Overview
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.
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. The Company has
addressed most of the product, service and training issues in
China. Sales in China for 2017 were $85,000 compared to
approximately $1 million for 2016. There are two reasons for
the lower number in 2017: 1. Legacy product quality issues from
2016 and early 2017, and 2. Inability to deliver products because
of lack of working capital. The Company expects to grow business in
China in 2018 and going forward.
The
Company’s cytology product line (non-Gyn and Gyn
applications) revenue was lower in Europe during 2017 because
product was not available to ship to meet demand, due to working
capital constraints. 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.
In 2017 the average EUR-USD exchange rate was 1.129507 compared to
1.10730 for 2016 (ODNDA) a significant increase. The stronger Euro
(and increasing lately to 1.19 against USD) 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.
Background
The
Company was incorporated in Delaware in December 1998 as the
successor to Bell National Corporation, a company incorporated in
California in 1958. In December 1998, Bell National, which was then
a shell corporation, acquired InPath, LLC, a development stage
company engaged in the design and development of products used in
screening for cervical and other types of cancer. For accounting
purposes, the acquisition was treated as if InPath had acquired
Bell National. However, Bell National continued as the legal entity
and the registrant for Securities and Exchange Commission
(“SEC”) filing purposes. Bell National merged into
Ampersand Medical Corporation, its wholly-owned subsidiary, in
May 1999, in order to change its state of incorporation to
Delaware. In September 2001, Ampersand acquired 100% of the
outstanding stock of AccuMed International, Inc., by means of a
merger of AccuMed into the wholly-owned subsidiary. Shortly after
the AccuMed merger, we changed our name to Molecular Diagnostics,
Inc. Subsequently, in June 2006, we changed our name to CytoCore,
Inc.
On
January 11, 2014, MEDITE Cancer Diagnostics, Inc. (formerly
CytoCore Inc. the “Company”) entered into a Stock
Purchase Agreement (the “Purchase Agreement”) with
MEDITE Enterprises, Inc., a Florida corporation
(“MEDITE”), MEDITE GmbH, a corporation organized under
the laws of Germany and wholly owned by MEDITE (the
“Subsidiary”), Michael Ott and Michaela Ott, the sole
shareholders of the MEDITE at that time (collectively, the
“Shareholders”).
Pursuant
to the Purchase Agreement, the Company agreed to acquire
100% of the issued and outstanding capital stock of MEDITE from the
Shareholders in exchange for the issuance of up to 15,000,000
shares of the Company’s common stock (the
“Shares”) to the Shareholders. The Purchase Agreement
also provides that the Shareholders will indemnify the Company for
certain losses during the one-year period following the
“Closing” as defined in the Purchase Agreement. In
connection with such indemnification rights, the Purchase Agreement
provided that 3,750,000 of the Shares was deposited with the
Company and held for a period of 12 months to cover certain
indemnification claims that the Company may have against the
Shareholders. These shares were released to the
Shareholders during 2015.
Closing
of the acquisition of MEDITE was conditioned upon: (i) the
completion of a private placement transaction resulting in gross
cash proceeds to the Company of $1.25 million (the “Private
Placement”), and (ii) the conversion of certain accrued wages
of the Company into shares of the Company’s common stock. In
addition, as of the Closing, there was to be no more than
18,750,000 shares of the Company’s common stock exclusive of
any shares of the Company’s common stock issued in connection
with the Private Placement.
On
April 3, 2014, pursuant to the terms and conditions of the Purchase
Agreement, as amended to date, the Company acquired 100% of the
issued and outstanding capital stock of MEDITE in exchange for the
issuance of up to 15,000,000 shares of the Company’s common
stock to the Shareholders, of which 14,687,500 shares were issued
upon the Closing of the Acquisition. In the event that the Company
issued less than $2,500,000 at a price of $1.60 in the Private
Placement, the Company was required to issue an additional 312,500
shares of common stock to the Shareholders. The Company issued
these shares during 2015. Also during 2014, prior to the reverse
merger, the Company issued 697,234 shares of common stock for
payment of certain accrued wages of the Company.
Recent Developments
In
January, 2018 the Company raised $150,000 in additional capital
under the same terms as described in the
Subordinate Convertible Notes
see Note
6.
Also in
January, 2018 the Company received a term sheet for additional debt
financing, consisting of a convertible note with an initial
conversion price of $0.075 per share. Each $0.075 invested
also receives one Common Stock share. The Convertible Notes
are subordinate to the GBP debt described in the
GPB Debt Holdings II, LLC (“GPB”)
Convertible Notes Payable
see Note 6, have a 5-year maturity
date and bear a 12% annual interest rate, payable
semi-annually. The Company received $1,955,000 in capital and
issued 26,066,667 common stock shares under these terms as of May
17, 2018.
On
October 16, 2016 the Company filed a Form D to issue up to $6.9
million of convertible secured promissory notes and approximately
5.3 million warrants to issue common stock at $0.60 a
share.
On
October 26, 2016, the board of directors appointed David E.
Patterson to the position of Chief Executive Officer and Director
of the Company. Pursuant to Mr. Patterson’s executive
employment agreement with the Company, the commencement date of Mr.
Patterson’s appointment was October 31, 2016. He was granted
250,000 restricted shares of the Company’s common stock (the
“Shares”). The Company valued the Shares at $0.50 per
share, based on the fair value of the stock on the date of grant.
On November 5, 2017, the Board of Directors (the
“Board”) of the Company held a meeting whereby David E.
Patterson informed the Board of his decision to retire as Chief
Executive Officer of the Company and resign his position as
Chairman of the Board and Board member of the Company, all
effective immediately. The Board approved a Transition
Agreement whereby Mr. Patterson would receive three equal monthly
payments with each payment being equal to his monthly salary, and
all future restricted stock grants in the amount of 166,667
shares pursuant to his employment agreement would fully vest as of
January 1, 2018 and be issued in consideration for assisting the
Company through a transition period. Mr. Patterson rescinded those
shares in March 2018.
Thereafter,
the Board, by unanimous consent, appointed current Board member,
William Austin Lewis IV, to the position of Chairman of the Board
of Directors of Company to serve until such time as his removal or
resignation.
Also,
Stephen Von Rump was appointed by a unanimous vote of the Board to
the position of Chief Executive Officer of the Company upon the
same terms and conditions as his current employment, to serve until
his resignation or removal.
On
November 12, 2017, the Board of Directors of the Company held a
meeting whereby they appointed Joel Kanter, age 61, to the position
of Director to serve until such time as his resignation or
termination. Mr. Kanter’s appointment fills the vacancy
created by the resignation of David E. Patterson.
On
January 2, 2018, the Board accepted Susan Weisman’s
resignation as Chief Financial Officer. Ms. Weisman received
a lump sum payment in consideration for assisting the Company
through a transition period ending on January 31,
2018.
The
Company filed a Form D on March 7, 2017, initiating a total
offering of $4,250,000, of which $25,000 in stock subscription were
received by the Company as of December 31, 2017, representing the
purchase of 50,000 shares of common stock.
During
the year ended December 31, 2017, the Company issued 5,060,000
shares of common stock for $2,530,000, less $187,000 of issuance
costs. In connection with the issuance of common stock, the Company
issued 2,530,000 warrants to purchase shares of common stock at
$0.50, for a term of 5 years. We also issued 50,000 shares from
stock subscriptions of $25,000 at December 31, 2016 and issued
25,000 warrants on the same terms and conditions.
Information
about Industry Segments
The
Company operates in the 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
|
|
|
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 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 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. It also
developed an innovative, easy to use standardized staining
solutions, and a very innovative and effective early cancer
detection marker-based assays. 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 the management team
reporting directly to our Chief Executive Officer. Further during
the 2017 period we added key personnel with excellent historical
performance in new product commercialization, sales development and
internal operations improvement. For information on revenues,
profit or loss and total assets, among other financial data,
attributable to our operations, see the consolidated financial
statements included herein.
Description of Business
MEDITE
manufactures, develops, markets and sells a wide range of
laboratory devices and consumable supplies for its target market in
the histology and cytology cancer diagnostics segment. Most devices
are manufactured at its German facility, and most consumables are
staged for export there. This facility also acts as central
location managing all international sales and logistics outside of
the Americas. A direct sales force is employed in Germany and the
U.S, and over 80 more countries worldwide are covered with an
existing and continuously expanding network of independent
distributors. In the U.S. MEDITE has established sales and
distribution channels that will prioritize its
products.
A
general goal of MEDITE in sales is to act as a one- stop-shop for
its customers. Instrument purchases are usually bigger investments,
with prices sometimes above the $50,000 level, which are more
seasonal and depend significantly on investment budgets. Therefore,
MEDITE also offers to sell the day to day consumables and sees its
brand not just on the devices, but also on the supply
products.
The
U.S. headquarters in Orlando, Florida manages the Company worldwide
and is developing, establishing and realizing the strategic goals
of the Company. It also acts as distributor for the Americas,
maintaining a warehouse with instruments, repair parts and
consumables available for sale and for warranty obligations to its
customers, and taking care of centralized marketing, regulatory
issues and finance. A second location in the U.S. operates as our
research laboratory for cancer assays and other cytology
developments and is located in the Chicago
area.
For
sales, MEDITE targets three major areas; U.S., Europe and China,
and now increasingly Eastern Europe and North Africa. While the
U.S. is currently the largest potential market for MEDITE products,
it is expected that the rest-of-world will experience continued
growth through 2018 due to the more established presence of MEDITE
in those markets.
Currently,
MEDITE’s principal customers are histology and cytology
laboratories associated with hospitals or research institutions and
independent laboratories in markets with direct sales and
distributors in markets covered by them. In the U.S. market, MEDITE
executed several distribution contracts with third party sales
organizations additional to its direct sales.
For
manufacturing of its high-quality devices at the German facility,
an enterprise resource planning software is used to manage the
material flow and production planning for about 6,000 different
parts. Management has evaluated and is in the process finalizing
its review of a company-wide system anticipated to be implemented
by the late 2018. Due to the wide range of products, the
availability of all parts is essential to finish a manufactured
product within an acceptable lead time. Smaller equipment items and
all consumable products have to be available at any time to
guarantee the customer continues to work. Usually orders of these
goods are shipped within 24 hours after receiving the order, while
for own-manufactured equipment, the delivery times is between 4 to
8weeks. This is not acceptable to many customers and the Company
continues to implement production planning processes to improve
delivery time. A major change in 2018 is that the Company now plans
and builds to forecast, whereas it previously built mostly to
confirmed orders (backlog).
The
Company’s strategy is to use its pipeline of newly developed
and currently under development of innovative devices, consumables
and newly developed assays to set new standards in the industry,
create new markets and to take over additional market shares from
its competition. These new offerings will further allow MEDITE to
develop significant strategic relationships to enhance sales and
revenue growth.
Products
Histology
MEDITE
offers its customers a comprehensive range of histology laboratory
devices for processing tissue, from receiving the tissue in the
laboratory to the final diagnosis. Most important to this segment
are very high levels of reliability, efficiency, and
safety.
Starting
from receiving the biopsies, it may be necessary to decalcify them;
for example, from bone tissue. The
USE 33
is an
ultrasonic decalcification instrument that automatically runs the
process under controlled temperatures. Due to this
innovative technology it can increase the speed of decalcification
by 300% compared to just using acid. Instead of days or
even weeks, the biopsies are ready much earlier for further
processing, which shortens the patient’s diagnosis wait time.
This specific instrument also is often used in research
labs.
The
next step is the tissue processing (dehydration and fixation),
which usually runs automatically in the laboratory overnight with
no human supervision. MEDITE’s
TPC 15
Duo and Trio
instruments offer a very high capacity of 440 or 660 biopsies per
run and also offer two or three independent protocols. Therefore,
depending on the size and kind of tissue, it can process
simultaneously the different steps, and therefore replace two or
three instruments of similar competitor’s instruments. It
also offers a very high level of safety. In the unlikely situation
of an error or just a power outage, it has a back-up battery, and
the emergency mode puts the biopsies into a safe position. An
advantage of this kind if tissue processer is the usability with
Xylene replacements like Isopropanol, a second-grade alcohol The
European Unit is proposing to ban Xylene in laboratories and so the
TPC15 is the perfect unit to do so. Competitor systems with pumps
have a higher risk in using Isopropanol. The price of the unit is
very competitive in its market based on its high
capacity.
After
tissue processing, the tissue will be transferred into a paraffin
block using an embedding center. MEDITE was the original inventor
of the three-piece units (heating, dispensing, and cooling). It is
much more flexible to adapt to human and laboratory needs. While
the dispensing unit usually is in the center, the others can be
added to the right or left depending if right or left handed.
Additional cooling units can also be added to extend the capacity.
MEDITE offer two types: the low-cost set
TES 99
when budget
matters, and the high-end version
TES Valida
when
design and technology is more important. The
TES Valida
is
recognized as the best system currently available worldwide. Every
histology lab has at least one system, but usually two or more of
these embedding centers in place – historically the market
consists of sales of several thousand units each year.
With
the paraffin block from the embedding center, the biopsy needs to
be sectioned using a microtome. Several types of automation are
demanded by the market; on the low end a manual microtome, in the
middle a semi-automatic version, and on the high end, a fully
automatic microtome. For a microtome, the most critical
functionality is extremely precise mechanics able to cut slices of
as small as 1 microns in thickness. Five years ago, MEDITE
developed the semi-automatic version
M530
first, then the
fully automatic version
A550
and started in
2014 the development of the manual version
M380
– mainly
for the Chinese market – of which the first production of
these units was sold in August 2015. Since 2016, the microtomy
manufacturing has operated in a second German facility in Nussloch
where the roots of worldwide microtomy started with skilled
employees. Since the new versions of all three types of microtomes
have been brought to the market with growing success. For China, a
special type of manual microtome M380 was developed to match the
unique usage characteristics of histotechnologists there. As part
of tissue sectioning, a freezing microtome called a
“cryostat” can be used for fast biopsies when a patient
needs a diagnosis immediately e.g. still being in the operational
theater. Prototypes of the
M630
were tested in
the field in 2017 and manufacturing of the first set of this
instrument will start in 2Q 2018. Based on the forecast with direct
and incremental sales we expect to sell 75 units within the first
year. The Company’s strategic goal for the cryostat is to
offer a high-quality device for a competitive price to win 10% of
the market (750 units annually).
When
the sections of the tissue are transferred to a microscopy slide
they undergo a staining process with several different protocols
depending on the type of tissue. To manage high volumes, robotic
multi-staining systems are used. MEDITE offers the most flexible
system,
TST
44,
which is computer controlled and can run several
staining protocols simultaneously, and its unique feature software
can even overtake slower with faster protocols. The maximum
capacity is about 400 slides per hour with that system. This
robotic stainer is currently going through an update and
modernization project during 2018. This includes the latest
innovative technology software, new color touch screen, new X-Y-Z
robotic technology and a modern newly designed case. For higher
volume throughput, e.g. for cytology laboratories, MEDITE offers
the
COT
20
linear staining system using a kind of conveyor
technology to realize a capacity of over 1,000 slides per
hour.
The
final step to the process is to place a cover over the tissue on
the stained microscope slide to preserve it for many years and make
it ready for digital scanning or directly for diagnoses under the
microscope by a pathologist. MEDITE offers the
RCM 9000
, the latest
version of a stand-alone robotic coverslipper using glass
coverslips. Another option MEDITE developed is the
ACS 720
glass
coverslipper which is connected directly to the TST 44
multi-stainer creating a higher level of automation by bridging the
former manual step between two separate instruments. This
instrument combination – known in the industry as a
“combi” - is very competitive and more and more public
tenders are asking for it. Finally, to also support higher
throughput laboratories, MEDITE developed the robotic coverslipper
TWISTER
using a clear film instead of cover glass. This triples the
capacity of a glass coverslipper up to 1,200 slides per
hour.
Several
smaller devices for stretching, drying, cooling, exhausting,
recycling, printing etc. are also manufactured by MEDITE but not
specifically described herein. These products are usually competing
mainly on price, but quality is still important.
In the
segment of histology consumables, MEDITE offers everything
necessary to run its instruments and to run the complete histology
laboratory. This includes embedding cassettes, microscope slides,
paraffin, staining solutions, reagents and other products. Some of
the consumable products are MEDITE developments and exclusively
manufactured by or for it. Other products are MEDITE branded but
manufactured and delivered from external high-quality vendors. The
procurement focus therefore is on high quality, not lowest
price.
Cytology
The
product strategy of MEDITE in this market is to offer products for
the whole process, from cell collection through processing to
diagnosis.
Some of
the histology processing instruments of MEDITE are also used in
cytology labs, like the staining and coverslipping
systems. Characteristics of the sample collected
determine the quality of the results of any tests performed on the
sample. The sensitivity and/or accuracy of a test is, for example,
likely to be reduced if the sample collection device or method does
not capture a sufficient amount of the target analyte, alters the
analyte of interest, or collects significant quantities of
substances that interfere with the analysis. One of the
Company’s major areas for product development is in sample
collection for specific cells and tissues.
Cervical
cytology specimens have traditionally been prepared as
“smears” where the cells on the collecting device are
literally wiped or smeared onto a microscope slide. In the 1980s,
an alternative method, variously called a “monolayer”
or “liquid-based” preparation (“LBP”), was
introduced. In this method, cells are washed off of the collection
device into a preservative solution to form a cell suspension. A
portion of this cell suspension is then transferred to a microscope
slide. LBPs presently account for about 80% of the cervical
cytology slides prepared in the U.S., but despite the technical
benefits of LBPs, only about 20% of the cervical cytology slides in
the European Union and much lower percentages in the rest of the
world are prepared in this manner. The primary limitations to
greater adoption of LBPs outside of the U.S. are the high equipment
and ancillary supply costs associated with the two predominant LBP
methods. With the acquisition of MEDITE, the Company sells two
alternative LBP methods product lines, the SureThin line which is
competing against the market leader Hologic, and the SafePrep line
which is competing against the second largest market player
Becton-Dickinson. Both product lines cover the complete set of
consumables necessary to preserve, extract and process cells onto a
microscopic slide. For the SureThin line, MEDITE also offers a
processing device automatically extracting the cells from the
preservative vial and transferring it on the slide. Both systems
have a significantly lower price than the competition, which is
increasingly important for some markets like the US, where a
cytology laboratory needs to lower its cost due to lower
reimbursement rates. This lower price level itself also creates new
markets, where it is now more affordable even to smaller
laboratories and can better compete against the traditional Pap
smear. Once a cytology specimen has been deposited onto a
microscope slide, it is stained in order to assist the cytologist
in detecting and identifying the various features of the deposited
cells that are relevant to determining whether the cells are
normal, dysplastic or cancerous.
The
Company is also now developing a new suite of products called
SureCyte as part of its digital pathology strategy, including a new
stain called C1 for use in many cytology and histology screening
and diagnostic applications. The new morphology stain is intended
for use as a direct replacement for the Pap and H&E stains used
in most cytological and histological tests. It will initially be
introduced for use in tests where the specimens are evaluated
visually with formulations for use with our automated slide imaging
and analysis system and possibly also flow cytometer systems to
follow.
As
mentioned above, we are developing a family of immunocytological
assays that combine the measurement of bio molecular cancer markers
and cell morphology in a single test. These assays are intended to
detect the presence of specific proteins and other markers that are
indicative of the presence of a target disease, allow
characterization of abnormal cells, or provide an estimate of the
risk of disease progression. These assays are specifically designed
to be compatible with the C1 stain and may be evaluated using our
automated slide imaging and analysis system. An added benefit of C1
is that after the specimen has been evaluated, it can be
counterstained with a Pap or other conventional stain for manual
confirmation or archiving. Internal laboratory tests show a very
high level of specificity and sensitivity, and the Company
currently is preparing a strategy for the clinical evaluation. A
system like this has the potential to displace the current
expensive HPV testing methods by offering a significantly higher
specificity and sensitivity, which management believes offers a
significant market opportunity.
Over
the last few years, the MEDITE developed software for an imaging
system for computer aided diagnosis of slides including its new C1
stain and its revolutionary new biomarker-based SureCyte assays.
The intent of a medical screening system like this is to
differentiate between patients who show no evidence of the target
disease state (“normal”) and those who do
(“abnormal”). Patients who have abnormal screening
results are offered follow-up testing to confirm, diagnose,
classify and determine the extent of disease and, where
appropriate, determine the appropriate treatment. Patients who have
a normal screening result are not offered these services. To allow
scarce medical resources to be focused upon those patients having
the greatest need, screening programs are structured to
differentiate between normal and abnormal patients as accurately,
rapidly, reliably and cost effectively as possible.
The
Company also is looking at new ways to analyze the SureCyte data,
for example ploidy analysis (popular in China) and micronuclei
counting. These have both been touted as alternatives to regular
PAP analysis.
The new
C1 stain is also expected to work in Non-GYN applications (e.g.
lung, bladder, thyroid and other cancers) and for Non-GYN imaging
together with the SureThin consumables and processing
units.
The
Company is also developing a new sample self-collection product
called
SoftKit
, which
is a low-cost disposable device for the self-collection of a sample
that can be evaluated to provide an assessment of the health of the
entire female genital tract. The Company has filed and issued
patents in multiple countries. The Company plans
to finish the final design of SoftKit in 2018, which can be used
for the collection of cellular samples that can potentially be
screened for a variety of gynecological cancers (including
cervical, endometrial, and ovarian), and for the collection of
gynecological samples to be tested for the presence of HPV and
variety of gynecological cancers and additional indications such as
sexually transmitted disease (“STD”) testing. SoftKit
addresses several market niches and segments that are not supported
effectively by traditional gynecological sampling devices. SoftKit
is designed to eliminate the need for assistance from a medical
professional when collecting gynecological samples for many
screening applications. The Company believes that this feature, in
addition to the range of tests that can be performed on a SoftKit
sample and SoftKit’s low cost, make it particularly
attractive for use in large scale public health screening
programs.
Product Development and Research
With
the acquisition of MEDITE, the Company currently employs 11
full-time equivalents for software, electrical and mechanical
design engineers. The strategic goal is to optimize development
processes to shorten the development period and time to market for
several ongoing and new R&D projects.
MEDITE’s
product development department is including engineering skills and
technology in software development, multilayer circuit board
design, electrical design, 3-D product design in (using CREO design
software), technical regulatory documentation, often individually
for different countries worldwide, and quality management based on
its ISO 9001 certificate.
The
main focus of the development team during 2017 was working on
innovative and new products like the cryostat M630 and the film
coverslipper TWISTER, a cytology processor and several updates and
modernization projects for existing instruments.
In
addition, a team of experienced researchers in biochemistry, with
successful track records and a very high reputation in that
segment, are working on special stains and assays for detection of
pre-cancerous and cancerous conditions in cytology and histology.
Some of these developed products are currently undergoing the
commercialization process, starting with field studies and are
expected to be rolled out in the near term.
Markets and Marketing Objectives
As
described also in other paragraphs of this report, our target is
basically the worldwide cancer diagnostics market. Currently we
serve in particular the histology and cytology segments of this
total market, but we are open to entering other cancer diagnostics
segments in the future when attractive economically. The total
annual market volume of histology and cytology is approximately
$5.8 billion with annual growth rates between 10 and 30% depending
on the specific market, cancer segment and
country.
Cancer is a major threat for mankind and the recently published
“World Cancer Report 2014” by the World Health
Organization, states that the number of cases will increase
world-wide by about 57% to 22 million cases in the next two
decades. At the same time cancer deaths will rise from 8.2 million
to 13 million per year.
MEDITE’s
current and future products will assist in the
detection
of precancerous and cancerous
conditions and provide the basis for more efficient and
cost-effective diagnosis. The net effect of utilizing
MEDITE’s anatomic pathology (tissue based) and cytology (cell
based) products may result in more lives saved at lower
costs.
While
distributing currently into approximately 80 countries of the
world, the Company’s sales and marketing efforts are in
particular focused on the three major markets of U.S., China and
Europe.
Currently
the target groups are the histology and cytology laboratories as
end users. In Germany and (in some cases) the U.S. it sells
directly to these laboratories, while in other countries it sells
indirectly to them through its international network of
distributors. Several of the products currently being developed by
the Company may also be sold to national health programs and/or
non-governmental public health agencies, or possibly directly to
consumers. The Company use several means like sales and technical
training, advertising materials, special offers etc. to motivate
its distributors selling MEDITE products. Depending on local
markets, the contact to public health care organizations or other
public authorities responsible for purchasing medical product is
important. While in many markets the laboratories directly can
decide about purchases, in others they have to undergo a tender
process.
Worldwide,
approximately 180 million Pap and 60 million breast cancer
screening tests are performed annually. The potential market is
approximately 1.5 to 1.8 billion women for each of these tests.
Bio-molecular screening, diagnostic, and treatment products
consequently are being developed to detect disease states early, so
they can be dealt with before they become life threatening and
expensive to treat. The Company is designing and developing
products to satisfy this paradigm shift and focus more on
diagnostic methods and tools for early detection.
With
the new products currently in the late stages of their development
and/or regulatory processes, like the SureThin US gynecological
(gyn) application or the SoftKit, the Company is targeting
different groups of end-users and establishing the logistics needed
to reach and support these users. Similarly, in addition to
marketing to laboratories, the SoftKit is expected to be marketed
to public health agencies as well as being directly marketed to the
patient to motivate them to purchase it on the internet, a pharmacy
or similar facility. MEDITE will continue to adjust its marketing
to the specific needs of each product group.
For the
cytology and histology laboratories, the Company distributes
national or international product catalogs each year with a wide
overview of the related product lines. These are available in
English, German and Polish languages and offered as export catalogs
to its international distributors who translate them into the
appropriate local languages. The catalogs are sent directly to the
laboratories where MEDITE is selling directly. The Company has
their products also featured on their websites for sales and
distribution of information.
MEDITE
also attends several local, national and international exhibition
and congresses which are segment-specific or medical
product-orientated like the NSH in the U.S., the ECP in Europe, the
Arab Health exhibition in Dubai, the Medica exhibition in Germany
and many more.
Sales and Distribution
The
Company is distributing its products to over 80 countries worldwide
while focusing on the three major areas of U.S., Europe and
China.
Depending
on their experience, strength in their local market and potential
sales volume, MEDITE uses exclusive or non-exclusive distribution
national contracts. Due to the fact that three of the major
competitors, Leica, Thermo and Sakura are changing their
distribution strategy more towards direct sales, several
well-established independent distributors with both international
and national sales coverage have shown increased interest to sell
MEDITE products as a priority offering versus other products
lines.
MEDITE
in the U.S. has deepened selling and marketing relationships with
two major marketing leaders with national distribution channels.
One of the companies is a publicly traded international firm with a
market cap of several billion. MEDITE is their chosen provider of
Histology and Cytology solutions. While until now the Company has
not realized the full potential of this distribution channel, it is
working to gain its share of this market. A second distribution
channel in the U.S. is selling MEDITE products through other
established sales organizations, utilizing their sales agreements
with end users and through their sales representative network. This
network is considered an important part of MEDITE’s future
sales growth strategy. These various distribution channels are
managed by senior experienced sales directors to insure planning
and penetration. MEDITE will also use a direct sales approach for
certain large customers, using employed product specialist e.g. in
cytology or even using our service employees for technical
assistance, training, installation and sales. The channel of
directs sales will be increased in the future using the
Company’s own employees or sales
representatives.
In
Europe, the Company sells direct in Germany with employed regional
sales representatives and through a network of independent
distributors in all other countries. Some of its sales partners
have worked with MEDITE for more than a decade. MEDITE schedules
several dates for sales training of distributors and technical
training for their technical service employees for free each year
to keep a high level of experienced staff trained for MEDITE
products worldwide, and also to collect feedback for product
improvement and development.
For the
Chinese market, MEDITE uses a strategic distribution agreement with
its local partner UNIC Medical. The major shareholder and president
is a professor of pathology and has established a wide network of
sales teams in China and other Asian countries. With their help,
the brand name MEDITE has attained recognition second in its
segment. MEDITE together with UNIC successfully got Chinese FDA
approval for all MEDITE histology instruments in 2014 and for the
cytology instrument late in 2015. Since then the UNIC team has been
increasingly successful is selling MEDITE products in China. The
shared goal in China is to become the market leader in the
histology and cytology market.
The
rest of the world is supported by an experienced team of export
professionals at the German facility also acting as the
Company’s logistic center. Especially in the medical area, a
deep knowledge of custom tariffs and rules, international
regulatory restrictions, international payment terms and dangerous
goods shipment regulations, are major skills needed by these
employees.
Government Regulation, Clinical Studies and Regulatory
Strategy
The
development, manufacture, sale, and distribution of medical devices
are subject to extensive governmental regulation worldwide. In the
U.S., our products are regulated under the Medical Device
Amendments to the Food, Drug and Cosmetic Act (the “FD&C
Act”) and cannot be sold, shipped or promoted in interstate
commerce without prior “clearance” or
“approval” by the FDA. In the European Union
(“EU”), medical devices are regulated under the Medical
Device, In-Vitro Device and other Directives that require that each
product be CE Marked to show that it conforms to all of the
requirements of the applicable Directive(s) before it can be
imported into or sold in the EU. MEDITE products which are selling
in the U.S. are FDA registered and all have the CE
mark.
The
regulatory systems in other major markets such as China and South
America continue to undergo substantial changes and now in many
respects resemble the systems in the EU. The CE Mark is now
accepted or required in essentially all significant markets other
than the U.S. In addition to having to obtain the appropriate
regulatory approvals, we are also required to register our products
with the national health authority in many countries in which we
expect to do business; we may have our quality and manufacturing
systems inspected and/or audited by representatives of various
national authorities; and may have to conform to additional
regulations imposed by individual countries.
Under
these regulations, we are subject to certain registration,
record-keeping and reporting requirements. Our manufacturing
facilities and those of our strategic partners, may be obligated to
conform to specified quality standards, and are subject to audits
and inspections. We are also subject to national, state and
local laws relating to such matters as safe working conditions,
manufacturing practices and environmental protection.
Failure to comply with these regulations could have a material
adverse effect on our future operations and may impose additional
costs and risks.
In the
U.S., the FD&C Act generally bars selling, advertising,
promoting, or other marketing of medical devices that have not been
authorized (approved or cleared) by the FDA. The promotion or sale
of medical devices for non-approved or “off-label” uses
is prohibited. The FDA also regulates the design and
manufacture of medical devices. These regulations have been
largely, but not completely, harmonized with the ISO quality system
standards for medical devices that are used for similar purposes in
most other countries. This incomplete harmonization requires
us to maintain two separate, but equal quality systems and
increases the cost and complexity of regulatory compliance.
The FDA and the corresponding regulatory agencies in other
countries may withdraw product clearances or approvals for failure
to comply with these regulatory standards and may impose additional
sanctions.
In the
U.S. most low to moderate risk medical devices that have legally
marketed predicates receive “clearance” to market
through a process described in Section 510(k) of the FD&C Act.
In order to receive clearance under the 510(k) process a product
must be shown to be “substantially equivalent” to an
appropriate legally marketed “predicate device”. High
risk devices and devices that do not have a predicate require
“approval” via a Pre-Market Approval
(“PMA”) submission in which de-novo demonstration of
the safety and efficacy must be established. Changes to a
product, its intended use, and/or its labeling often require the
submission of another 510(k) or PMA application. Obtaining
approval to market via the PMA process takes substantially longer
and is far more expensive than obtaining clearance to market via
the 510(k) notification process.
Each
country has historically imposed its own unique regulations on
medical products. In recent years, however, there has been a trend
toward the harmonization of these regulations resulting in greater
consistency between countries. This has resulted in a large and
growing number of countries (over 70 as of this writing) adopting
the CE Mark as a central element of their regulatory process for
medical devices. The U.S. is the only major country that has not
adopted the CE Mark. For a product to be CE Marked, the
manufacturer must demonstrate to the satisfaction of the regulatory
authorities that the product is safe and effective (conforms to the
“Essential Requirements” for that class of product) and
that it is manufactured in accordance with specified quality
standards. In most countries the CE Mark is a pre-condition
for medical device registration and in some places such as the EU,
is mandatory in order for a product to be imported into or sold
within the country or region. Failure to comply with the
regulations pertaining to CE Marking can result in product seizures
and other sanctions.
Although
Company registration to the ISO 13485 quality system standard is
not required for companies selling Class I (lowest risk category)
medical devices and products in the EU, such registration is for
all practical purposes mandatory for companies selling products in
Class II and higher. All products that are presently being sold and
a significant portion of those that are in development are
currently classified as Class I devices. However, some of our
upcoming products are expected to be in Class II or Class IIa and
some changes that are being discussed in the EU may, if they come
to pass, result in the reclassification of some of our Class I
products into Class II. Our quality system is presently registered
to ISO 9001 which is the parent standard of ISO 13485. We presently
plan to have our quality system registered to ISO 13485 by the end
of 2018.
The EU
is in the process of determining whether the various Directives
pertaining to medical devices should be “recast” to
bring them into conformance with the recommendations of the Global
Harmonization Taskforce (GHTF) and is also studying the possibility
of replacing these Directives, which must be transposed into
national laws by each country in order to become effective, with
EU-wide laws that do not require transposition. Conversion from the
present Directives to corresponding EU laws could be beneficial in
that it is expected to eliminate country-specific differences in
how the Directives are applied and enforced and therefore
facilitate our compliance with the pertinent regulations in the EU.
Harmonization of the current medical device
classification system with that recommended by the GHTF may,
however, result in some or all of our products being placed in more
restrictive categories that could significantly increase our
regulatory compliance costs and time to market.
The
GHTF, which is comprised of representatives from major medical
device regulatory agencies such as the FDA, has developed a single
unified medical device identification system that will be mandatory
as it is implemented worldwide. These regulations went into
effect in many countries during 2014 and went into effect in
additional countries by the end of 2016 with a final implementation
in 2020. The Company is positioned to comply with these new
regulations under this regulation for our current products and have
the mechanisms in place to obtain such codes and the registrations
of the affected products, if needed, in the future. In a number of
countries these regulations include user fees that will increase
our cost of regulatory compliance.
We are
also required to comply with certain environmental regulations with
respect to products that are sold in various countries. One of
these regulations is the Directive on Packaging and Packaging
Wastes in the EU that: mandates the minimization of packaging;
restricts the use of certain packaging materials; and imposes
requirements, including possible “take-back”
provisions, with respect to the recycling of packaging materials.
All of our current products comply with the requirements of this
Directive. At present, we comply with the recycling portions
of this Directive by ensuring that all packaging materials are
compatible with recycling programs that are in place in the EU.
However, in the future we may be required to take a more
active role in the recycling of certain types of products including
possibly “taking back” and recycling laboratory
instruments. Implementing a compliant take-back program will
increase our operating and regulatory compliance
costs.
In the
EU electronic products, including clinical laboratory instruments
are required to comply with two environmental Directives, one of
which requires that the manufacturer “take back” and
recycle the electronic portions of these instruments and the other
(the so-called RoHS Directive) of which restricts the presence of
certain materials in electronic products. The Company complies with
the RoHS Directive by requiring its suppliers to use only RoHS
complaint materials in the construction of its
products.
The
“REACH” regulation, which requires the registration of
all chemical products produced in or imported into the EU is
presently in its implementation phase. The long-term impact of this
extremely complex multi-level regulation on the Company is unknown
at present but is anticipated to be minimal in the near term as our
sales of chemical products (stains, preservative, etc.) are and are
expected to continue to be at less than the threshold levels for
registration and reporting. An increase in sales of such products
above currently forecast levels and/or a reduction in the
applicable thresholds could potentially result in additional costs
to the Company.
Data
from clinical trials and studies is often required in regulatory
submissions and is highly desirable for use in product marketing
activities. In general, at least one trial or study is necessary
for each new product and additional studies or trials are needed to
support new or modified indications for use and new marketing
claims.
Cost and Reimbursement
In the
U.S., laboratory customers bill most insurers (including Medicare)
for screening and diagnostic tests such as the Pap test. Insurers,
such a private healthcare insurance or managed care payers, in
addition to Medicare, reimburse for the testing, with a majority of
these insurers using the annually-set Medicare reimbursement
amounts as a benchmark in setting their reimbursement policies and
rates. Other private payers do not follow the Medicare rates and
may reimburse for only a portion of the testing or not at
all.
Outside
of the U.S., healthcare providers and/or facilities are generally
reimbursed through numerous payment systems designed by
governmental agencies, such as the National Health Service in the
United Kingdom, the Servicio Sanitaris Nazionale in Italy and the
Spanish National Health System, as well as private insurance
companies and managed care programs. The manner and level of
reimbursement will depend on the procedures performed, the final
diagnosis, the devices and/or drugs utilized, or any combination of
these factors, with coverage and payment levels determined at the
payer’s discretion.
Our
ability to successfully commercialize the current and future
products depends in part on the extent to which coverage and
reimbursement for such products will be available from third-party
payers in the U.S. such as Medicare, Medicaid, health maintenance
organizations and health insurers, and other public and private
payers in foreign jurisdictions. The coverage policies and
reimbursement levels of these third-party payers may impact the
decisions of healthcare providers and facilities regarding which
medical products they purchase and the prices they are willing to
pay for those products. In some countries, our ability to
commercialize products will also depend upon us becoming a
qualified bidder on the tender offers issued by the National
Healthcare Authority. When we succeed in bringing products to the
market, we cannot be assured that third-party payers will pay for
such products or establish and maintain price levels sufficient for
realization of an appropriate return on our investment in product
development. Additionally, we expect many payers to continue to
explore cost-containment strategies (e.g., competitive bidding for
clinical laboratory services within the Medicare program, so-called
“pay-for-performance” programs implemented by various
public and private payers, etc.) that could potentially impact
coverage and/or payment levels for current or future MEDITE
products.
Competition
Historically,
competition in the healthcare industry has been characterized by
the search for technological innovations and efforts to market such
innovations. Technological advances have accelerated the pace of
change in recent years. The cost of healthcare delivery has always
been a significant factor in markets outside of the U.S. In recent
years, the U.S. market has also become much more cost
conscious. The Company believes technological innovations
incorporated into certain of its products offer cost-effective
benefits that address this particular market
opportunity.
MEDITE
is currently focused upon histology and cytology which are the two
major fields of the anatomic pathology market. Each of these
segments is dominated by only 2 – 3 major players. In
histology, the Company’s manufactured instrument line
competes with those from Leica, Sakura and Thermo Fisher, while in
cytology its current SureThin and SafePrep product lines compete
with products from the Cytyc division of Hologic and the TriPath
division of Becton-Dickinson. Unlike certain of these competitors,
MEDITE is a global one-stop supplier for all histology and cytology
laboratories.
In
cytology, the Company is currently developing a versatile
fully-automated, objective analysis, screening and evaluation
system for cancer screening that can be used with its current
liquid-based cytology SureThin line and the former CytoCore
developed SureCyte stain, which is highly reproducible and produces
staining results within seconds. This same system can be used with
the Company’s newly-developed SureCyte biomarker assays and,
unlike the few competing systems, it is specifically designed to
perform cytological screening for a broad range of cancers when
equipped with the appropriate software and reagent
modules.
In
general, the Company believes that its products compete on a
combination of clinical performance, accuracy, functionality,
reliability, quality, product features and effectiveness in
standard medical applications while being sufficiently versatile to
support future applications. It also believes that cost control and
cost effectiveness are additional key factors in achieving and
maintaining a competitive advantage. It focuses a significant
amount of its product development efforts on producing systems and
tests that will not add to overall healthcare cost.
Operations
The
Company’s operations consist of sales and marketing, research
and development (including information technology), technical
service, accounting and administration and manufacturing. Its
quality assurance manager is independent and authorized to act at
his own discretion in the interest of patient safety.
MEDITE
instruments and certain other products are manufactured in the
Company’s factory in Burgdorf, Germany. Product manufacturing
is monitored by TUV Sud for the UL (“Underwriter
Laboratories”, US electrical standard testing) while its
quality system is periodically audited by DQS. Small lot
manufacturing with Kanban flow control and ERP management is used
to ensure the timely delivery of smaller instruments while
minimizing finished goods inventories. Larger instruments, most of
which are customized to meet the unique requirements of their
purchasers, are manufactured to order with a short turnaround.
Extra safety stock is maintained for the few single source items
that are used in its products, while qualified second sources are
maintained for all other critical items. All incoming purchased
goods intended for resale, whether or not under the MEDITE brand
name, or for use in the manufacture of MEDITE products, are subject
to intensive incoming inspection, and all finished MEDITE
manufactured products receive intense final quality control testing
including 24-48-hour burn-in, as appropriate, to the specific
product before shipment. MEDITE additionally audits and monitors
the quality systems of third party suppliers of MEDITE-branded
consumables and supplies.
The
sales and distribution department is organized into the two major
departments of direct sales and export (distributors). For direct
sales the goal for consumables and smaller instruments is to ship
them within 24 hours after the receipt of the order. The export
department is handling quotes, orders and shipments to almost every
country worldwide. Every query should be answered within 24 hours.
After receiving an order for larger equipment, the manufacturing
department informs the export department of the expected shipping
date.
The
MEDITE enterprise resource planning system is an integrated
software that handles sales, material management and production
planning. It is also automatically connected to the accounting
system, transferring customer and supplier invoices, payments and
the material consumption as a just in time controlling
tool. Management has evaluated and is in the process
finalizing its review of a company-wide system anticipated to be
implemented by the middle of 2018.
Intellectual Property
The
Company relies on a combination of patents, licenses, trade names,
trademarks, know-how, proprietary technology, trade secrets and
policies and procedures to protect our intellectual property. It
considers such security and protection a very important aspect of
the successful development and marketing of its products in the
U.S., Germany, China and other foreign markets.
Patents,
trademarks and copyrights are essential components in the
protection of MEDITE’s intellectual property worldwide. As
the Company manufactures and sells products globally, it has
designed its intellectual property strategy to provide the
necessary protection while containing and managing the associated
costs. Two of the major components of this strategy are the filing
of “provisional” patent applications in the US, and of
filing utility patent applications under the Patent Cooperation
Treaty (PCT) or similar entry points into national patent offices
worldwide.
With
the passage of the America Invents Act (AIA), the patent systems in
all major countries now award patents on a
“first-to-file” basis that places a premium upon filing
one or more patent applications as soon as it is determined that an
invention meets the minimum standards for patentability. This
filing is in the form of a “utility” application that
meets all of the requirements for examination by a patent office.
The U.S. offers the opportunity to file “provisional”
patent applications that, while not being in form for examination
and not providing any formal rights or protections, is accepted by
almost all countries as officially establishing the
“priority” or invention date for utility applications
that are derived from it within one year of the date of the filing
of the provisional application. Provisional applications therefore
provide a means of obtaining the earliest possible priority date
while allowing time to refine and expand the scope of the invention
and associated claims that are included in any resulting utility
application. The Company’s practice is to convert each of its
provisional patent applications into some number of utility patent
applications within this 12-month period. In most cases each
provisional application results in one utility filing. However, in
some cases a single provisional application can generate two or
more separate utility applications and/or multiple provisional
applications can be consolidated into a single utility application.
During the examination of a utility application, the examining
patent office may require the Company to divide the application
into two or more separate applications or it may file a
continuation-in-part patent application that expands upon the
technology disclosed in an earlier patent application and which has
the potential of superseding or improving upon the disclosure of
the earlier application. For these reasons, estimating the number
of patents that are likely to be issued based upon the number of
provisional and utility applications filed is
difficult.
MEDITE
routinely prepares and intends to continue to prepare additional
patent applications for processes and inventions arising from its
research and development process. The protections provided by a
patent are determined by the claims that are allowed by the patent
office that is processing the application. During the patent
prosecution process it is not unusual for the claims made in the
initial application to be modified or deleted or for new claims to
be added to the application. For this reason, it is not possible to
know the exact extent of protection provided by a patent until it
is issued. Recent changes in US patent law, particularly conversion
to a “first to file” system and introduction of a
challenge period after a patent is granted may influence our IP
strategy, especially as related to the filing of provisional
applications. Several recent court decisions are also expected to
influence these decisions.
The
Company’s products are or may be sold worldwide under
trademarks and copyrights that it considers to be important to its
business. It owns the trademarks relevant to these products and may
file additional U.S. and foreign trademark and copyright
applications in the future.
Future
technology acquisition efforts will be focused toward those
technologies that have strong patent or trade secret
protection.
The
Company cannot be sure that patents or trademarks issued, or which
may be issued in the future will provide us with any significant
competitive advantages. We cannot be sure any of our patent
applications will be granted or that their validity or
enforceability will not be successfully challenged. The cost of any
patent-related litigation could be substantial even if we were to
prevail. In addition, the Company cannot be sure that someone will
not independently develop similar technologies or products,
duplicate our technology or design around the patented aspects of
our products. The protection provided by patents depends upon a
variety of factors, which may severely limit the value of the
patent protection, particularly in certain countries. We intend to
protect much of our core technology as trade secrets, either
because patent protection is not possible or, in management’s
opinion, would be less effective than maintaining secrecy. However,
the Company cannot be sure that our efforts to maintain secrecy
will be successful or that third parties will not be able to
develop the technology independently.
Research and Development Expenditures
The
Company’s research and development efforts are focused on
introducing new products as well as enhancing our existing product
line. We utilize mainly in-house research and development personnel
and, in some cases, external research and development services
including collaboration with universities, medical centers and
other entities are used if management identifies these
relationships to be helpful and efficient. Our research and
development activities are presently conducted in the U.S. and
Germany. Management believes research and development is
critical to our success and business strategy. Research work in the
U.S. in the area of chemical and biological components is expected
to continue for the foreseeable future as we seek to refine the
current process and add additional capabilities to our analysis
procedures, including the detection of other forms of cancer and
precursors to cancer. We anticipate the need to invest a
substantial amount of capital, including the cost of clinical
trials, required to complete current developments and bring it to
market.
The
continuing development of new and update existing technology and
consumables for histology and cytology is necessary to further
increase the Company’s competitiveness and management intends
to spend a certain percentage of revenue on an on-going basis. With
increased revenue, the percentage attributed to research and
development is anticipated to decline, even with the expenditures
increasing.
Components and Raw Materials
Many of
the raw materials used in the Company’s products are readily
available from multiple diversified sources. As these raw materials
typically account for less than 10 % of the cost of the finished
parts that go into the product, changes in prices for these
materials will not have a significant influence on our
manufacturing costs.
For
paraffin the raw material is oil based and therefore the price
fluctuates depending on the commodity markets. Management believes
that the sales prices are adaptable and can be adjusted for
significant swings in oil prices.
Some of
the staining solutions reagents are dependent on specific chemicals
where the price also fluctuates. The Company typically will
negotiate a fixed price with our supplier for a term of one year to
limit its exposure.
The
availability of electronic and electrical parts for circuit board
manufacturing is another challenge the Company closely monitors.
The Company has negotiated with our critical parts suppliers to
provide 12-month notice before discontinuing parts and, the Company
if necessary, will place a last large order for sufficient number
of these parts to support the continued manufacture and support of
all MEDITE products that use the part for the anticipated life of
the MEDITE product. In addition, it takes advantage of the extended
availability programs that are offered by some manufacturers of
electronic components and assemblies. The Company also attempts to
transfer this discontinuation risk to our external circuit board
module vendors, if possible.
Working Capital Practices
The
Company raised additional cash of $2,105,000 from the sale of
convertible debt subsequent to December 31, 2017, through the date
of this filing, all raised by May 17, 2018. Working capital has
improved by approximately the same amount as of the date of this
filing.
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2018.
At
December 31, 2017, the Company’s cash and restricted cash
balance was $490,025 and its operating losses for the year ended
December 31, 2017 had used most of the Company’s liquid
assets.
Accrued
salaries, vacation and related expenses at December 31, 2017,
includes amounts owed the former CFO Robert McCullough of
approximately $1.1 million and amounts owed to both Michaela and
Michael Ott totaling approximately $104,000. Included in
advances – related parties are amounts owed to the
Company’s former CFO Robert McCullough of $50,000 on
December 31, 2017 and amounts owed to Michaela Ott, stockholder and
former CEO of the Company, of 16,000 Euros, ($19,160 as December
31, 2017) and 71,000 Euros ($85,022 as of December 31, 2017)
related to two short term bridge loans. The Company has established
a payment plan agreement with Michaela and Michael Ott. See further
discussion regarding the legal proceedings with Robert
McCullough.
The
Company’s security agreement (described in detail below) with
its lender GPB Capital has provided borrowings of 35% of our
collateralized assets.
Employees
As of
December 31, 2017, the Company employed a total of 71 employees
including 3 trainees, 0 employees on disability and 4 part-time
employees which represents 2 full-time-equivalents. None of our
employees are members of a labor union.
Financial Information about Foreign and Domestic Operations and
Export Sales
Markets
outside of North America are an important factor in the
Company’s business strategy. Any business that operates on a
worldwide basis and conducts its business in one or more local
currencies is subject to the risk of fluctuations in the value of
those currencies against the dollar, as well as foreign economic
conditions. Such businesses are also subject to changing political
climates, differences in culture and the local practices of doing
business, as well as North American and foreign government actions
such as export and import rules, tariffs, duties, embargoes and
trade sanctions. The Company does not regard these risks, however,
as a significant deterrent to our strategy to introduce our MEDITE
product lines to foreign markets in the future. The Company’s
current operations include payments and receivables in the three
currencies of USD, EURO and Yen. For USD and Euro we try to
naturally hedge them by having revenues and expenses in both
currencies. Even in not handling other currencies directly, the
exchange rates in both USD and Euro may influence our costs and
prices directly and/or indirectly. The Company intends to adopt
strategies to minimize the risks of changing economic and political
conditions within the foreign countries we intend to do
business.
During
the fiscal year ended December 31, 2017, the Company had direct
foreign operations in Germany and distributed to approximately 80
countries in total.
Not
applicable as small reporting company.
The
Company occupies a total of 72,513 square feet of property of which
24,324 is leased space. The owned building at the address
Wollenweberstrasse 12, 31303 Burgdorf, Germany, has 43,884 square
feet. In addition, until recently we occupied a leased neighborhood
building with an additional 11,302 square feet in space for
manufacturing. As of March 31, 2018, we have vacated this building
and consolidated all Burgdorf operations and personnel into the
main building. Since February 2016, the Company leased a second
German manufacturing facility in Nussloch for the microtomy
manufacturing with leased space of 4,305 square feet. The
headquarter facility at the address 4203 SW 34th Street, Orlando,
FL 32811, U.S. with a space of 5,520 square feet is leased until
July 31st, 2018, and the research laboratory facility at address
Unit 306, 888 E. Belvidere Road, Grayslake, IL 60030, U.S. with
1,904 square feet with a lease expiration of June 30, 2018. The
Company considers our facilities to be well utilized, well
maintained, and in good operating condition. Further, we consider
the facilities to be suitable for our intended purposes and to have
capacities adequate to meet current and projected needs for our
operations.
The
terms of our current leased facilities vary from 3 months’
notice for part of the German operation to a term agreement until
June 30, 2018 for the laboratory facility in the Chicago area, and
until July 31, 2018, for the Orlando facility. The monthly rent for
the Orlando facility will increase from $2,488 currently to $ 2,563
per month in the last year of the lease.
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. 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 the settlement, concluding that a settlement did not
exist because the parties had not agreed on all its constituent
elements. On March 20, 2018 counsel for the defendants (the Company
and certain former officers and directors) filed a motion with the
Court to withdraw as counsel from Michael Ott, Michaela Ott and
David Patterson due to a conflict of interest between certain
parties. However, those parties consented to allow current counsel
to continue representing the Company. On April 6, 2018, counsel for
the defendants filed a motion for the Court to deny
plaintiff’s motion to force the Company to accept an
agreement based upon the August 2017 Settlement Term Sheet. On
April 22, the judge ruled in favor of the Company and denied
plaintiff’s motion to compel.
Not
Applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular data in thousands, except share and per share
amounts)
NOTE 1: THE COMPANY AND BASIS OF PRESENTATION
The Company and Basis of Presentation
MEDITE Cancer
Diagnostics, Inc. (“MDIT”, “MEDITE”,
“we”, “us” or the “Company”)
was incorporated in Delaware in December 1998.
These statements
include the accounts of MEDITE Cancer Diagnostics, Inc. and its
wholly owned subsidiaries, which consists of MEDITE Enterprise,
Inc., MEDITE GmbH, Burgdorf, Germany, MEDITE GmbH, Salzburg,
Austria, MEDITE Lab Solutions Inc., Orlando, USA, MEDITE sp. z
o.o., Zilona-Gora, Poland and CytoGlobe, GmbH, Burgdorf, Germany.
During 2017, both the Austrian and Poland operations were
consolidated into MEDITE GmbH.
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 71 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.
Going Concern
We have
incurred significant operating losses and negative cash flows from
operations. The Company incurred net losses of approximately $6.8
million and $2.2 million for the years ended December 31, 2017 and
2016, respectively. In addition, operating activities used cash of
approximately $3.6 million and $1.1 million for the years ended
December 31, 2017 and 2016, respectively. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern.
The
Company raised additional cash of $2.3 million, net of offering
costs from the sale of 5,060,000 shares of common stock during
2017. Management is actively seeking additional equity
financing.
On
September 26, 2017, the Company entered into a securities purchase
agreement (the “Purchase Agreement”) with GPB Debt
Holdings II, LLC (“GPB”), pursuant to which the
Company issued to GPB a secured convertible promissory note and
received gross proceeds of $4.9 million. The Company is required to
make interest-only payments for the first 23 months after September
26, 2017 with quarterly principal payments beginning on month 24 at
a rate of 10% of the face value of the Note with the remaining 60%
due on September 26, 2020. The proceeds were used to pay (i) the
outstanding balance of various credit facilities due to
Hannoveresche Volksbank in the amount of $2.3 million, (ii) the
outstanding balance of a settlement with VR Equity in the amount of
$0.5 million and (iii) the outstanding balance on secured
promissory notes in the amount of $0.3 million. In addition, issued
subordinated notes to 3 other investors for net proceeds of $0.4
million with similar terms as the Purchase Agreement. See Note 6
for additional details of the transactions.
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2017. Management believes it
will be able to reduce its operating losses through an increase in
its revenues and reduction in manufacturing costs through process
efficiencies. No assurances can be given that management will be
successful in meeting its revenue targets and reducing its
operating loss.
The
consolidated financial statements included herein have been
prepared on a going concern basis, which contemplates continuity of
operations and the realization of assets and the repayment of
liabilities in the ordinary course of business. Management
evaluated the significance of the Company’s operating loss
and determined that the Company’s current operating plan and
sources of capital would be sufficient to alleviate concerns about
the Company’s ability to continue as a going
concern.
In the
future, we may require sources of capital in addition to cash on
hand to continue operations and to implement our strategy. If our
operations do not become cash flow positive, we may be forced to
seek equity investments or debt arrangements. No assurances can be
given that we will be successful in obtaining such additional
financing on reasonable terms, or at all. If adequate funds are not
available on acceptable terms, or at all, we may be unable to
adequately fund our business plans and it could have a negative
effect on our business, results of operations and financial
condition. In addition, if funds are available, the issuance of
equity securities or securities convertible into equity could
dilute the value of shares of our common stock and cause the market
price to fall, and the issuance of debt securities could impose
restrictive covenants that could impair our ability to engage in
certain business transactions.
NOTE 2: Summary of Significant Accounting Policies
Principle of Consolidation, Basis of Presentation and Significant
Estimates
The
accompanying consolidated financial statements 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.
In
preparing the accompanying consolidated financial statements,
management has made certain estimates and assumptions that affect
reported amounts in the consolidated financial statements and
disclosures of contingencies. Significant assumptions consist of
the allowance for doubtful accounts, valuation of inventories,
useful lives of property and equipment, recoverability of
long-lived assets, valuation of stock-based transactions, deferred
tax asset valuations, sales returns and warranties. Changes in
facts and circumstances may result in revised estimates and actual
results may differ from these estimates.
Revenue Recognition
The
Company derives its revenue primarily from the sale of medical
products and supplies for the diagnosis and prevention of cancer.
Product revenue is recognized when all four of the following
criteria are met: (1) persuasive evidence that an arrangement
exists; (2) delivery of the products has occurred or risk of
loss transfers to the customer; (3) the selling price of the
product is fixed or determinable; and (4) collectability is
reasonably assured. The Company generates the majority of its
revenue from the sale of inventory. For certain sales, the Company
and its customers agree in the sales contract that risk of loss and
the transfer of title occur upon the Company packing the items for
shipment, segregating the items packaged and notifying the customer
that their items are ready for pickup. The Company records such
sales at time of completed packaging and segregation of the items
from general inventory and notification has been confirmed by the
customer.
Shipping
and handling costs are included in cost of goods sold and charged
to the customers based on the contractual terms.
Cash
The
Company’s bank deposit account balances may at times exceed
federally insured limits. The Company has not
experienced, nor does it anticipate, any losses in such
accounts.
Restricted
Cash
The
Company is required to maintain restricted cash balances equal to 6
months of interest payments on the secured convertible promissory
note to GPB.
Allowance for Doubtful Accounts
The
Company generally provides for an allowance against accounts
receivable for an amount that could become uncollectible. Such
receivables are reduced to their estimated net realizable value.
The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience and other
relevant factors.
The
Company evaluates the collectability of its receivables at least
quarterly, using various factors including the financial condition
and payment history of customers, an overall review of collections
experience on accounts and other economic factors or events
expected to affect the Company’s future collection
experience.
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 on net
realizable value. Inventories consists of parts purchased from
outside vendors, raw materials used in the manufacturing of
products; 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.
Warranty
The
Company provides a warranty on all equipment sold for a period of
one year from date of sale. The Company recognizes warranty costs
based on estimates of the costs that may be incurred under its
warranty obligations. The warranty expense and related accrual is
included in the Company’s cost of revenues and the warranty
reserve is included in accounts payable and accrued expenses and is
recorded when revenue is recognized. The Company
periodically assesses the adequacy of its recorded warranty reserve
and adjusts the amounts as necessary.
The
Company has a warranty reserve of $187,000 and $27,000 as of
December 31, 2017 and 2016, respectively.
Property and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets
as follows:
|
Buildings
|
33
yrs
|
|
Machinery
and equipment
|
3-10yrs
|
|
Office
furniture and equipment
|
2-10
yrs
|
|
Vehicles
|
5
yrs
|
|
Computer
equipment
|
3-5
yrs
|
Normal
maintenance and repairs for equipment are charged to expense as
incurred, while significant improvements are
capitalized.
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”), Accounting Standards
Codification (“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 year. The
resulting translation gains and losses are recorded in accumulated
other comprehensive income (loss) as a component of
stockholders’ equity.
Advertising
The
Company expenses the cost of advertising and promotional costs at
the time the expense is incurred. Advertising and promotional costs
for the years ended December 31, 2017 and 2016 were $166,000 and
$54,000, respectively.
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 acquired 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 determine 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. At December 31, 2017 and 2016 the Company tested for
impairment and determined that the valuation was adequate, and no
impairment was deemed necessary.
Impairment of Long-Lived Assets
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 long-lived 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 long-lived 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 long-lived asset and perform the quantitative
impairment test by comparing the fair value with the carrying
amount in accordance with FASB ASC Subtopic 350-30.
Goodwill
Goodwill
is recognized for the excess of consideration paid over the amounts
assigned to assets acquired and liabilities assumed in a business
combination. The Company’s goodwill relates to the
reverse merger that occurred on April 3, 2014. 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. 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.
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.
Stock-Based Compensation
The
estimated fair values of employee stock option grants are
determined as of the date of grant using the Black-Scholes option
pricing model. This method incorporates the fair value of our
common stock at the date of each grant and various assumptions such
as the risk-free interest rate, expected volatility based on the
historic volatility of publicly-traded peer companies, expected
dividend yield, and expected term of the options. The estimated
fair values of restricted stock are determined based on the fair
value of our common stock on the date of grant. The estimated fair
values of stock-based awards, including the effect of estimated
forfeitures, are expensed over the requisite service period, which
is generally the awards’ vesting period. We classify
stock-based compensation expense in the consolidated statements of
operations and comprehensive loss in the same manner in which the
award recipient’s payroll costs are classified.
Our
accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows FASB guidance.
All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably
measurable. The measurement date of the fair value of the equity
instrument issued is the earlier of the date on which the
counterparty’s performance is complete or the date at which a
commitment for performance is reached. For transactions in which
the fair value of the equity instrument issued to non-employees is
the more reliable measurement and a measurement date has not been
reached, the fair value is re-measured at each vesting and
reporting date using the Black-Scholes option pricing model.
Compensation expense for these share-based awards is recognized
over the term of the consulting agreement or until the award is
approved and settled.
We
follow the guidance of FASB ASC 718-10, which requires that
share-based payments be reflected as an expense based upon the
grant-date fair value of those awards. The expense is
recognized over the remaining vesting periods of the awards, if
any.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts
receivable, account payable and accrued expenses, secured lines of
credit and long-term debt, notes due to employees and advances to
related parties. The carrying value for all such instruments except
notes due to employees and advances to related parties approximates
fair value due to the short-term nature of the instruments. The
fair value of long-term debt is determined using current applicable
rates for similar instruments as of the balance sheet date. The
Company cannot determine the fair value of its notes due to
employees and advances to related party due to the related parties
nature of such instruments and because instruments similar to these
instruments could not be found.
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.
Debt Issuance Costs and Debt Discount
Debt
issuance costs and debt discounts are recorded net of debt in the
consolidated balance sheets. Amortization expense of debt issuance
costs and debt discounts is calculated using the effective interest
method over the term of the debt and is recorded in interest
expense in the accompanying consolidated statements of
operations.
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 December 31, 2017 and 2016 as the effect would be
anti-dilutive (i.e. would reduce the loss per share).
The
Company computes its loss applicable to common stock holders by
subtracting dividends on preferred stock, including undeclared or
unpaid dividends if cumulative, from its reported net loss and
reports the same on the face of the condensed consolidated
statement of operations. The Company includes convertible
securities into their EPS calculation when reporting net income
through the "if-converted" method whereby the securities are
assumed converted and earnings per incremental share is
computed.
Convertible
securities outstanding for the entire period are assumed converted
at the beginning of the period. Convertible securities issued
during the period are treated as if they were converted at the date
of issuance. The earnings per incremental share is the after-tax
foregone interest expense divided by the number of shares of common
stock that would have been issued from the conversion weighted for
the period they would have been outstanding.
Income Taxes
We
account for income taxes using the asset and liability method,
which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been recognized in the consolidated financial statements or in
our tax returns. Deferred taxes are determined based on the
difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Changes in deferred
tax assets and liabilities are recorded in the provision for income
taxes. We assess the likelihood that our deferred tax assets will
be recovered from future taxable income and, to the extent we
believe, based upon the weight of available evidence, that it is
more likely than not that all or a portion of deferred tax assets
will not be realized, a valuation allowance is established through
a charge to income tax expense. Potential for recovery of deferred
tax assets is evaluated by estimating the future taxable profits
expected and considering prudent and feasible tax planning
strategies.
We
account for uncertainty in income taxes recognized in the
consolidated financial statements by applying a two-step process to
determine the amount of tax benefit to be recognized. First, the
tax position must be evaluated to determine the likelihood that it
will be sustained upon external examination by the taxing
authorities. If the tax position is deemed more-likely-than-not to
be sustained, the tax position is then assessed to determine the
amount of benefit to recognize in the consolidated financial
statements. The amount of the benefit that may be recognized is the
largest amount that has a greater than 50% likelihood of being
realized upon ultimate settlement. The provision for income taxes
includes the effects of any resulting tax reserves, or unrecognized
tax benefits, that are considered appropriate as well as the
related net interest and penalties.
Reclassification
Certain
prior period amounts have been reclassified to conform to the
current period presentation.
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.
On
January 22, 2015, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2015-17, “Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes.” The
amendments eliminate the guidance in Topic 740 that requires an
entity to separate deferred tax liabilities and assets into a
current amount and a noncurrent amount in a classified statement of
financial position. The FASB decided to require noncurrent
classification of all deferred tax liabilities and assets in a
classified statement of financial position. For public business
entities, the amendments in this Update are effective for financial
statements issued for annual periods beginning after December 15,
2016, and interim periods within those annual periods. The Company
adopted ASU 2015-17 effective January 1, 2017 and has classified
deferred taxes as noncurrent in Company’s 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.
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 will include restricted cash with cash in the consolidated
statement of cash flows upon adoption.
In
January 2017, the FASB issued ASU 2017-01, “Business
Combinations (Topic 805): Clarifying the definition of a
business”
.
The
amendments in this Update clarify the definition of a business with
the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or
disposals) of businesses. The guidance in this update is effective
for fiscal years beginning after December 15, 2017, and interim
periods within those years. Management does not anticipate the
implementation to have a material impact on the Company’s
consolidated financial statements.
In
January 2017, the FASB also issued ASU 2017-04, “Intangibles
- Goodwill and other (Topic 350): Simplifying the test for goodwill
impairment”. The amendments in this Update remove the second
step of the current goodwill impairment test. An entity will apply
a one-step quantitative test and record the amount of goodwill
impairment as the excess of a reporting unit's carrying amount over
its fair value, not to exceed the total amount of goodwill
allocated to the reporting unit. The new guidance does not amend
the optional qualitative assessment of goodwill impairment. This
guidance is effective for impairment tests in fiscal years
beginning after December 15, 2019. The Company has early adopted
ASU 2017-04 and our analysis used for the Company’s
consolidated financial statements conforms to the new
standard.
In July
2017, the FASB issued a two-part ASU No. 2017-11, “(Part I)
Accounting for Certain Financial Instruments with Down Round
Features, (Part II) Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Non-controlling
Interests with a Scope Exception.” The ASU will (1)
“change the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round
features” and (2) improve the readability of ASC 480-10 by
replacing the indefinite deferral of certain pending content with
scope exceptions. The amendments in Part I of this Update change
the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. For
freestanding equity classified financial instruments, the
amendments require entities that present earnings per share
(“EPS”) in accordance with Topic 260 to recognize the
effect of the down round feature when it is triggered. That effect
is treated as a dividend and as a reduction of income available to
common shareholders in basic EPS. Convertible instruments with
embedded conversion options that have down round features are now
subject to the specialized guidance for contingent beneficial
conversion features (in Subtopic 470-20, Debt—Debt with
Conversion and Other Options), including related EPS guidance (in
Topic 260). The amendments in Part II of this Update
re-characterize the indefinite deferral of certain provisions of
Topic 480 that now are presented as pending content in the
Codification, to a scope exception. Those amendments do not have an
accounting effect. This new accounting guidance is effective for
public companies for fiscal years beginning after December 15, 2018
(i.e., calendar years beginning on January 1, 2019), including
interim periods within those fiscal years. Early adoption is
permitted. The Company completed a transaction with a down round
feature and has chosen to early adopt ASU 2017-11 during the year
ended December 31, 2017.
NOTE 3: Inventories
The
following is a summary of the components of inventories (in
thousands):
|
|
|
|
|
|
|
|
|
Raw
materials
|
$
1,220
|
$
1,309
|
|
Work in
progress
|
44
|
203
|
|
Finished
goods
|
1,139
|
2,299
|
|
|
|
|
|
|
$
2,403
|
$
3,811
|
Some of
the raw materials are manufactured subcomponents utilized in
finished goods.
NOTE 4: Property and Equipment
The
following is a summary of the components of property and equipment
as of (in thousands):
|
|
|
|
|
|
|
|
|
Land
|
$
230
|
$
202
|
|
Building
|
1,274
|
1,120
|
|
Machinery and
equipment
|
1,527
|
1,198
|
|
Office furniture
and equipment
|
251
|
225
|
|
Vehicles
|
36
|
62
|
|
Computer
equipment
|
103
|
87
|
|
Construction in
progress
|
3
|
-
|
|
Less: Accumulated
depreciation
|
(1,646
)
|
(1,337
)
|
|
|
$
1,778
|
$
1,557
|
Depreciation
and amortization expense, including amounts in other assets for the
years ended December 31, 2017 and 2016 were $293,000 and $214,000,
respectively.
NOTE 5: Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses include the following at
December 31 (in thousands):
|
|
|
|
|
Accounts
payable
|
$
1,004
|
$
1,127
|
|
Accrued franchise
taxes
|
342
|
342
|
|
Accrued directors
fees
|
45
|
55
|
|
Accrued
professional fees
|
76
|
135
|
|
Warranty
reserve
|
187
|
27
|
|
Accrued salaries,
vacation and related expenses
|
1,415
|
1,262
|
|
Other accrued
expenses
|
183
|
216
|
|
Total accounts
payable and accrued expenses
|
$
3,252
|
$
3,164
|
NOTE 6: Debt
The
Company’s outstanding debt was as follows as of (in
thousands):
|
|
|
|
|
|
|
|
|
Hannoversche
Volksbank credit agreement #1
|
$
-
|
$
1,321
|
|
Hannoversche
Volksbank credit agreement #2
|
-
|
397
|
|
Hannoversche
Volksbank term loan #3
|
-
|
117
|
|
Secured
promissory notes
|
50
|
650
|
|
DZ Equity
Partners Participation rights
|
-
|
789
|
|
Subordinate
convertible notes payable
|
932
|
-
|
|
GPB Debt
Holdings II, LLC Convertible note payable
|
5,356
|
-
|
|
Total
|
6,338
|
3,274
|
|
Discount on
convertible notes payable
|
(1,419
)
|
-
|
|
Less current
portion of long-term debt
|
(50
)
|
(3,214
)
|
|
Long-term
debt
|
$
4,869
|
$
60
|
GPB Debt Holdings II, LLC (“GPB”) Convertible Notes
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 original $5 million GPB Note and
an additional discount of 300,000 Euro ($356,400 at September 26,
2017) attributed to the purchase and settlement of the 750,000 Euro
($890,325 at September 26, 2017) note with VR Equity Partners
formerly DZ Equity Partners (“DZ”) by GPB and
considered an additional purchase discount, with the Company
receiving net proceeds of $4.7 million and (ii) a warrant to
purchase an aggregate of 4,120,308 shares of common stock of the
Company (the “Warrant”). The Company allocated the
proceeds received to the GPB Note and the warrants on a relative
fair value basis at the time of issuance. The total debt discount
will be amortized over the life of the GPB Note to interest
expense. The estimated relative fair value of the warrants was
$520,052. Amortization expense of the debt discount, which includes
original issue discount, loan fees and the warrant value, during
the year ended December 31, 2017 was $131,822. 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.
Hannoversche Vollesbank and DZ Equity Partners Debt
In July
2006, MEDITE GmbH, Burgdorf, entered into a master line of credit
agreement #1 with Hannoversche Volksbank. The line of credit was
amended in 2012, 2015 and in 2016. Borrowings on the master line of
credit agreement #1 bore interest at a variable rate based on
Euribor (Euro Interbank Offered Rate) depending on the type of
advance elected by the Company and defined in the agreement.
Interest rates depending on the type of advance elected ranged from
3.75 – 8.00% during the years ended December 31, 2017 and
2016. The line of credit was collateralized by the accounts
receivable and inventory of MEDITE GmbH, Burgdorf, and a mortgage
on the building owned by the Company and is guaranteed by Michaela
Ott and Michael Ott, stockholders of the Company. This master
credit line was repaid with the proceeds of the GPB Note and the
collateral and guarantees were released.
In June
2012, CytoGlobe, GmbH, Burgdorf, entered into a line of credit
agreement #2 with Hannoversche Volksbank. Borrowings on the master
line of credit agreement #2 bore interest at a variable rate based
on Euribor (Euro Interbank Offered Rate) depending on the type of
advance elected by the Company and defined in the agreement.
Interest rates ranged from 3.90 – 8.00% during the years
ended December 31, 2017 and 2016. The line of credit was
collateralized by the accounts receivable and inventory of
CytoGlobe GmbH, Burgdorf and was guaranteed by Michaela Ott and
Michael Ott, stockholders of the Company, and the state of Lower
Saxony (Germany) to support high-tech companies in the area. This
credit line was repaid with the proceeds of the GPB Note and the
collateral and guarantees were released.
In
November 2008, MEDITE GmbH, Burgdorf, entered into a Euro 400,000
($420,800 as of December 31, 2016) term loan #3 with Hannoversche
Volksbank with an interest rate of 4.7% per annum. The term loan
was guaranteed by Michaela Ott and Michael Ott, stockholders of the
Company, and was collateralized by a partial subordinated pledge of
the receivables and inventory of MEDITE GmbH, Burgdorf. This term
loan was repaid with the proceeds of the GPB Note and the
collateral and guarantees were released.
In
March 2009, the Company entered into a participation rights
agreement with DZ Equity Partners (“DZ”) in the form of
a debenture with a mezzanine lender who advanced the Company Euro
750,000 ($789,000 as of December 31, 2016). The debenture bore
interest at the rate of 12.15% per annum The default rate of
interest will increase three percent. The rate of interest
increased three percent, to 15.15% on June 1, 2017. GPB purchased
the participation rights agreement with DZ and settled the debt
owed by the Company and included the balance in the GPB
Note.
Securities Purchase Agreements
On
December 31, 2015, the Company entered into a Securities Purchase
Agreement (the “2015 Purchase Agreement”) with seven
individual accredited investors (collectively the
“Purchasers”), pursuant to which the Company agreed to
issue to the Purchasers secured promissory notes in the aggregate
principal amount of $500,000 with interest accruing at an annual
rate of 15% (the “Note(s)”) and warrants to purchase up
to an aggregate amount of 250,000 shares of the common stock, par
value $0.001) per share, of the Company (the
“Warrant(s)”) with an initial exercise price of $1.60
per share, subject to adjustment and are exercisable for a period
of five years. On March 15, 2016, the Board of Directors
approved renegotiated terms to increase the warrants issued to the
Purchasers from a total of 250,000 warrants to 500,000 and fixed
the exercise price of the warrants to $0.80. The Notes mature on
the earlier of the third month anniversary date following the
Closing Date, as defined in the Note, or the third business day
following the Company’s receipt of funds exceeding one
million dollars from an equity or debt financing, not including the
financing contemplated under the 2015 Purchase Agreement. The Notes
are secured by the Company’s accounts receivable and
inventories held in the United States. If the Notes are not
redeemed by the Company on maturity, the Purchasers are entitled to
receive 10% of the principal balance of the Notes outstanding in
warrants for every month that the Notes are not
redeemed. On March 31, 2016, these Notes matured and
were not repaid. Therefore, the Notes were in default on
April 1, 2016. The Company agreed to pay the Purchasers
10% of the principal balance of the Notes in warrants until the
Notes are repaid. During the year ended December 31,
2016, the Company issued 450,000 warrants in connection with the
default provisions, which were valued at $130,387 and recorded as
interest expense in the consolidated statement of operations and
comprehensive loss. The Notes are secured by the Company’s
accounts receivable and inventories held in the United States.
During the year ended December 31, 2017, the Company issued 50,000
warrants in connection with the default provision and 270,000
warrants in connection with the January 2017 extension provision
(see below), which were valued at $11,443 and $76,083,
respectively, and recorded it as interest expense in the
consolidated statements of operations and comprehensive loss. In
January 2017, the Company extended the term of the Notes in default
on April 1, 2016 to June 30, 2017 and reduced the price on the
warrants issued from $0.80 to $0.50. The Company recorded $64,405
attributed to the repricing of the warrants. One noteholder did not
extend the term of the notes and the Company defaulted on July 1,
2017 and received 33,333 warrants to purchase shares of common
stock which the Company valued at that date at $8,741. The note
below was repaid in full September 2017, see below.
Using
the proceeds from the GPB Note, the Company repaid $166,667 of
outstanding Notes. In addition, Notes totaling $133,333 converted
into subordinated convertible notes at a purchase price of 97.5% of
the Face Value of the $136,752 notes with substantially the same
terms as the GPB Note. In connection, the Company issued 105,194
warrants to purchase common stock with a term of 5 years and an
exercise price of $0.60 per share with a ratchet downside
protection of $0.30 exercise price per share floor. The Company
allocated the value of these notes and the warrants on a relative
fair value basis at the time of issuance. The total debt discount
will be amortized over the life of these notes to interest expense.
The estimated relative fair value of the warrants was $13,277.
Amortization expense of the debt discount, which includes original
issue discount and the warrant value, during the year ended
December 31, 2017 was $450.
Another
Note with a principal and accrued interest balance of $63,250
remains unpaid and is not considered in default as the Company
received notification to freeze this account. The remaining Notes
have been paid as of December 31, 2017. The accrued interest on the
remaining Notes of $25,250 was converted into 50,500 shares of
common stock.
On May
25, 2016, the Company entered into a Securities Purchase Agreement
(the “May Purchase Agreement”) with two individual
accredited investors, one of which who serves on the
Company’s Board of Directors (collectively
the “May Purchasers”), pursuant to which the Company
agreed to issue to the May Purchasers secured promissory notes in
the aggregate principal amount of $150,000 (the “May
Note(s)”) with an interest rate of 15% and warrants to
purchase up to an aggregate amount of 150,000 shares of common
stock, of the Company (the “May Warrant(s)”). The
May Notes may be converted into Units issued pursuant to the
Company’s private financing of up to $5,000,000 (the
“Follow On Offering”) Units at a price of $0.80/Unit
(the “Units”) consisting of: (i) a 2 year
unsecured convertible note, which converts into shares of common
stock at an initial conversion price of $0.80 per share and (ii) a
warrant to purchase one half additional share of common stock, with
an initial exercise price equal to $0.80 per share (the
“Follow On Warrant”). The May Notes are secured by the
Company’s accounts receivable and inventories held in the
United States. The Company recorded a debt discount of $51,000
related to the relative fair value of the warrants on the date of
the May Purchase Agreement, which was amortized to interest expense
in the consolidated statement of operations and comprehensive loss
during the year ended December 31, 2016. If the May Notes are not
redeemed by the Company on maturity, the Purchasers are entitled to
receive 10% of the principal balance of the Notes outstanding in
warrants for every month that the Notes are not redeemed. On August
25, 2016, these Notes matured and were not
repaid. Therefore the Notes were in default on August
26, 2016. The Company agreed to pay the Purchasers 10% of the
principal balance of the May Notes in warrants until the May Notes
are repaid. During the year ended December 31, 2016, the
Company issued 75,000 warrants in connection with the default
provisions, which were valued at $17,627 and recorded as interest
expense in the consolidated statement of operations and
comprehensive loss. In January 2017, the Company extended the term
of the Notes in default to June 30, 2017 and reduced the price on
the warrants issued from $0.80 to $0.50. During the year ended
December 31, 2017, the Company issued 80,000 warrants in connection
with the January 2017 extension provision, which were valued at
$27,058 and recorded it as interest expense in the consolidated
statements of operations and comprehensive loss. One noteholder did
not extend the term of the notes and the Company defaulted on July
1, 2017 and issued 33,333 warrants to purchase shares of common
stock which the Company valued at that date at $8,741 and recorded
the amount as interest expense. The note was paid in September
2017. One noteholder converted a $50,000 note plus accrued interest
of $8,417 into 116,833 shares of common stock on June 30, 2017 and
received 50,000 warrants to purchase shares of common
stock.
Accrued
interest of $127,167 associated with the Notes and the May Notes
was converted into 254,334 shares of common stock at a value of
$0.50 per share during the year ended December 31,
2017.
Subordinate 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 was $1,351.
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 was insignificant.
Employee Notes Payable
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 December 31, 2016, all Notes Due to
Employees, except one, were in default and due on demand.
Therefore, the Notes Due to Employees in default are presented as
current in the consolidated balance sheet as of December 31,
2017. 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 terms provided for the
shares issued in a 2014 Agreement to be adjusted in the event
equity shares were sold below $1.60 a share. The estimated fair
value of the conversion feature was determined to be insignificant
as of the agreement date and throughout the year ended December 31,
2016. Subsequent to December 31, 2016, the Company negotiated with
the employees whose notes were in default. The Company has agreed
to pay approximately $330,000 to settle three of these promissory
notes and issue 1,029,734 warrants to purchase shares of the
Company’s common stock at $0.50 a share with a term of 5
years. The conversion feature was eliminated effective December 31,
2016. The Company was to pay these employees approximately
$330,000, the first payment of $94,000 was paid in April 2017, the
second payment of $94,000 was due 30 days from signing the
agreement and the final payment of $142,000 was due 60 days from
signing the agreements however the remaining payments remained due
at September 30, 2017. In November 2017, the employees have agreed
to renegotiate the March 30, 2017 agreement in good faith with the
Company as to a future payment plan mutually agreeable by all
parties. The Company issued 1,029,734 warrants to purchase common
stock at $0.50 a share with a term of 5 years. The fair value of
the warrants issued of $389,000 was valued based on the Black
Scholes model based on a stock price of $0.70, an interest free
rate of 1.33% and volatility of 50%. The settlement was accounted
for as an extinguishment under the applicable accounting guidance.
The Company recorded a loss on extinguishment on notes payable due
to employees of $158,000.
The
following table summarizes the maturities of the Company’s
outstanding debt at December 31, 2017 and Notes Due to Employees,
at December 31, 2017 (in thousands):
|
Year
|
Convertible Notes
Payable
|
|
|
2018
|
$
-
|
$
326
|
|
2019
|
1,222
|
45
|
|
2020
|
5,066
|
-
|
|
Total
|
$
6,288
|
$
371
|
Note 7: Related Party Transactions
Included
in advances – related parties are amounts owed to the
Company’s former CFO and Chairman of the Board of
$50,000 at December 31, 2017 and December 31, 2016. Also
included in advances – related parties are amounts owed to
Michaela Ott, stockholder and former CEO of the Company, of 16,000
Euros, ($19,160 as December 31, 2017) and 71,000 Euros ($85,022 as
of December 31, 2017) related to two short term bridge loans. The
Company has made arrangements to settle these obligations to Ms.
Ott evenly over a 24-month period, starting on October 31, 2017. In
addition, the Company settled obligations related to accrued
salaries, vacation and related expenses totaling $152,000 owed to
Michael Ott, stockholder and former COO of the Company and Ms. Ott.
The Company made an upfront payment to each Mr. and Ms. Ott of
$6,750 and will pay the remaining amount owed over a period of 18
months scheduled to start in October 2017. The Company
signed additional agreements to settle the debt owed from the US
entity where the wages were earned versus the German entity. The
Company has paid Michaela Ott $9,319 for the year ended December
31, 2017 related to the amount owed. The balance due to Michaela
Ott at December 31, 2017 is $74,551 related to the wages owed.
During the year ended December 31, 2017, the Company has paid
Michael Ott $6,362 and the remaining balance outstanding at
December 31, 2017 was $50,900.
The
Company paid Mr. and Ms. Ott the agreed upon severance payments.
Total severance payments totaled $118,810 for the year ended
December 31, 2017. Mr. Ott and Ms. Ott remain as Directors of the
Company and continue to work with the Company.
On June
30, 2017, one secured noteholder, an affiliate of a member of our
Board of Directors, converted a $50,000 secured promissory note
plus accrued interest of $8,417 into 116,833 shares of common
stock. The Company issued 50,000 warrants to purchase shares of
common stock at a price of $0.50, with a term of five years. See
further discussion related to secured promissory notes in Note
6.
On
February 12, 2016, one of the Purchasers of a $100,000 secured
promissory note and holder of 50,000 (increased to 100,000 warrants
as of December 31, 2016) warrants to purchase shares of common
stock at the time of his election, was elected to the Board of
Directors to serve as Director and Chairman of the Company’s
audit committee. Total warrants due to this director related to the
above secured promissory notes for original issuance,
modifications, default period and the modification period at
December 31, 2017 was 260,000 warrants to purchase common stock. On
September 27, 2017, the remaining balance of $66,667 was converted
into a subordinated convertible note discussed in Note 6 of $68,376
subordinated convertible debt and received 52,597 warrants to
purchase shares of common stock at $0.60 a share. The Company
issued 48,000 shares of common stock for $24,000 of accrued
interest at $0.50. See relative fair value and additional
discussion in Note 6.
At
December 31, 2017 and 2016, the Company has accrued $45,000 and
$55,000, respectively to the above Director and Chairman of the
audit committee for services for 2016 as a member of the Board of
$35,000 and an additional $20,000 for audit committee services for
the year ended December 31, 2016 and $20,000 for the audit
committee services for the year ended December 31, 2017. The
Company paid $30,000 of the outstanding balance during the year
ended December 31, 2017.
Accounts
payable and accrued expense include $18,508 due to its past
CFO’s company for past services performed as a consultant to
the Company at December 31, 2017.
The
Company has accrued wages and vacation of approximately $1.1
million payable to the former CFO at December 31, 2017 and 2016. In
August 2017, the Company offered a settlement for the legal matter
with a settlement term sheet whereby a formal settlement agreement
and forbearance agreement was to be entered with the court.
Pursuant to the settlement proposal, the Company was to issue a
combination of stock, warrants and payments over a period of up to
three years. 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. See Note 11 for further
discussion regarding the legal proceedings with the Company’s
former CFO.
NOTE 8:
Stockholders’ Equity
Loss
per share
A
reconciliation of the numerator and the denominator used in the
calculation of loss per share is as follows:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
Basic and
Diluted:
|
|
|
|
Reported net loss
(in thousands)
|
$
(6,811
)
|
$
(2,163
)
|
|
Less unpaid and
undeclared preferred stock dividends
|
(91
)
|
(91
)
|
|
Net loss applicable
to common stockholder
|
$
(6,902
)
|
$
(2,254
)
|
|
|
|
|
|
Weighted average
common shares outstanding
|
26,436,064
|
21,423,535
|
|
Net loss per common
share
|
$
(0.26
)
|
$
(0.11
)
|
Because
the following instruments would be anti-dilutive at all times
presented, the potentially issuable common stock from options to
purchase a total of 2,100,000 common shares with a weighted average
exercise price of $0.50 at December 31, 2017, warrants to purchase
a total of 11,444,671 with a weighted average exercise price of
$0.58 at December 31, 2017 and 1,396,161 with an weighted average
exercise price of $1.08 at December 31, 2016 and preferred stock
convertible into shares for the years ended December 31, 2017 and
2016, of 1,090 and 1,090 common shares respectively, were not
included in the computation of diluted loss per share applicable to
common stockholders.
Preferred Stock
A
summary of the Company’s preferred stock as of
December 31 is as follows:
|
|
|
|
Preferred Stock Dividends
|
|
|
|
|
|
|
Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
convertible
|
590,197
|
47,250
|
47,250
|
$
—
|
$
—
|
|
Series B
convertible, 10% cumulative
|
1,500,000
|
93,750
|
93,750
|
633,163
|
595,663
|
|
Series C
convertible, 10% cumulative
|
1,666,666
|
38,333
|
38,333
|
185,913
|
174,413
|
|
Series D
convertible, 10% cumulative
|
300,000
|
-
|
-
|
-
|
-
|
|
Series E
convertible, 10% cumulative
|
800,000
|
19,022
|
19,022
|
683,718
|
641,870
|
|
Undesignated
Preferred Series
|
5,143,137
|
—
|
—
|
|
—
|
|
Total Preferred
Stock
|
10,000,000
|
198,355
|
198,355
|
$
1,502,794
|
$
1,411,946
|
The
undeclared and unpaid preferred stock dividends were calculated
from the date of the merger through December 31, 2017.
Summary of Preferred Stock Terms
Series A Convertible Preferred Stock
|
Stated
and 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
|
Stated
Value:
|
$4.00
per share, $375,000
|
|
Liquidation
Value
|
$1,008,000
|
|
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 December 31, 2017 were
$633,163
|
Series C Convertible Preferred Stock
|
Stated
Value:
|
$3.00
per share, $115,000
|
|
Liquidation
Value
|
$301,000
|
|
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 December 31, 2017 were
$185,913
|
Series E Convertible Preferred Stock
|
Stated
Value:
|
$22.00
per share, $418,488
|
|
Liquidation
Value
|
$1,102,000
|
|
Conversion
Price:
|
$800.00
per share
|
|
Conversion
Rate:
|
0.0275—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 December 31, 2017 were
$683,718
|
Issuance of Common Stock
Effective
April 28, 2017, the Company increased the authorized shares from
35,000,000 to 50,000,000. On August 1, 2017 the Company received
written consent of the holders of the majority of the issued and
outstanding shares of our Common Stock, to amend the 2017
Employee/Consultant Common Stock Compensation Plan and to file
a Certificate of Amendment to our Certificate of
Incorporation (the “Certificate of Incorporation”) to
increase the Company’s authorized common stock, par value
$0.001 per share (the “Common Stock”), from 50,000,000
shares to 100,000,000 shares, (the “Amendment”) and
keep the authorized shares of preferred stock, par value $0.001 per
share (the “Preferred Stock”), unchanged.
The
Company filed a Form D on March 7, 2017, initiating a total
offering of $4,250,000, of which $25,000 in stock subscription were
received by the Company as of December 31, 2016, representing the
purchase of 50,000 shares of common stock.
During
the year ended December 31, 2017, the Company issued 5,060,000
shares of common stock for $2,530,000, less $187,000 of issuance
costs. In connection with the issuance of common stock, the Company
issued 2,530,000 warrants to purchase shares of common stock at
$0.50, for a term of 5 years. We also issued 50,000 shares from
stock subscriptions of $25,000 at December 31, 2016 and issued
25,000 warrants on the same terms and conditions.
On
October 26, 2016, the board of directors appointed David E.
Patterson to the position of Chief Executive Officer and Director
of the Company. Pursuant to Mr. Patterson’s executive
employment agreement with the Company, the commencement date of Mr.
Patterson’s appointment was October 31, 2016. He was granted
250,000 restricted shares of the Company’s common stock (the
“Shares”). The Shares were to vest in three 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
retired in November 2017. At that time the Company entered into a
transition agreement with Mr. Patterson to pay him three months of
salary and to allow the restricted shares to continue to vest under
the previous terms. The Company valued the Shares at $0.50 per
share, based on the fair value of the stock on the date of grant.
The Company recorded $35,000 and $7,000 of stock-based compensation
expense during the years ended December 31, 2017 and 2016
respectively.
The
Board appointed two officers on May 4, 2017, who received a total
of 350,000 shares of restricted common stock with a three-year
vesting schedule. In addition, on April 26, 2017, the Company
appointed an officer who received 200,000 shares of restricted
common stock with a three-year vesting schedule. On June 9, 2017
the Company issued 160,000 shares of restricted common stock with a
vesting schedule through December 31, 2019. Amortization associated
with restricted stock to officers and management, is $76,000 for
the year ended December 31, 2017 which included the forfeiture due
to the resignation of an officer subsequent to year end. In
addition, the Company issued 50,000 shares of common stock to an
investor relations firm in June 2017 at a value of $0.50 per share
for services through September 30, 2017. For the year ended
December 31, 2017, the Company recorded $25,000 included in
selling, general and administrative expenses for professional fees
for investor relations expense.
Accrued
interest of $127,167 associated with the Notes and the May Notes
was converted into 254,354 shares of common stock at a value of
$0.50 per share during the year ended December 31, 2017. See Note 6
for additional discussions. On June 30, 2017, one secured
noteholder, an affiliate of a member of our Board of Directors
converted a $50,000 secured promissory note for $50,000 plus $8,417
of accrued interest into 116,833 shares of common stock. The
Company issued 50,000 warrants to purchase shares of common stock
at a price of $0.50, with a term of five years. See additional
discussion in Note 6.
In
September 2017, the Company issued 182,927 of shares of common
stock valued at $75,000 for compensation to its broker related to
the GPB Note. The value was recorded as a debt discount, see Note
6.
During
June 2016, the Company issued 292,167 shares of common stock to
directors and consultants for accrued fees totaling to $274,870 as
follows. The Company issued 68,750, 55,462, 68,750 shares of common
stock to our director John Abeles for $55,000, Augusta Ocana for
$44,370 and former director Alexander Miley for $55,000,
respectively. The Company issued 63,125 shares of common stock to
Northlea Partners, LLC, for the accrued fees of $50,500, a
Partnership that John Abeles is the General Partner. The Company
issued 20,455 shares of common stock for accrued fees of $45,000
and 15,625 shares of common stock for $25,000 of fees to
consultants.
On
November 2, 2016, the Company filed a Form D Notice of Exempt
Offering of Securities for up to $3,000,000 (“$3 Million Form
D”). The Company received $411,915, as an initial funding of
this offering at $0.50 a share, by selling 823,830 shares of common
stock and 205,958 common stock warrants. The offering is subject to
a up to 7.5% commission paid to their broker/dealers totaling
$30,894 plus warrants of 7.5% coverage at $0.50 conversion price
per share, with a term of 5 years. The offering closed prior to
December 31, 2016.
Options
The
Company’s 2017 Employee/Consultant Common Stock Compensation
Plan (the “Plan”) for the issuance of up to 3,000,000
options to grant common stock to the Company’s employees,
directors and consultants was adopted pursuant to the written
consent of holders of a majority of the Company’s common
stock obtained as of March 7, 2017 and was considered approved on
April 21, 2017. The Company amended the Plan on August 1, 2017
and was considered approved on September 1, 2017 to include certain
technical changes and increased the shares from 3,000,000 to
5,000,000. During the year ended December 31, 2017, the Company
issued 2.1 million of non-qualified stock options with a term of 10
years, with a strike price above the market on the date of issuance
of $0.50, to vest one-third upon issuance, one-third at the
beginning of the calendar year of service, or January 1, 2018 and
one-third on January 1, 2019, to the Board of Directors valued at
$520,307 using the Black Scholes Model. Included in selling,
general and administrative in the accompanying consolidated
statement of operations and comprehensive loss is $346,872 for the
year ended December 31, 2017, related to the non-qualified options
issued to the Board of Directors.
|
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value
|
Weighted Average
Remaining Contractual Life (Years)
|
|
Outstanding at
December 31, 2016
|
-
|
$
-
|
—
|
-
|
|
Granted
|
2,100,000
|
0.50
|
—
|
-
|
|
Exercised
|
—
|
—
|
—
|
—
|
|
Expired
|
—
|
—
|
—
|
—
|
|
Outstanding at
December 31, 2017
|
2,100,000
|
$
0.50
|
—
|
9.75
|
Warrants outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2016
|
1,396,161
|
$
1.08
|
—
|
4.11
|
|
Granted
|
10,048,510
|
0.55
|
—
|
-
|
|
Outstanding at
December 31. 2017
|
11,444,671
|
$
0.59
|
—
|
4.90
|
During
the fourth quarter of 2017, the Company issued 276,135 warrants
with a relative fair value of $28,530 and an initial exercise price
of $0.60 per share (the “Exercise Price”). The Exercise
Price is subject to a ratchet downside protection with a $0.30 per
share floor price in the event the Company issues additional equity
securities, and subject to adjustments for stock splits, dividends,
combinations, recapitalizations and the like. The Warrants is
exercisable for a period of five years (the “Term”) and
provides for cashless exercise it at the time of exercise a
registration statement registering the underlying securities is not
available. The Warrant is not to be exercisable until 6 months
after the closing date. The Company issued 26,250 warrants to
purchase common stock at $0.60 to its broker related to the
December subordinate convertible notes. The estimated fair value of
the warrants was $3,000 which was recorded as a debt
discount.
On
September 26, 2017, the Company closed on a loan with GPB discussed
in Note 6. The Company issued 4,120,308 warrants with a relative
fair value of $520,052 and an initial exercise price of $0.60 per
share (the “Exercise Price”). The Exercise Price is
subject to a ratchet downside protection with a $0.30 per share
floor price in the event the Company issues additional equity
securities, and subject to adjustments for stock splits, dividends,
combinations, recapitalizations and the like. The Warrants is
exercisable for a period of five years (the “Term”) and
provides for cashless exercise it at the time of exercise a
registration statement registering the underlying securities is not
available. The Warrant is not to be exercisable until 6 months
after the closing date. In connection with the GPB Note, The
Company issued 375,000 warrants to purchase common stock at $0.60
to its broker related to the GPB Note on similar terms as provided
to GPB. The estimated fair value of the warrants was $52,421, which
was recorded as a debt discount.
On
September 27, 2017, the Company closed on subordinated loans,
including Notes converted into subordinated loans discussed in Note
6 with similar terms and conditions. The Company issued an
aggregate of 440,500 of warrants with a relative fair value of
$55,598, with an initial exercise price of $0.60 per share (the
“Exercise Price”). The Exercise Price is subject to a
ratchet downside protection with a $0.30 per share floor price in
the event the Company issues additional equity securities, and
subject to adjustments for stock splits, dividends, combinations,
recapitalizations and the like. In connection with the loans, the
Company issued 24,375 warrants to purchase common stock at $0.60 to
its broker. The estimated fair value of the warrants was $3,407,
which was recorded as a debt discount.
In
January 2017, the Company reached an agreement with all secured
promissory noteholders, to extend the maturity of the secured
promissory notes to June 30, 2017, whereby the warrants were
repriced from $0.80 a share to $0.50 a share see Note 6. The notes
continue to bear interest at 15% and the secured promissory
noteholders continue to receive warrants amounting to 10% of the
principal balance, as long as the notes remain outstanding. The
Company repriced all warrants issued totaling 1.2 million warrants
amounting to a $64,405 incremental value using the Black-Scholes
model on January 16, 2017, the date of the amendments at a current
market price of $0.36 a share, at an interest free rate of 1.33%
and remaining terms ranging from 4 years to 4 years and 11.5
months.
During
the year ended December 31, 2017, the Company issued 5,060,000
shares of common stock for $2,530,000, less $187,000 of issuance
costs. In connection with the issuance of common stock, the Company
issued 2,530,000 warrants to purchase shares of common stock at
$0.50, for a term of 5 years. We also issued 50,000 shares from
stock subscriptions of $25,000 at December 31, 2016 and issued
25,000 warrants on the same terms and conditions. On January 16,
2017, the Company also amended the original equity raise closed on
December 7, 2016 and issued an additional 411,915 warrants to
purchase shares of common stock at an exercise price of $0.50, for
a term of 5 years. The Company issued 272,625 warrants to purchase
common stock to brokers related to the above transaction for
2017.
NOTE 9: Leases
The
Company has several operating leases for office, laboratory and
manufacturing space. The Company’s operating lease for one of
its German facilities has been terminated as of March 31, 2018, and
its Poland facility has been terminated as of July 1, 2017. Monthly
rent payments for the German facilities are Euro 4,295 ($4,842 as
of December 31, 2017). The Company’s laboratory facility in
Chicago, IL terminates June 30, 2018 and requires monthly payments
of $1,175 through June 30, 2017, increasing to $1,250 through the
end of the lease. The Company’s Orlando facility has
escalating rents ranging from $2,488 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 $12,471.
Total rental expense was $144,000 and $183,000 for the years ended
December 31, 2017 and 2016, respectively.
NOTE 10: Income Taxes
The
provision for income taxes consists of the following for the years
ended December 31 (in thousands):
|
|
|
|
|
Federal
|
$
—
|
$
—
|
|
State and
local
|
—
|
—
|
|
Foreign
|
6
|
—
|
|
|
|
|
|
Total current
income tax expense
|
$
6
|
$
—
|
|
Summary of
Expense
|
|
|
|
Current
|
—
|
—
|
|
Deferred
|
(493
)
|
(132
)
|
|
|
|
|
|
Total Income Tax
Benefit
|
$
(487
)
|
$
(132
)
|
For the
years ended December 31, 2017 and 2016, the provision for
income taxes differs from the expected tax provision computed by
applying the U.S. federal statutory rate to loss before taxes as a
result of the following:
|
|
|
|
|
|
|
|
|
Statutory U.S.
federal rate
|
(34.0
)%
|
(34.0
)%
|
|
Permanent
differences
|
—
%
|
—
%
|
|
Impact of
differences related to foreign earnings
|
19.33
%
|
1.05
%
|
|
Impact of Tax Cuts
and Jobs Act rate change
|
(9.87)
%
|
—
%
|
|
Valuation
allowance
|
17.84
%
|
27.16
%
|
|
Provision for
income tax expense
|
(6.70
)%
|
(5.79
)%
|
The
significant components of the Company’s deferred tax assets
and liabilities are as follows at December 31:
|
|
|
|
|
|
|
|
Deferred Tax
Assets:
|
|
|
|
Net operating
loss carryforwards
|
$
4,952
|
$
4,535
|
|
Accrued
expenses
|
-
|
1,160
|
|
Accounts
receivable timing differences
|
733
|
-
|
|
Stock-based
compensation
|
78
|
-
|
|
Property and
equipment
|
84
|
53
|
|
Total Deferred
Tax Assets
|
5,847
|
5,748
|
|
Valuation
Allowance
|
(5,847
)
|
(5,548
)
|
|
Net Deferred Tax
Asset
|
-
|
200
|
|
Deferred Tax
Liability:
|
|
|
|
In-process
research and development and trademarks
|
(1,485
)
|
(2,205
)
|
Net Deferred Tax
Liability
|
$
(1,485
)
|
$
(2,005
)
|
The
Company files a consolidated federal return for MEDITE Cancer
Diagnostics, Inc and MEDITE Enterprises and a stand-alone federal
tax return for MEDITE Lab Solutions. Each Company files
a separate Florida Corporate return. Corporate returns
are also filed in Germany, Austria and Poland for the entities
doing business in these respective countries.
Realization
of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are
uncertain. Accordingly, the net deferred tax assets for
the U.S. federal and state, Austria and Poland have been fully
offset by a valuation allowance. In 2013 and 2014 MEDITE
Cancer Diagnostics, Inc. had a change in ownership of greater than
50%. The result of these changes is that the net operating loss
carryovers derived prior to the ownership changes have become
subject to the limitation requirements of Section 382 of the
Internal Revenue Code in the United States. Section 382 requires
the Company to apply a limitation rate to the value of the Company
immediately prior to the change to determine the annual limitation
for the utilization of the pre-change net operating losses. Based
on these limitations, the Company has reduced the deferred tax
asset and related valuation allowance to reflect the impact of
these limitations at December 31, 2017. The net impact to the
valuation allowance for the reduction of attributes and current
year activity is a decrease of $299,000 in 2017.
At
December 31, 2017, the Company had net operating loss carry
forwards for U.S. federal income tax of approximately $16.6
million, which will begin to expire in 2018. At
December 31, 2017, the Company had net operating loss carry
forwards for state income tax of approximately $8.3 million, which
will begin to expire in 2027. At December 31, 2017, the
Company had net operating loss carry forwards for foreign income
tax of approximately $3.4 million, which will carry forward
indefinitely for Germany and Austria.
The
Company has not recognized U.S. deferred income taxes on any
undistributed earnings for the foreign subsidiaries. The Company
intends to indefinitely reinvest those earnings in operations
outside the U.S.
Tax Uncertainties
In June
2006, the Financial Accounting Standards Board (FASB) issued
interpretation ASC 740-10-50, "Accounting for Uncertainty in Income
Tax". This pronouncement clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with Statement of Financial Accounting
Standards ASC 740-10-50, "Accounting for Income
Taxes". This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to
be taken in the tax return. ASC 740 also provides guidance on
de-recognition of tax benefits, classification on the balance
sheet, interest and penalties, accounting in interim periods,
disclosure and transaction. In accordance with ASC
740-10-50, the Company is classifying interest and penalties as a
component of tax expense.
The
Company has analyzed filing positions in all of the federal and
state jurisdictions where it is required to file income tax
returns, as well as open tax years in these jurisdictions. The
periods subject to examination for the Company’s tax returns
are for the years 2012, 2012 and 2013. The Company believes that
its income tax filing positions and deductions would be sustained
on audit and does not anticipate any adjustments that would result
in a material change to its financial position. Therefore, no
reserves for uncertain income tax positions have been
recorded.
The
Company had unrecognized tax benefits of $0 as of December 31, 2017
and 2016. These unrecognized tax benefits, if
recognized, would not affect the effective tax rate. There was no
interest or penalties accrued at the adoption date and at December
31, 2017.
The
Company is subject to U.S. federal income tax including state and
local jurisdictions. Currently, no federal or state income
tax returns are under examination by the respective taxing
jurisdictions.
On
December 22, 2017, the President of the United States signed into
law the Tax Cuts and Jobs Act (“the Act”). The Act
amends the Internal Revenue Code to reduce tax rates and modify
policies, credits, and deductions for individuals and businesses.
For businesses, the Act reduces the corporate tax rate from a
maximum of 35% to a flat 21% rate. The rate reduction is effective
January 1, 2018. As a result of the rate reduction, the Company has
reduced the deferred tax liability balance as of December 31, 2017
by $720,000.
Due to
the Company's full valuation allowance on its deferred tax asset,
the Company has reduced its valuation allowance as a result of the
Act.
Due to
uncertainties which currently exist in the interpretation of the
provisions of the Tax Cuts and Jobs Act of 2017 regarding Internal
Revenue Code section 162(m), the Company has not evaluated the
potential impacts of IRC Section 162(m) as amended by the Tax Cuts
and Jobs Acts of 2017 on its consolidated financial
statements.
On
December 22, 2017 Staff Accountant Bulletin No. 118 (“SAB
118”) was issue to address the application of US GAAP in
situations when a registrant does not have the necessary
information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for
certain income tax effects of the Act. In accordance with SAB 118,
the Company has determined that there is no deferred tax benefit of
expense with respect to the re-measurement of certain deferred tax
assets and liabilities due to the full valuation allowance against
the net deferred tax assets. Additional analysis of the law and the
impact to the Company will be performed and any impact will be
recorded in the respective quarter in 2018.
NOTE 11: Commitments and Contingencies
Legal Proceedings
On
November 13, 2016, the Company’s former CFO filed a complaint
against the Company and certain officers and directors of the
Company in the United States District Court for the Northern
District of Illinois, Eastern Division, Case No. 1:16-cv-10554,
whereby he is alleging (i) breach of the Illinois Wage and
Protection Act, (ii) breach of employment contract and (iii) breach
of loan agreement. He is seeking monetary damages up to
approximately $1,665,972. The Company has denied the substantive
allegations in the complaint and is vigorously defending the suit.
Management believes that the claims set forth in the complaint
against the Company are without merit. The Company has accrued
wages and vacation of approximately $1.1 million and a $50,000 note
payable to the former CFO at September 30, 2017 and December 31,
2016. The presiding Federal Judge has referred the lawsuit to
mediation. No settlement was reach during the April 2017
meditation. The Company has proactively initiated settlement offer.
In August 2017, the parties reached a Settlement Term Sheet whereby
a final forbearance and settlement agreement must be filed with the
magistrate judge. On November 8, 2017 the Plaintiff filed a motion
to compel settlement with a meeting before a magistrate judge on
November 14, 2017.
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.
Other Commitments
As a
result of cash constraints experienced by the former CytoCore, the
Illinois Franchise Taxes due for the years 2013, 2012, 2011, 2010
and 2009 have not been filed or paid. The Company believes that it
has made adequate provision for the liability including penalties
and interest totaling $342,000. As the Company has moved its
corporate headquarters out of the state of Illinois, it does not
expect its liability going forward to increase
substantially.
NOTE 12: Segment Information
The
Company operates in one operating segment. However, the Company
operates corporate entities and has assets and operations in the
United States, Germany and Poland. The following table shows the
breakdown of our operations and assets by Country (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
$
11,179
|
$
11,268
|
$
4,761
|
$
6,064
|
$
16
|
$
238
|
$
15,956
|
$
17,570
|
|
Property and
equipment, net
|
108
|
68
|
1,670
|
1,487
|
-
|
2
|
1,778
|
1,557
|
|
Intangible
Assets
|
10,518
|
10,518
|
-
|
-
|
-
|
-
|
10,518
|
10,518
|
|
Revenues
|
699
|
894
|
5,873
|
8,127
|
241
|
217
|
6,813
|
9,238
|
|
Net income
(loss)
|
$
(3,333
)
|
$
(1,816
)
|
$
(3,751
)
|
$
(306
)
|
$
273
|
$
(41
)
|
$
(6,811
)
|
$
(2,163
)
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Histology
Equipment
|
$
251
|
$
295
|
$
2,980
|
$
4,077
|
$
218
|
$
217
|
$
3,449
|
$
4,589
|
|
Histology Consumables
|
448
|
243
|
1,890
|
2,967
|
23
|
-
|
2,361
|
3,210
|
|
Cytology
Consumables
|
-
|
356
|
1,003
|
1,083
|
-
|
-
|
1,003
|
1,439
|
|
Total
Revenues
|
$
699
|
$
894
|
$
5,873
|
$
8,127
|
$
241
|
$
217
|
$
6,813
|
$
9,238
|
NOTE 13: Subsequent Events
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 proactively initiated settlement offer. In
August 2017, the parties executed a Settlement Term Sheet whereby a
final forbearance and settlement agreement was to file 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.
In
January, 2018 the Company raised $150,000 in additional capital
under the same terms as described in the
Subordinate Convertible Notes
section
above.
Also in
January, 2018 the Company received a term sheet for additional debt
financing, consisting of a convertible note with an initial
conversion price of $0.075 per share. Each $0.075 invested
also receives one common stock share. The Convertible Notes
are subordinate to the GBP debt described in the
GPB Debt Holdings II, LLC (“GPB”)
Convertible Notes Payable
section above, have a 5-year
maturity date and bear a 12% annual interest rate, payable
semi-annually. The Company received $1,955,000 in capital and
issued 26,066,667 common stock shares under these terms as of May
17, 2018.
