwill to reporting
units, and determination of the fair value of each reporting unit
using a discounted cash flow methodology. This analysis requires
significant judgments, including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the
long-term rate of growth for our business, estimation of the useful
life over which cash flows will occur, and determination of our
weighted average cost of capital.
The
estimates used to calculate the fair value of a reporting unit
change from year to year based on operating results, market
conditions, and other factors. Changes in these estimates and
assumptions could materially affect the determination of fair value
and goodwill impairment for each reporting unit.
Net Loss Per Share
Basic
loss per share is calculated based on the weighted-average number
of outstanding common shares. Diluted loss per share is calculated
based on the weighted-average number of outstanding common shares
plus the effect of dilutive potential common shares, using the
treasury stock method and the if-converted method. MEDITE’s
calculation of diluted net loss per share excludes potential common
shares as of March 31, 2018 and 2017 as the effect would be
anti-dilutive (i.e. would reduce the loss per share).
The
Company computes its loss applicable to common stock holders by
subtracting dividends on preferred stock, including undeclared or
unpaid dividends if cumulative, from its reported net loss and
reports the same on the face of the condensed consolidated
statement of operations.
Recent Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09,
“Revenue with Contracts from Customers.” ASU 2014-09
supersedes the current revenue recognition guidance, including
industry-specific guidance. The ASU introduces a five-step model to
achieve its core principal of the entity recognizing revenue to
depict the transfer of goods or services to customers at an amount
that reflects the consideration to which the entity expects to be
entitled in exchange for those goods and services. The updated
guidance is effective for public entities for interim and annual
periods beginning after December 15, 2017 with early adoption
permitted for annual reporting periods beginning after December 15,
2016. The Company adopted the modified retrospective transition
method of ASU 2014-09 effective January 1, 2018 and there was no
material change to its current business practices upon
implementation.
In
February 2016, the FASB issued ASU No. 2016-02,
“Leases” (“ASU 2016-02”). The core
principle of ASU 2016-02 is that an entity should recognize on its
balance sheet assets and liabilities arising from a lease. In
accordance with that principle, ASU 2016-02 requires that a lessee
recognize a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the
underlying leased asset for the lease term. The recognition,
measurement, and presentation of expenses and cash flows arising
from a lease by a lessee will depend on the lease classification as
a finance or operating lease. This new accounting guidance is
effective for public companies for fiscal years beginning after
December 15, 2018 (i.e., calendar years beginning on January 1,
2019), including interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the
impact the adoption of ASU 2016-02 will have on the Company’s
consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of
Cash Flows - Restricted Cash (Topic 230)”. This new standard
requires companies to include amounts generally described as
restricted cash and restricted cash equivalents in cash and cash
equivalents when reconciling beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. This guidance
is effective for annual and interim reporting periods beginning
after December 15, 2017 and requires retrospective application. The
Company adopted this standard in the first quarter of 2018 by using
the retrospective method, which required the following disclosures
and changes to the presentation of its consolidated financial
statements: cash and restricted cash reported on the consolidated
statements of cash flows now includes restricted cash of $417,000
as of December 31, 2017, as well as previously reported
cash.
In January 2017, the FASB issued ASU 2017-01, “Business
Combinations (Topic 805): Clarifying the definition of a
business”. The
amendments in this Update clarify the definition of a business with
the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or
disposals) of businesses. The guidance in this update is effective
for fiscal years beginning after December 15, 2017, and interim
periods within those years. The implementation had no material
impact on the Company’s consolidated financial
statements.
Note
3. Inventories
|
|
|
|
|
|
|
|
The following is a summary of the components of inventories (in
thousands):
|
|
March
31,
|
December
31,
|
|
2018
|
2017
|
|
(Unaudited)
|
|
Raw
materials
|
$1,445
|
$1,220
|
Work
in process
|
48
|
44
|
Finished
goods
|
1,164
|
1,139
|
|
$2,657
|
$2,403
|
Note
4.
Debt
The
Company’s outstanding debt was as follows as of (in
thousands):
|
March
31,
|
December
31,
|
|
2018
|
2017
|
|
(Unaudited)
|
|
Secured
promissory note
|
50
|
50
|
Subordinated
convertible notes payable
|
1,085
|
932
|
GPB
Debt Holdings II, LLC convertible note payable
|
5,356
|
5,356
|
2018
Convertible notes payable
|
1,425
|
-
|
Total
|
7,916
|
6,338
|
Discounts
on convertible notes payable
|
(2,709)
|
(1,419)
|
Less
current portion of long-term debt
|
(50)
|
(50)
|
Long-term
debt
|
$5,157
|
$4,869
|
GPB Debt Holdings II, LLC (“GPB”) Convertible Note
Payable
On September 26,
2017, the Company entered into the Purchase Agreement with GPB,
pursuant to which the Company issued to GPB (i) a secured
convertible promissory note in the aggregate principal amount of
$5,356,400 (the “GPB Note”) at a purchase price equal
to 97.5% of the face value of the of the original $5 million GPB
Note and an additional discount of 300,000 Euro ($356,400 at
September 26, 2017) considered an additional purchase discount,
with the Company receiving net proceeds of $4.7 million and (ii) a
warrant to purchase an aggregate of 4,120,308 shares of common
stock of the Company (the “Warrant”). The Company
allocated the proceeds received to the GPB Note and the warrants on
a relative fair value basis at the time of issuance. The total debt
discount will be amortized over the life of the GPB Note to
interest expense. The estimated relative fair value of the warrants
was $520,052. Amortization expense of the debt discount, which
includes original issue discount, loan fees and the warrant value,
during the year ended December 31, 2017 and the three months ended
March 31, 2018 was $131,822 and $114,438, respectively. The GPB
Note matures on the 36th month anniversary date following the
Closing Date, as defined in the GPB Note (the “Maturity
Date”). The GPB Note is secured by a senior secured first
priority security interest on all of the assets of the Company and
its subsidiaries evidenced by a security agreement (the
“Security Agreement”). Each subsidiary also entered
into a guaranty agreement pursuant to which the subsidiaries have
guaranteed all obligations of the Company to the GPB. The GPB Note
bears interest at a rate of 13.25% per annum (which interest is
increased to 18.25% upon an Event of Default). The GPB Note is
initially convertible at a price of $0.65 (the “Conversion
Price”) into 8,240,615 shares of common stock. There was no
discount relate to the conversion feature. The exercise price of
the Warrant is subject to a ratchet downside protection with a
$0.30 per share floor price in the event the Company issues
additional equity securities, and subject to adjustments for stock
splits, dividends, combinations, recapitalizations and the like.
The GPB Note is being amortized quarterly at a rate of 10% of the
face value of the Note beginning on month 24, with the remaining
60% due at the Maturity Date. There is a flat 3% success fee which
allows for the prepayment of the GPB Note and applies to the
payment of principal during the Term through the Maturity Date. The
GPB Note contains customary events of default. The GPB Note
contains certain covenants, such as restrictions on the incurrence
of indebtedness, the existence of liens, the payment of restricted
payments, default, redemptions, and the payment of cash dividends
and the transfer of assets. GPB also has a right of participation
for any Company offering, financing, debt purchase or assignment
for 36 months after the closing date. The Company is required to
maintain a 6-month interest reserve of $417,000 in restricted cash.
The shares underlying the GPB Note and the Warrants are to be
registered by the Company through a registration rights agreement
within 60 days and the registration statement is to be declared
effective within 180 days. Failure to file, or to meet other
criteria defined as the event date will required the Company to pay
2% of the registrable securities times the price at the event date
per month, up to 12% in cash payments. On February 5, 2018,
the Company entered into a Forbearance Agreement with GBP that
provides relief until July 1, 2018 of the Company’s
requirement to maintain an interest reserve and to complete a
registration rights agreement and provides relief until April 1,
2018 of the Company’s requirement to make interest
payments. According to the Forbearance Agreement, interest
payments must be current by December 31, 2018.
Securities Purchase Agreement
The
Company has an outstanding note payable with a principal and
accrued interest balance of $63,250 that is not considered in
default as the Company received notification to freeze this
account.
2018 Convertible Notes
On
February 6, 2018, the Company established a private placement of
convertible notes and common stock to raise approximately
$1,500,000, with an over-allotment option for an additional
$750,000. The convertible notes have a conversion price of $0.075
per share. The investors received shares of common stock of the
Company based on an assumed purchase price of $0.075 per share and
the investor is not required to pay any additional consideration
for the shares of common stock. As of March 31, 2018 the Company
had received $1,325,000 and converted $100,000 of accrued
liabilities and issued 19,000,000 shares of common stock. The
convertible notes mature five years from the closing date, have an
interest rate of 12%, are secured obligations of the Company,
senior to other outstanding indebtedness and are expressly
subordinate to the Company’s indebtedness with GPB Debt
Holdings II, LLC.
Of the total $1,425,000 received and converted, the Company
received $950,000 and converted $100,000 of accrued liabilities
from related parties, including Board members, and issued
14,000,000 shares of common stock.
In
order to account for this instrument, we had to determine if it had
an embedded beneficial conversion feature (“BCF”),
which is measured at the commitment date by allocating a portion of
the proceeds equal to the intrinsic value of that feature (not the
fair value) to APIC. This allocation will result in a discount on
the convertible instrument. The intrinsic value is calculated as
the difference between the effective conversion price and the fair
value of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is
convertible.
If the
intrinsic value of the BCF is greater than the proceeds allocated
to the convertible instrument, the amount of the discount assigned
to the BCF is limited to the amount of proceeds allocated to the
convertible instrument. The net carrying amount should be accreted
from zero to its face value over the term of the convertible
debt.
For
this instrument the BCF was greater than the proceeds so therefore
the convertible notes of $1,425,000 had an initial debt discount of
$1,425,000. Amortization expense of the debt discount during the
three month period ended March 31, 2018 was $45,417.
Subordinated Convertible Notes
On
September 27, 2017, the Company received $425,000 and issued
$435,897 subordinated convertible debt with an original issue debt
discount of $10,897 and with similar terms as the GPB Note. The
Company issued 335,306 warrants to purchase shares of common stock
with a term of 5 years and an exercise price of $0.60 per share,
with a ratchet down side protection of $0.30. The Company allocated
the value of these notes and the warrants on a relative fair value
basis at the time of issuance. The total debt discount will be
amortized over the life of these notes to interest expense. The
estimated relative fair value of the warrants was $42,321.
Amortization expense of the debt discount, which includes original
issue discount and the warrant value, during the year ended
December 31, 2017 and the three months ended March 31, 2018 was
$1,351 and $8,975, respectively.
In
December 2017, the Company received $350,000 and issued $358,974
subordinated convertible debt with an original issue debt discount
of $8,974 and with similar terms as the GPB Note. The Company
issued 276,135 warrants to purchase shares of common stock with a
term of 5 years and an exercise price of $0.60 per share, with a
ratchet down side protection of $0.30. The Company allocated the
value of these notes and the warrants on a relative fair value
basis at the time of issuance. The total debt discount will be
amortized over the life of these notes to interest expense. The
estimated relative fair value of the warrants was $28,531.
Amortization expense of the debt discount, which includes original
issue discount and the warrant value, during the year ended
December 31, 2017 and the three month period ending March 31, 2018
was $0 and $5,511 respectively.
In January 2018, the Company received $150,000 and issued
$153,847 subordinated convertible debt with an original issue debt
discount of $3,847 and with similar terms as the GPB Note. The
Company issued 118,343 warrants to purchase shares of common stock
with a term of 5 years and an exercise price of $0.60 per share,
with a ratchet downside protection of $0.30. The Company allocated
the value of these notes and the warrants on a relative fair value
basis at the time of issuance. The total debt discount will be
amortized over the life of these notes to interest expense. The
estimated relative fair value of the warrants was approximately
$28,000. Amortization expense of the debt discount, which includes
original issue discount and the warrant value, during the three
months ended March 31, 2018 was $2,600.
Employee Notes Payable
On March 30, 2017, the Company agreed to pay certain employees
approximately $330,000 in connection with a settlement of
outstanding promissory notes and accrued vacations. The Company
issued 1,029,734 warrants to purchase common stock at $0.50 a share
with a term of 5 years. The fair value of the warrants of $389,000
was amortized in full during 2017. Per the terms of the agreement,
the first payment of $94,000 was paid in April 2017, the second
payment of $94,000 was due 30 days from signing the agreement and
the final payment of $142,000 was due 60 days from signing the
agreements, however the remaining payments remained due at March
31, 2018. In November 2017, the
employees agreed to renegotiate the March 30, 2017 agreement in
good faith with the Company as to a future payment plan mutually
agreeable by all parties. This negotiation was put on hold in
2018 until the Company’s cash situation improved, and
discussions resumed in June. It is expected that a new
agreement will be completed and implemented during
2018.
Note
5.
Related Party
Transactions
Included in
advances – related parties are amounts to the
Company’s former CFO and Chairman of the Board of
$50,000 at March 31, 2018 and December 31, 2017. Also included
in advances – related parties are amounts of 49,162 Euros,
($60,573 as March 31, 2018) to Ms. Ott related to two short term
bridge loans. The Company has made arrangements to settle these
obligations evenly over a 24 month period, starting on October 31,
2017. In addition, the Company settled obligations related to
accrued salaries, vacation and related expenses totaling $152,000
owed to Mr. and Ms. Ott. The Company will make an upfront payment
to each Mr. and Ms. Ott of $6,750 and will pay the remaining amount
owed over a period of 18 months starting in October
2017. The Company signed additional agreements to settle
the debt owed from the US entity when the wages earned versus the
German entity. The Company has paid Michaela Ott $13,978 for the
three months ended March 31, 2018 related to the amount owed. The
balance due to Michaela Ott at March 31, 2018 is $60,573 related to
the wages owed. During the three months ended March 31, 2018, the
Company has paid Michael Ott $9,544 and the remaining balance
outstanding at March 31, 2018 was $41,356.
Accrued
salaries, vacation and related expenses at March 31, 2018 and
December 31, 2017, includes amounts for the former CFO of
approximately $1.1 million, which is included in accounts payable
and accrued expenses in the accompanying condensed consolidated
balance sheets. See Note 7 for further discussion regarding the
legal proceedings with the Company’s former CFO.
The Company received $950,000 and converted
$100,000 of accrued liabilities from related parties, including
Board members, and issued 14,000,000 shares of common stock (see
Note 4).
Note
6.
Stockholders’
Equity
Common
stock during the three months ended March 31, 2018, the Company
issued a private placement of convertible notes and common stock to
raise approximately $1,500,000, with an over-allotment option for
an additional $750,000 (see Note 4). As of March 31, 2018, the
Company had received $1,325,000 and converted $100,000 of accrued
liabilities and issued 19,000,000 shares of common
stock.
Of
the total $1,425,000 received and converted, the Company received
$950,000 and converted $100,000 of accrued liabilities from board
members, and issued 14,000,000 shares of common stock.
Warrants
During
the three month period ended March 31, 2018, the Company issued
118,343 warrants related to the January 2018 subordinated loan with
a relative fair value of approximately $28,000. The value of
the warrants were determined using the Black-Scholes model, at an
interest free rate of 1.33%, volatility of 402% and a remaining
term of 5 years and a market price of $0.30 during the three months
ended March 31, 2018 (see Note 4).
On
March 2, 2018, the Company granted 1,062,500 warrants at an
exercise price of $0.075 to TriPoint Global Equities LLC for
services related to the issuance of a private placement of
convertible notes (see Note 4). The estimated fair value is
included in the debt discount of the 2018 convertible notes (see
Note 4).
Note 7.
Commitments and Contingencies
Legal Proceedings
On
November 13, 2016, the Company’s former CFO filed a complaint
against the Company and certain officers and directors of the
Company in the United States District Court for the Northern
District of Illinois, Eastern Division, Case No. 1:16-cv-10554,
whereby he is alleging (i) breach of the Illinois Wage and
Protection Act, (ii) breach of employment contract and (iii) breach
of loan agreement. He is seeking monetary damages up to
approximately $1,665,972. The Company has denied the substantive
allegations in the complaint and is vigorously defending the suit.
Management believes that the claims set forth in the complaint
against the Company are without merit. The Company has accrued
wages and vacation of approximately $1.1 million and a $50,000 note
payable to the former CFO at September 30, 2017 and December 31,
2017. The presiding Federal Judge has referred the lawsuit to
mediation. No settlement was reach during the April 2017
meditation. The Company has proactively initiated settlement offer.
In August 2017, the parties reached a Settlement Term Sheet whereby
a final forbearance and settlement agreement must be filed with the
magistrate judge. On November 8, 2017 the Plaintiff filed a motion
to compel settlement with a meeting before a magistrate judge on
November 14, 2017.
On
February 20, 2018, the magistrate judge denied Plaintiff’s
motion. On March 8, 2018, Plaintiff again filed a Motion to Enforce
Settlement Agreement which has been opposed by the Company. On
April 22, the judge ruled in favor of the Company and denied
plaintiff’s motion to compel.
On May
15, 2018, a complaint was filed in the United States District Court
of Northern California against the individual directors of the
Company by Robert McCullough, Jr, and Dr. Zhongxi Zheng. The
Company was named as a Nominal Defendant. The complaint alleges
various claims including Breach of Fiduciary Obligations, Abuse of
Control, Unjust Enrichment, Fraud, Intentional Misrepresentation
and Negligent Representation. The suit seeks certain declaratory
relief, injunctive relief and an accounting. Management believes
these claims are frivolous and without any merit whatsoever, and
are being filed for the sole purpose of harassing the named
Defendants and to leverage a more beneficial settlement in the suit
discussed in the paragraph above. Further, management believes that
the suit was filed in a court having no personal jurisdiction over
any of the named Defendants, The Company and individual directors
will vigorously defend against this suit and seek to have it
immediately dismissed. If successful, Defendants will seek
attorneys’ fees and appropriate sanctions.
Note
8.
Segment
Information
The
Company operates in one operating segment. However, the Company has
assets and operations in the United States, Germany and Poland. The
following tables show the breakdown of the Company’s
operations and assets by region (in thousands):
|
United
States
|
Germany
|
Total
|
|||
|
March
31,
|
December
|
March
31,
|
December
|
March
31,
|
December
|
|
2018
|
31, 2017
|
2018
|
31, 2017
|
2018
|
31, 2017
|
Total Assets
|
$10,858
|
$11,179
|
$5,550
|
$4,777
|
$16,408
|
$15,956
|
Property & equipment, net
|
99
|
108
|
1,660
|
1,670
|
1,759
|
1,778
|
Intangible assets
|
10,518
|
10,518
|
-
|
-
|
10,518
|
10,518
|
|
United
States
|
Germany
|
Total
|
|||
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
Revenues:
|
|
|
|
|
|
|
Histology Equipment
|
$28
|
$146
|
$688
|
$768
|
$716
|
$914
|
Histology Consumables
|
92
|
104
|
588
|
573
|
680
|
677
|
Cytology Consumables
|
-
|
-
|
109
|
300
|
109
|
300
|
Total Revenues
|
$120
|
$250
|
$1,385
|
$1,641
|
$1,505
|
$1,891
|
Net loss
|
$(949)
|
$(570)
|
$(453)
|
$(385)
|
$(1,402)
|
$(955)
|
Note
9.
Subsequent
Events
On April 26, 2018, the Company consummated the closing of
Securities Purchase Agreements (the “Purchase
Agreements”) with two accredited investors, both of whom are
directors of the Company (“Purchasers”), pursuant to
which the Company issued to the Purchasers secured promissory notes
in the aggregate principal amount of $610,000 (the
“Notes”) in consideration of an aggregate of $580,000
in cash, and $30,000 of which constitutes the conversion of accrued
liabilities owed by the Company to one of the Purchasers. The Notes
mature on the 60th month anniversary date following the Closing
Date, as defined in the Notes (the “Maturity Date”).
Accrued interest shall be paid in restricted common stock of the
Company calculated at a value of $0.075 per share and
on the basis of a 360-day year and shall accrue and compound
monthly. The Notes are secured by
security agreements (the “Security Agreements”) and
shall represent perfected senior liens on all of the assets of the
Company and its subsidiaries and will be subordinate to the
obligation entered into with GPB Debt Holdings II, LLC and the
affiliated subordinate investors on September 26, 2017. The Notes
shall bear interest at a rate of 12% per annum. In addition, and in
accordance with the terms of the Purchase Agreements, the
Purchasers are to be issued 8,133,334 shares of the Company’s
restricted common stock based on an assumed purchase price at
$0.075 per share (the “Shares”). The Purchasers shall
have piggy-back registration rights with respect to the
Shares.
Under the same terms as described above, on May 9, 2018, the
Company consummated the closing of Securities Purchase Agreements
(the “Purchase Agreements”) with two accredited
investors, pursuant to which the Company issued to the Purchasers
secured promissory notes in the aggregate principal amount of
$250,000 (the “Notes”) in consideration of an aggregate
of $250,000 in cash, and the Purchasers are to be issued an
aggregate of 3,333,333 shares of restricted common stock based upon
an assumed purchase price at $0.075 per share.
Item 2.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking
Statements
This
document 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.” Forward-looking statements by their nature
address matters that are, to different degrees, uncertain. For us,
particular uncertainties that could cause our actual results to be
materially different than those expressed in our forward-looking
statements include, but are not limited to: 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 numerous other
matters of national, regional and global scale, including those of
a political, economic, business and competitive nature.
These uncertainties may cause our actual future results to be
materially different than those expressed in our forward-looking
statements. 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. We do not
undertake to update our forward-looking statements.
Overview of MEDITE Cancer Diagnostics, Inc.
MEDITE
Cancer Diagnostics, Inc. (the “Company”,
“MEDITE”, “it”, “we”, or
“us”), formerly CytoCore, Inc., develops, manufactures, markets and
sells MEDITE branded products (instruments and consumables), in the
areas of histology and cytology. These premium medical devices and
consumables are 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%. The well-established brand of MEDITE is
widely known and remains a professional description of the
Company’s business. The Company’s trading symbol is
“MDIT”.
In 2017
the Company focused on implementation of several growth
opportunities including enhanced distribution of core products
through focused sales and distribution channels, newly developed
patented assays, new laboratory devices and several marketing
projects like the introduction of the SureCyte C1 fluorogenic stain
worldwide. The Company has approximately 64 employees in two
countries, a distribution network in over 80 countries and a wide
range of products for anatomic pathology, histology and cytology
laboratories available for sale.
On June 13, 2018 the Company successfully completed its major
3-year audit for the ISO 9001 quality standard, and its
certification was renewed for another 3 years. This is a
direct result of our renewed focus on product and process quality
over the past year.
China
is an important market to the Company and we have addressed several
product quality issues described under Revenue and Results of
Operations elsewhere within this Report. China is an important market to the Company and in
2017 we addressed several product quality, service and training
issues. Sales in China were negligible during the first
quarter of 2018, but the Company has booked over $200,000 so far in
the second quarter and the outlook for the year is to continue
growing that trend.
The Company’s cytology product line (non-Gyn and Gyn
applications) revenue was lower in Europe during the first quarter
of 2018 because product was not available to ship to meet demand,
due to working capital constraints and late delivery from
suppliers.
The Company is in the process of moving forward the submission of
an application to the US Food and Drug Administration
(“FDA”) for SureThin Gyn applications. The Company will
be able to compete with the dominant suppliers in this $600 million
market and target major strategic lab partners. The impact of the
gynecology segment SureThin solution in the US market will drive
significant new revenue and gross margin improvement opportunities
moving forward.
The
patented self-collection device SoftKit targets the growing
POC (Point of 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 ongoing diagnostic tests. SoftKit is planned to be
sold through various marketing channels that serve the gynecology
consumer health and emerging post-acute care space. The Company is
currently developing a study plan with a major research center in
the Midwest, with the goal of submitting for FDA
approval.
Management
believes that 2017 developments allowed the Company to more fully
leverage the products and biomarker solutions from the original
CytoCore component of MEDITE. The first entry is the introduction
of the SureCyte C1 fluorogenic instant stain, offering tremendous
opportunities for lab efficiencies and enhanced patient care. C1 is
the first of many new offerings under the SureCyte brand that will
ultimately include algorithms for computer-assisted analysis and
advanced assays for micro-environment analysis. The Company is
currently conducting informal studies with several labs in the U.S.
and Europe and is also conducting a formal study with a hospital in
China in partnership with UNIC. CI has recently received the CE
Mark in the EU.
As part
of early SureCyte marketing activities, the Company is working with
numerous U.S. and European Key Opinion Leaders (KOLs) and clinical
sites to test the C1 stain, provide feedback on the overall product
line plans, and to create white papers and publish articles in
highly-recognized peer-reviewed journals and
conferences.
The
Company will begin manufacturing its new cryostat line during the
second quarter of 2018 and has already taken some customer orders.
This enhanced microtome and cryostat product line will allow MEDITE
to meet the anticipated demand for these instruments as well as
enhance its worldwide distribution channel through its suppliers
including China.
The
Company operates in the industry segment for cancer screening,
diagnostics instruments and consumables for histology and cytology
laboratories.
Definition:
|
Histology
- Cancer diagnostics based on the structures of cells in
tissues
|
|
Cytology
- Cancer screening and diagnostics based on the structures of
individual cells
|
Cancers
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 diagnostic
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. The
Company believes 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 about 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, and in general a search for more cost-effective
solutions.
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
laboratories worldwide. The MEDITE brand stands for innovative and
high-quality products – most equipment is 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.
All of
the Company’s operations during the reporting period were
conducted and managed within this segment, with management team
reporting directly to the Chief Executive Office. For information
on revenues, profit or loss and total assets, among other financial
data, attributable to operations, see the consolidated financial
statements included herein. Further during 2017 the Company added
key personnel with excellent historical performance in new product
commercialization, sales development and internal operations
improvement.
Outlook
Due to
promising innovative new products for cancer risk assessment and an
increasing number of distribution contracts executed in recent
years, management believes the profitability and cash-flow of the
business will grow and improve. Significant on-going manufacturing
issues have been identified and addressed, and additional 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, 2.) Increasing sales in the U.S. to optimize the
excellent sales/distribution channels available there and 3.)
Invigorate the distribution networks for EU/ROW and continue to
expand Chinese market sales by broadening the Company’s
collaboration with the local distributor UNIC. The Company also
will work on continuously optimizing manufacturing capacity and
planning to increase gross margin. Implementation of these plans
are contingent upon securing additional debt and/or equity
financing, which was partly completed through May 2018 (see
Subsequent Events). If the Company is unable to obtain additional
capital or generate profitable sales revenues, we may be required
to curtail product development and other activities. The
consolidated financial statements presented herein do not include
any adjustments that might result from the outcome of this
uncertainty.
Currently,
the Company’s sales are primarily generated in Euro currency.
For the three months ended March 31, 2018 the average EUR-USD
exchange rate was 1.22921 compared to 1.0655 for the three months
ended March 31, 2017 (ODNDA) a significant increase. The stronger
Euro is favorable to revenue reporting since 90% of the
Company’s revenue is in Euro, but also increases COGS for
products sold in the U.S. and other countries conducting business
in USD (including China). Overall, the stronger Euro is favorable
to revenue reporting.
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, 2017 filed with the SEC on May 17,
2018.
Three months ended March 31, 2018 as compared to the three months
ended March 31, 2017 (in thousands USD)
Net Sales
Net
sales for the three months ended March 31, 2018, was $1,505 as
compared to $1,891 for the three months ended March 31, 2017.
Net sales decreased by $386 or 20.4 % as a result of a
decreased by $195 in equipment sales and a $191 decrease in
Cytology consumable sales during the first quarter of 2018. This
was the result of funding issues early in the first quarter of
2018. Sales by month have been trending upward each month this
year.
Costs of Revenue
Cost of
revenues were $1,170, or 78% of the revenues for the three months
ended March 31, 2018, as compared to $1,211, or 64% of the revenues
for the three months ended March 31, 2017. The cost of revenue
consisted of higher manufacturing and fixed costs during 2018 due
delays in sourcing parts and some installation issues.
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
first quarter 2018, research and development expenses decreased to
$305 compared to $425 for the first quarter 2017. The Company
reduced the number of R&D staff by two employees in the first
quarter of 2018.
Selling, General and Administrative
For the first quarter 2018, SG&A expenses
were $919 as compared to $782 for the first quarter 2017. The first
quarter 2018 included increased professional fees and increased
financing fees resulting from the result of the increased
convertible debt financing for GPB Debt Holdings II, LLC
(“GPB”) convertible notes payable and 2018 convertible
notes (see Note 4 of the accompanying condensed consolidated
financial
statements).
Operating
Loss
The
operating loss of $960 for the first quarter of 2018 compares to
MEDITE’s operating loss of $576 for the first quarter of 2017
and is directly related to lower sales for the period offset by
lower research and development costs discussed above.
Interest Expense
Interest expenses increased by 132% to $447 in
the three months ended March 31, 2018, compared to $193 for the
three months ended March 31, 2017. The increase in interest expense
in was the result of the increased convertible debt financing
for GPB convertible notes payable and 2018 convertible notes
(see Note 4 of the accompanying condensed consolidated financial
statements).
Net Loss
The net
loss for the quarter ended March 31, 2018, totaled $1,402, as
compared to net loss of $955 for the quarter ended March 31, 2017.
The loss for 2018 directly related to lower sales for the period
and higher SG&A expenses discussed above.
Liquidity and Capital Resources
Due to
promising new products and distributions contracts executed in the
last two years and management changes with increased focus on the
various sales channels and manufacturing and quality systems,
management anticipates the profitability and cash flow of the
business will 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.) increase direct sales in the USA and continue
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.
For the
three months ended March 31, 2018, we used net cash in operations
of approximately $1,641 compared to $645 for the same period in
2017. During 2018, cash used in operations consisted of loss from
operations, offset by amortization of debt discounts and debt
issuance costs.
For the
three months ended March 31, 2018, net cash used in investing
activities were $2 compared to $16 for the same period in
2017. The improvement in this activity relates to lower
purchases of equipment in 2018 compared to 2017.
For the three months ended March 31, 2018,
financing activities provided $1,428 compared to $914 provided by
financing activities for the same period in 2017. On
February 6, 2018, the Company established a private placement of
convertible notes and common stock to raise approximately
$1,500,000, with an over-allotment option for an additional
$750,000. The convertible notes have a conversion price of $0.075
per share. The investors received shares of the Company based on an
assumed purchase price of $0.075 per share and the investor is not
required to pay any additional consideration for the common stock.
As of March 31, 2018 the Company had received $1,325,000 and
converted $100,000 of accrued liabilities and issued 19,000,000
shares of common stock. The convertible notes mature five years
from the closing date, have an interest rate of 12%, are secured
obligations of the Company senior to other outstanding indebtedness
and are expressly subordinate to the Company’s indebtedness
with GPB.
The
accompanying condensed consolidated financial statements have been
prepared in conformity with GAAP, which contemplate continuation of
the Company as a going concern. This contemplates the
realization of assets and the liquidation of liabilities in the
normal course of business. At March 31, 2018, the
Company’s cash balance was $153,000 and its operating losses
for the year ended December 31, 2017 and for the three months March
31, 2018 have used most of the Company’s liquid assets. These
factors raise substantial doubt about the Company’s ability
to continue as a going concern. However, the Company has
approximately $78,000 in working capital as of March 31, 2018
compared to negative working capital of approximately $318,000 on
December 31, 2017. The Company raised additional cash of
$1.5 million from the issuance of convertible notes payable
starting in the first quarter of 2018 (see Note 4 of the
accompanying condensed consolidated financial
statements).
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2018.
If
management is unsuccessful in completing its equity financing,
management will begin negotiating with some of the Company's major
vendors and lenders to extend the terms of their debt and also
evaluate certain expenses that have been implemented for the
Company’s growth strategy. However, there
can be no assurance that the Company will be successful in these
efforts. The condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Off-Balance Sheet Arrangements
As of
March 31, 2018, 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 Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) 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
Officer has 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 Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Part II. Other Information
Item 1.
Legal
Proceedings.
On
November 13, 2016, the Company’s former CFO filed a complaint
against the Company and certain officers and directors of the
Company in the United States District Court for the Northern
District of Illinois, Eastern Division, Case No. 1:16-cv-10554,
whereby he is alleging (i) breach of the Illinois Wage and
Protection Act, (ii) breach of employment contract and (iii) breach
of loan agreement. He is seeking monetary damages up to
approximately $1,665,972. The Company has denied the substantive
allegations in the complaint and is vigorously defending the suit.
Management believes that the claims set forth in the complaint
against the Company are without merit. The Company has accrued
wages and vacation of approximately $1.1 million and a $50,000 note
payable to the former CFO at September 30, 2017 and December 31,
2016. The presiding Federal Judge has referred the lawsuit to
mediation. No settlement was reach during the April 2017
meditation. The Company has proactively initiated settlement offer.
In August 2017, the parties reached a Settlement Term Sheet whereby
a final forbearance and settlement agreement must be filed with the
magistrate judge. On November 8, 2017 the Plaintiff filed a motion
to compel settlement with a meeting before a magistrate judge on
November 14, 2017.
On
February 20, 2018, the magistrate judge denied Plaintiff’s
motion. On March 8, 2018, Plaintiff again filed a Motion to Enforce
Settlement Agreement which has been opposed by the Company. On
April 22, the judge ruled in favor of the Company and denied
plaintiff’s motion to compel.
On May
15, 2018, a complaint was filed in the United States District Court
of Northern California against the individual directors of the
Company by Robert McCullough, Jr, and Dr. Zhongxi Zheng. The
Company was named as a Nominal Defendant. The complaint alleges
various claims including Breach of Fiduciary Obligations, Abuse of
Control, Unjust Enrichment, Fraud, Intentional Misrepresentation
and Negligent Representation. The suit seeks certain declaratory
relief, injunctive relief and an accounting. Management believes
these claims are frivolous and without any merit whatsoever, and
are being filed for the sole purpose of harassing the named
Defendants and to leverage a more beneficial settlement in the suit
discussed in the paragraph above. Further, management believes that
the suit was filed in a court having no personal jurisdiction over
any of the named Defendants, The Company and individual directors
will vigorously defend against this suit and seek to have it
immediately dismissed. If successful, Defendants will seek
attorneys’ fees and appropriate sanctions.
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds.
On
February 6, 2018, the Company established a private placement of
convertible notes and common stock to raise approximately
$1,500,000, with an over-allotment option for an additional
$750,000. The convertible notes have a conversion price of $0.075
per share. The investors received shares of the Company based on an
assumed purchase price of $0.075 per share and the investor is not
required to pay any additional consideration for the common stock.
As of March 31, 2018 the Company had received $1,325,000 and
converted $100,000 of accrued liabilities and issued 19,000,000
shares of common stock. The convertible notes mature five years
from the closing date, have an interest rate of 12%, are secured
obligations of the Company senior to other outstanding indebtedness
and are expressly subordinate to the Company’s indebtedness
with GPB.
Item 3.
Defaults upon Senior Securities.
On February 5, 2018 the Company entered into a Forbearance
Agreement with GBP that provides relief until July 1, 2018 of the
Company’s requirement to maintain an interest reserve and to
complete a registration rights agreement and provides relief until
April 1, 2018 of the Company’s requirement to make interest
payments. According to the Forbearance Agreement, interest
payments must be current by December 31, 2018.
Item 6. Exhibits
Exhibit
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Number
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Description
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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.
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Section
302 certification by the chief 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.
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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.
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Section
906 certification by the chief financial officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002.
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101.INS
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XBRL
Instance
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101.SCH
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XBRL
Taxonomy Extension Schema
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101.CAL
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XBRL
Taxonomy Extension Calculation
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101.DEF
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XBRL
Taxonomy Extension Definition
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101.LAB
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XBRL
Taxonomy Extension Labels
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101.PRE
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XBRL
Taxonomy Extension Presentation
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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.
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MEDITE
Cancer Diagnostics, Inc.
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Date: June
22, 2018
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/s/ Stephen Von
Rump
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Stephen
Von Rump
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Chief
Executive Officer
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Date:
June 22, 2018
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/s/ Stephen Von
Rump
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Stephen
Von Rump
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Chief
Financial Officer
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